1. CCI eases M&A rules, to boost consolidation

CCI eases M&A rules, to boost consolidation

Investors already holding 25% or more as shares or voting rights in a firm can now enhance their stake to the 50% threshold without prior approval of the Competition Commission of India...

By: | New Delhi | Published: January 27, 2016 1:22 AM
The CCI, which vets mergers and acquisitions to ensure that they don’t potentially destroy competition, assesses “the appreciable adverse effect” on competition in the relevant market due to the combination in question.  (Reuters)

The CCI, which vets mergers and acquisitions to ensure that they don’t potentially destroy competition, assesses “the appreciable adverse effect” on competition in the relevant market due to the combination in question. (Reuters)

Investors already holding 25% or more as shares or voting rights in a firm can now enhance their stake to the 50% threshold without prior approval of the Competition Commission of India, as the latter has eased its regulations for combinations. A firm or group that is in the same/identical business as the company whose stakes are picked up will also have the benefit of the exemption.

Of course, the caveat that the waiver won’t be available if such acquisition results in acquisition of sole or joint “control” of the target entity would stay.

Hitherto, investors with 25% or more in a firm have required to take the competition watchdog’s nod for “gross acquisition of more than 5% of the shares or voting rights (additionally) in a financial year”.

Analysts called the CCI’s latest move as a “major relaxation” comparable to the 2013 aligning of its then tougher M&A regulations with market regulator Sebi’s takeover code. The requirement of prior approval of the CCI for such stake acquisitions, they noted, have been hampering tranche-wise capital infusions in many firms, including online retailers, they said. While investors would often want to link capital investments in a firm to its performance and expansion timelines, there are instances where even operational expenditure like the spending on marketing blitzkrieg needs multiple investments from outside.

The CCI has also waived its prior approval for acquisition of up to 10% of the total shares or voting right of a firm, treating them as “solely as an investment”, However, the voting rights acquired should be in sync with the shareholding and the acquirer should not become a member of the board or nominate one to it or “participate in the affairs or the management of the enterprise”. Currently, even for share acquisitions below 10%, the CCI’s prior approval is required if voting rights, even if equitable, are acquired.

However, sources said this relaxation, meant to promote private private equity and venture capital investments, may not practically help these classes of investors. This, they said, is because PEs and VCs, being fiduciaries, would invariably want seats on the boards of the companies they invest in.

Investments by high net worth individuals could, however, be eased by the new norm, as these investors are not always keen on board positions.

“The present moves of CCI will provide the much-required flexibility to investors,” said Hemal Mehta, partner at Deloitte Haskins & Sells.

The CCI, which vets mergers and acquisitions to ensure that they don’t potentially destroy competition, assesses “the appreciable adverse effect” on competition in the relevant market due to the combination in question. As per the rules under the Competition Act, if parties to a combination are in the business of identical or substitutable goods and services, they would need to file a notice with the CCI if their combined market share is more than 15% of the relevant market. If the parties are in different stages/levels of production chain, then the combined market share threshold for the notice requirement is 25%.

“The amendments to the combination regulations are based on industry demands and the experience gained by CCI while dealing with past cases. They would be conducive to the M&A environment by providing greater clarity and eliminating filing of applications which may not be material or necessary,” said Prashant Kapoor, partner (M&A-tax) at KPMG in India.

M&A-friendly
* If one already has 25% or more in a firm as shares/ voting rights, buyer can raise the stake up to 50% sans CCI’s prior nod
* Waiver also for firms in identical business; boost to consolidation plans of India Inc
* Up to 10% investment exempt from prior CCI approval, if no board position sought; to ease HNI investments

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