The Indian merger control regime recently witnessed a significant transformation with the introduction of a new set of regulations of the Competition Commission of India (CCI). These among other things bring in for the first time the much talked about deal value threshold.
Interestingly, and in a departure from past practice, these regulations apply retroactively to deals that have been signed, but not closed.
Whilst the intent behind introducing a threshold based on the value of a transaction was to exercise jurisdiction over mergers and acquisitions that might otherwise be overlooked, its retroactive application has sparked uncertainty in the regulatory landscape.
The implications of this move are far-reaching, affecting dealmaking timelines, established legal frameworks, market dynamics, and investor confidence.
Traditionally, significant changes to the Indian merger control regime have been applied prospectively, allowing sufficient time for businesses to adapt. For example, when combination regulations were first introduced in 2011, transactions approved or signed before the effective date were granted a safe harbour.
In fact, the CCI had taken a view then that for the first one year it would not commence gun jumping proceedings against any party that had concluded a deal without the CCI’s approval. Similarly, when the long-form merger filing format was revised in 2022, a one-month notice period was provided before the new Form II took effect.
Whilst the latest regulations do not provide a transition period, this is somewhat mitigated by the fact that the amendments were well-communicated in advance. The amendment process was extensively publicised with draft regulations released more than a year ago, and stakeholders had the opportunity to participate in consultations before the regulations were finalised.
Nevertheless, some interpretational issues remain, particularly concerning the deal value threshold, and detailed guidelines or FAQs would be helpful in clarifying these aspects.
The most concerning aspect of the new merger control regulations, however, is their departure from established practice by applying the new rules retroactively to deals that were signed but not yet fully consummated (either wholly or partly) before the regulations came into effect on September 10, 2024.
Impact on Deal Structuring
The application of the regulations to deals signed before their enactment creates uncertainty for businesses. This will require parties to transactions that have already been signed to re-evaluate deals under the new regulations.
Such deals may also end up having to obtain regulatory approvals that were not initially anticipated. This is because transactions are negotiated with transaction documents, including conditions precedent such as merger control approvals, prepared according to the law in effect at the time of signing.
However, due to the retroactive application of the new regulations, deals signed before the regulations came into effect may need to be renegotiated to comply with the amended regulations, and the trigger document(s) may need to be amended.
This could lead to delays or even the cancellation of deals if the compliance costs are too high, or if the transaction is no longer commercially feasible under the new regime or with the revised timelines.
Start-ups, in particular, often rely on timely injection of capital or acquisition by larger firms to scale. If a transaction signed before the new regulations is subjected to retroactive review, it could delay the funding round.
Start-ups may find themselves in a limbo while awaiting regulatory approval, which can disrupt cash flow, strategic plans, and, in some cases, even threaten such start-ups’ survival.
Impact on Foreign Investment
Foreign Direct Investment (FDI) is critical for emerging markets like India, particularly in sectors such as technology, infrastructure, and manufacturing. Foreign investors often rely on regulatory predictability when making investment decisions.
Such retroactive application undermines this predictability as foreign companies may hesitate to enter the market or expand their existing operations in India, potentially creating a chilling effect on foreign investment and the ease of doing business.
Parties may look to insert protective clauses in transaction documents (such as material adverse change clauses) to address regulatory risks, but this could complicate negotiations.
For the CCI, a retroactive application of the merger control regulations brings its own set of challenges. The CCI may face an upsurge in filings as parties rush to comply with the new filing requirements for deals that have already been signed.
This could place additional strain on the regulator’s already limited resources, potentially leading to delays in processing.
To meet statutory timelines, the CCI might be compelled to invalidate a larger number of filings, which could, in turn, have a cascading effect on (the already extended!) deal timelines.
In the light of these considerations, companies will need to invest in thorough due diligence and legal expertise to effectively navigate the complexities of the new framework. The coming months will likely witness an uptick in regulatory filings, along with broader questions regarding interpretational issues and the overall impact of these regulations on India’s investment climate.
As India continues to refine its competition policy, it will be crucial to strike a fair balance between regulatory intervention in order to promote fair competition and maintaining a stable, predictable and certain regulatory environment for businesses. Achieving this balance is key to fostering both domestic growth and attracting foreign investment, and ensuring that India remains an attractive destination for business in the global market.
In the light of the above analysis, it may be desirable for the CCI to reconsider the retroactive application of the new deal value thresholds to deals already signed but not closed.
Dhall is former head of CCI; Desai is Partner and Hirani is Associate at Touchstone Partners, Delhi
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