The Ministry of Corporate Affairs, Government of India (MCA) notified significant amendments (Notification) on 27 March 2017 to the small target exemption (also known as the de minimis exemption) (STE), expanding its scope to include mergers and amalgamations and clarifying that only the “true target” in case of asset acquisitions will now be considered for the purposes of determining the applicability of the asset and turnover thresholds under the Competition Act, 2002 (as amended) (Act).
The Notification takes effect as of 27 March 2017, which is the date of its publication.
This newsflash examines the changes and their impact.
The STE as it stood earlier
Previously, the STE exempted only acquisitions of shares, voting rights or control from approval requirements under the Act if,
- The value of assets of the target enterprise was not more than INR 3.5 billion (approximately USD 54 million; EUR 50 million; GBP 43 million; JPY 6 billion) in India;
- The turnover of such enterprise was not more than INR 10 billion (approximately USD 154 million; EUR 143 million; GBP 124 million; JPY 17 billion) in India.
The STE was not applicable to transactions structured as mergers or amalgamations (transactions where one entity merged with or amalgamated into another).
Additionally, in case of asset acquisitions, the assets and turnover of the selling enterprise, and not the value of the true target assets/division/business being acquired, were considered for the purposes of applying the threshold tests under the Act.
The Notification and its Amendments
Expanded Scope of the STE: Mergers & Amalgamations
While the thresholds under the STE remain constant, the STE is now applicable in case of acquisitions as well as mergers and amalgamations under Section 5(c) of the Act.
Expanded Scope of the STE: Asset Acquisitions
The Notification clarifies, as a matter of principle, that where only a “portion of an enterprise or division or business is being acquired”, it is the value of the assets and turnover attributable to the relevant portion or division or business that will considered to determine the applicability of the thresholds under the Act, and therefore, parties will no longer be obliged to look to the seller’s assets / turnover.
The value of the assets of the business or division or the portion of the enterprise being acquired shall be determined with reference to the audited books of account of the enterprise or as per the statutory auditor’s report in the financial year immediately preceding the financial year in which the proposed combination) transaction falls. Similarly, the turnover shall be certified by the statutory auditor on the basis of the last available accounts of the company.
This amendment takes away from the principle of attributability which has been cited by the Competition Commission of India (CCI) in Regulation 5(9) of the CCI (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations), various orders passed by the CCI and explained in a document published on the website of the CCI titled Frequently Asked Questions for Combinations in India. The principle of attributability required that for asset acquisitions the value of assets and turnover of the enterprise whose assets were being transferred would be attributed to the value of assets and turnover of the enterprise to which the assets are being transferred.
Now, it is only the value of assets and turnover of the true target that will be considered, as opposed to that of the seller.
In our opinion, the CCI will now also have to amend the Combination Regulations to this effect considering the clear conflict between the Notification and the Regulation 5(9) of the Combination Regulations.
Expanded Scope of STE: Applicability to Foreign Transactions
The Notification and its changes will also apply to asset transfers where the assets are located outside India or the said assets have no turnover attributable to India or where the assets / turnover of the assets being transferred pursuant to the foreign-to-foreign transaction meet the de minimis threshold.
Expanded Scope of STE: Applicability to Joint Ventures
The principle of attributability required that the value of assets / turnover of each of the parents contributing business / assets to the joint venture would be considered “targets” for the purposes of applying the thresholds under the Act. These were understood to be “brownfield” joint ventures and were thus notifiable to the CCI. The principle applied similarly to a brownfield joint venture, where the parents transferred assets to the joint venture entity and were in effect treated as the targets themselves. In light of this Notification, this approach is no longer necessary and the value of the assets and turnover attributable only to the portion of the assets that are being transferred to the joint venture company by the parents will be considered.
Brownfield joint ventures need only be notified when the true target meets the relevant thresholds under the Act.
Expanded Scope of the STE: Validity and Time Period
The STE as previously notified by the MCA by its notification dated 4 March 2016 has been rescinded and is now applicable for a period of five years from the date of publication of the Notification i.e., until 27 March 2022. The amendments in the Notification with respect to the principle of attributabilty, clarifying that it is only the value of the true target that need be considered for the purposes of the filing thresholds, is not limited by time.
Indeed, this is a welcome step as it aligns the Indian merger control regime with internationally accepted practices. Particularly with regard to asset acquisitions, this will substantially reduce the number of notifications received by the CCI since this is a narrower approach with a focus on the “true” target, as opposed to the selling enterprise. This will also reduce the burden on transacting parties and brings relief to transactions that have limited or no nexus to India.