"Ease of doing business in India" is one of the fundamental mantras in the government's economic policy framework. In an effort to reaffirm its stance in this regard, on 16 March 2022, the Ministry of Corporate Affairs (MCA) renewed two significant notification procedures relevant to acquisitions, amalgamations and mergers. This article provides an overview of their importance and highlights the ramifications of their revival.
Section 5 of the Competition Act 2002 (as amended) sets out eight assets- and turnover-based (standalone and group) thresholds to determine the notification requirement of an acquisition, amalgamation and merger. Should the cumulative value of assets and/or turnover of the parties jointly exceed the notification thresholds, a transaction requires a prior approval from the Competition Commission of India (CCI).
As a result, even if a transaction entails the acquisition or transfer of a comparatively small enterprise or business, such transaction may attract CCI scrutiny if the acquirer's finances alone meet the notification thresholds.
Based on the premise that competitive concerns are unlikely to arise from transactions involving such small target enterprises, the MCA, through a series of notifications, the latest of which was dated 27 March 2017,(1) exempted transactions from a pre-clearance requirement where:
- the value of assets of the target asset or target enterprise was not more than 3.5 billion Indian rupees (approximately $45.98 million) in India; or
- the turnover of the target asset or target enterprise was not more than 10 billion Indian rupees (approximately $131.39 million).
This notification was valid for five years until 28 March 2022.
As a favourable decision regarding the continuance of the 2017 notification was eagerly awaited by stakeholders, the MCA, through its notification dated 16 March 2022, extended the exemption on an "as is" basis with the same thresholds for another five years (ie, until 28 March 2027).
Section 6(2) of the Competition Act 2002 provides that parties to a combination are required to file a merger notification to the CCI within 30 calendar days of a "trigger event". Typically, in case of a merger or amalgamation, a board resolution is considered as a "trigger event", and in case of an acquisition, execution of the binding documents is considered as a "trigger event".
A failure to notify a transaction within the 30-calendar day timeline can expose transacting parties to gun-jumping proceedings, even if the belated filing is not truly a case of gun-jumping, and the resultant penalties. As India has a mandatory and suspensory regime, and that preparation of comprehensive merger notification is a time-consuming process, the MCA, by way of a notification dated 29 June 2017, had relaxed the onerous 30-day requirement to file the merger notification with the CCI. This statutory timeline requirement was suspended until the validity of the notification up to 28 June 2022.
In a notification dated 16 March 2022, the MCA pre-emptively extended the filing period relaxation for five years (ie, until 28 June 2027). As a result, parties can easily file a merger notification after the occurrence of a trigger event and prior to the consummation of the proposed transaction in part or whole.
Despite speculation that the STE thresholds have been revised or the criteria for exemption has been altered in view of the increasing concerns of several sizeable tech deals escaping CCI scrutiny, the MCA has ensured that two major merger notification procedures remain consistent. The renewal signals India's continued commitment to boost its appeal in the M&A and foreign investment space and to support the country's start-up ecosystem by keeping a minimal transactional burden. The renewal of the timeline notification is also welcome, as its alignment with global best practices will reinforce India's commitment to economic growth.
However, another significant MCA notification, which quietly lapsed in March 2021 and which merits a revival, is the group definition notification that was first introduced in March 2011 to raise voting rights thresholds for the purposes of defining a "group" from 26% to 50%. This concession was renewed in March 2016 for a further five-year period (ie, until 3 March 2021) and has since expired. In the absence of this notification, the value of assets and turnover of entities in which voting rights meet or exceed 26% must be aggregated while assessing a transaction's notification requirement under the group thresholds test stipulated in section 5 of the Competition Act. The roll back to the 26% threshold could potentially trigger a surge in merger filings and an increase in the regulatory burden on the CCI.
For further information on this topic please contact Anisha Chand, Soham Banerjee or Siddharth Bagul or at Khaitan & Co by telephone (+91 11 4151 5454) or email ([email protected], [email protected] or [email protected]). The Khaitan & Co website can be accessed at www.khaitanco.com.
(1) The small target exemption (STE) notification was first introduced on 4 March 2011 with asset and turnover thresholds of 2.5 billion Indian rupees (approximately $32.8 million) and 7.5 billion Indian rupees (approximately $98.5 million), respectively, for a period of five years. This was only applicable to acquisitions. In March 2016, the STE benefit was renewed for five years with enhanced thresholds. Subsequently, in March 2017, rescinding the March 2016 notification, the STE benefit was extended to mergers and amalgamations.