September 30, 2024
Starting September 10, 2024,mergers and acquisitions (M&A) in India valued at over Rs. 2000 crore will face mandatory review by the Competition Commission of India (CCI). This will apply only if the target company has substantial business operations (SBO) in India.
What’s Changed?
Previously, M&A deals were reviewed based on asset and turnover thresholds. However, many companies in the digital and technology sectors, which may have lower assets or turnover, but still greatly impacted the market, escaped scrutiny under the Competition rules. A notable example of this Facebook’s acquisition of WhatsApp in 2014 for around Rs. 1,16,000 crore. Despite the massive value of the deal and the two entities being among the world’s widest used communication applications, the transaction did not meet the merger control thresholds not only in India but also in other jurisdictions like the EU as well. To address this gap, countrieslike Germany amended their competition laws to include a deal value threshold(DVT).
Now India has also introduced DVTas an additional criteria to determine whether a merger or acquisition needs to be notified to the CCI for review and approval. This means that any transaction with a significant market value will be reviewed regardless of the company’s assets or turnover. However, this will apply only if the target company has substantial business operations (SBO) in India.
The new regulations consider all forms of consideration, including cash, deferred payments, intellectual property (IP) rights, and even future payment estimates, to determine the total value of the deal. The change addresses gaps left by traditional thresholds based on assets and turnover, especially in the digital market.
What is Substantial Business Operations or SBO?
An enterprise is considered to have SBO in India, if:
a) Digital Services: For digital serviced, 10%or more of its business or end users are in India compared to its total global users; or
b) Gross Merchandise Value (GMV): The GMV(cash, receivables, or other consideration for or facilitating the sale of goods or services, directly or as an agent) for the period of 12 months preceding the relevant date in India is:
i. 10% or more of its total global GMV, and
ii. more than Rs. 500 crores; or
c) Turnover:The turnover during the preceding financial year in India is:
i. 10% or more of its total global turnover derived from all the products and services, and
ii. more than Rs. 500 crores.
Who is Affected?
These new thresholds primarily impact high-value, tech-heavy deals, especially in the fast-evolving digital sector where mergers and acquisitions happen quickly. Many digital companies provide services that are free and do not tend to acquire more assets despite being very large companies with the ability to affect the competition in the market. These are the deals and companies that will now come under CCI purview.
Impact of the New Regulations
The new regulations provide a stricter system for monitoring anti-competitive practices. By expanding CCI’s jurisdiction, they ensure that high-value deals can’t escape regulation. This aims to strengthen transparency and accountability in India’s M&A market.On the flip side, greater regulatory scrutiny could lead to hurdles for younger companies seeking acquisition.
Additionally, with the increase in workload, the CCI may need to enhance its resources and capacity to manage this broader oversight. Over time, these changes are intended to ensure that high-value deals are carefully reviewed, leading to fairer market practices.
