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The Competition Commission of Indiais likely to issue draft proposals this month on the calculation of deal value threshold (DVT) and what constitutes significant business operations (SBO) in India, said market watchers.
Following the amendment of the Competition Act, 2002, in April this year, CCI’s nod is needed for M&A transactions valued at over Rs 2,000 crore, and if the target entity being acquired or merged has substantial business operations in India.
The tests to be applied for SBO are likely to be in line with some of the criteria and factors applied in countries such as Germany and Austria, with some tweaks.
For technology or digital companies, for instance, SBO could be determined by the number of monthly subscribers or active users, or the number of unique visitors on a website. The other determinants could be the target company’s turnover derived from India, its market share, location of customers, and access to Indian customers’ data. The new rules could also look at direct customers of a digital service, and if the digital service’s offering is included by other digital services.
For pharma companies, the factors could be whether the company has an R&D centre or a contract manufacturing unit in India.
“Will SBO be determined based on the direct or indirect presence of the parties, number of subscribers, location of customers, and market share of the target?” said Gauri Chhabra, partner, Shardul Amarchand Mangaldas & Co. “In the case of global transactions, will India-specific value need to be considered? For multiple co-investors, will the entire value paid by all the investors be considered to determine the deal value and trigger a filing? These are some issues that need clarity.”
The DVT has to consider if the deal is paid entirely in cash, part cash, part shares or through a share swap. Indian accounting standards may be used to arrive at the right value, said experts.
“Austria primarily focuses on whether the target has a local presence (a site or a subsidiary), whereas Germany looks at the industry in question, in particular, whether the parties’ turnover reliably reflects its market position in this industry,” said Vaibhav Choukse, partner and head of practice (competition law) at JSA.
Digital, real estate companies to be affected
Digital deals and those related to the real estate sector are most likely to be affected by the new norms, according to Chhabra. This is because target entities with less than the prescribed assets or turnover currently availing of the de-minimis exemption, despite having substantial presence and/ or market power, will be caught.
“A lot of the buildings and land that were acquired by real estate companies were not notified to the regulator because they did not meet the turnover threshold. All those transactions will require a filing now,” Chhabra said.
According to earlier norms, CCI’s nod was not required if the value of the assets being acquired or merged was not more than Rs 350 crore in India or turnover was not more than Rs 1,000 crore in India.
“A fine balance needs to be struck between casting the net too wide and too narrowly under the DVT. Hopefully, SBO will be defined in a way that a filing requirement is triggered only for target companies, having a meaningful and sizeable India nexus,” said Bharat Budholia, partner, AZB & Partners.
In the past, several transactions, especially in the digital space, slipped through the cracks of the CCI’s review, despite the potential impact on competition.
The new norms may stretch deal closure timelines and impact deal certainty.
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