Introduction

Through a March 27 2017 Gazette notification, the Ministry of Corporate Affairs modified the method for calculating assets and turnover for the purposes of providing notice of an acquisition or acquiring control, merging or amalgamating a portion of an enterprise, division or business for the purpose of Section 5 of the Competition Act 2002, without changing the thresholds for assets or turnover prescribed in Gazette Notification 674 (E) dated March 4 2016. The earlier notification has been rescinded with immediate effect. The latest notification, which was published in the Official Gazette on March 29 2017, will apply for five years (ie, up to March 28 2022).

Revised method of calculation of thresholds

For the purposes of Section 5 of the act, where a portion of an enterprise, division or business is being acquired, taken control of, merged or amalgamated with another enterprise, the assets and turnover of the enterprise will be calculated on the basis of the relevant assets or turnover of the said portion of the enterprise, division or business being acquired.

Value of assets

The value of the assets of the said portion of the enterprise, division or business will be determined based on the book value of the assets shown in the enterprise's audited books of accounts or as per the statutory auditor's report where a financial statement has not yet been filed. The value will be based on the financial year immediately preceding the financial year in which the date of the proposed combination falls.

Value of turnover

The turnover of the portion, division or business being acquired, taken control of, merged or amalgamated will be certified by the statutory auditor on the basis of the last available audited accounts of the company.

Target exemption extended to mergers and amalgamations

The latest notification has included mergers and amalgamations within the de minimis exemption (also known as the target exemption). Previously, only acquisitions were covered under the de minimis exemption.

Thresholds for applying de minimis exemption

The government has also modified the method for calculating assets and turnover when applying the de minimis exemption. Competition Commission of India (CCI) approval is no longer required for transactions where the value of assets being acquired, taken control of, merged or amalgamated are less than Rs3.5 billion or the turnover of the enterprises that are party to the acquisition is less than Rs10 billion.

Impact

Under the March 4 2016 notification, for the purpose of determining the applicability of the de minimis exemption, the value of the target's assets and turnover (ie, the enterprise whose control, shares, voting rights or assets are being acquired) had to be considered.(1) For instance, in Elli Lily's acquisition of global veterinary pharmaceuticals business Novartis AG, the CCI held that the de minimis rule applied on the basis of the target's assets or turnover, and not the assets and turnover of the relevant business which was being acquired.(2)

Similarly, in SRF Ltd's acquisition of El Du Pont De Nemours's pharma-grade propellants business, the CCI held that the assets and turnover of the enterprise whose control, shares, voting rights or assets are being acquired must be considered for the purposes of thresholds, as set out in the de minimis notification, and not the value of assets and turnover of the segment or particular business division being acquired.(3)

However, under the latest notification, the de minimis exemption can be applied by taking into account the value of assets of the portion, unit or business division of the target being acquired, without regard to the total value of the assets or turnover of the enterprise from which such assets are being acquired.

Comment

This is a welcome change. The CCI's earlier interpretation had led to anomalous situations, whereby the transfer of insignificant Indian assets triggered a filing since the size of the foreign parent controlling entity exceeded the threshold limits. This was also partly due to the removal of an earlier exemption in March 2014 to international mergers with insignificant local presence, which had little impact on competition in Indian markets. The earlier interpretation also affected Indian deals (eg, the sale of brands by pharmaceutical companies) where, although the brands themselves were insignificant in value, filing was triggered due to thresholds of the buyer. The changes are in line with international practices and will reduce the burden of filing for industry and the regulator.

For further information on this topic please contact MM Sharma at Vaish Associates by telephone (+91 11 4929 2525) or email (mmsharma@vaishlaw.com). The Vaish Associates website can be accessed at www.vaishlaw.com.

Endnotes

(1) CCI order dated January 13 2017 in Combination Registration C-2015/12/349 (Schulke & Mayr GmbH), Para 8.12.

(2) CCI order dated July 14 2016 in Combination Registration C-2015/12/289 (Eli Lilly), Para 13.5.

(3) CCI order dated August 16 2016 in Combination Registration C-2015/12/347 (SRF Ltd), Para 8.12.

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