The Competition Act, 2002 (as amended), mandates that merger and acquisition (M&A) transactions in which the parties breach certain asset and turnover thresholds require the approval of the Competition Commission of India (CCI), unless one or more of the exemptions provided in the relevant regulations apply to such transactions. The thresholds provided under the Act are based on the combined value of assets and turnover of the parties to the transaction i.e., the acquirer and the target. Therefore, it is possible that acquisitions involving very small targets and large acquirers would qualify as combinations that require prior approval of the CCI. The ministry of corporate affairs recognised the fact that transactions involving small targets would ordinarily have a negligible impact on the competitive landscape and to overcome this particular lacuna in the law, prior to the merger control becoming effective in India, the ministry introduced the small target exemption (also known as the de minimis exemption) through a notification dated March 4, 2011, and a corrigendum dated May 27, 2011.
The exemption provides that in the event the enterprise whose assets, control, shares or voting rights are being acquired has assets of a value less than or equal to R250 crore in India or turnover less than or equal to R750 crore in India, then an acquisition involving such target would not require the CCI’s prior approval. This exemption was introduced for a period of 5 years only and is set to expire in March 2016.
Did the CCI miss out on scrutinising some important transactions because of the availability of this exemption? Perhaps it did—there are some sectors that are fragmented and it is possible for a large acquirer to keep acquiring smaller companies and garner a significant market share without the CCI’s scrutiny. Did the market or the economy suffer because of this? It is too soon to say and, the CCI has other powers it can use against such enterprises. Therefore, should the small target exemption stay? Yes, it must.
At the time that the exemption was notified by the ministry, the CCI had been operational for 2 years and merger control was going to come into effect on June 1 that year (2011).
Stakeholders were concerned that a large number of deals requiring CCI’s approval would mean delays, which would hamper deal timelines. But, this was 5 years ago. Merger regulation in India, while still developing, has come of its own. The CCI has clearly shown its prowess in dealing with complex M&A and except for the occasional hiccups (mostly administrative) the regulator is on top of its game. However, the concerns of 5 years ago still remain and the benefits of this exemption cannot be emphasised enough. This exemption has effectively kept merger control under control! The CCI is not inundated with notifications that it does not have the time for, while, for the most part, transactions that were truly insignificant as regards their likely impact on competition have steered clear of the need for the CCI’s approval, aiding merger and acquisition activity in India.
While the exemption is effective in its current form, an increase in the thresholds would update it in line with the changes in the economy, including the change in inflation and other national statistical metrics. Such a development would be well received by industry.
At present, the exemption is applicable in cases where either the target’s value of assets is below R250 crore or the turnover is below R750 crore. This “or” could be amended to be read as “and” so that the exemption would be applicable in cases where both the asset value and turnover of the target are below the thresholds of R250 crore and R750 crore, respectively. Such a change would bring those sectors that are asset-heavy but turnover-light (e.g., hospitality) or asset-light but turnover-heavy (e.g., information technology) under the scanner. Quite irrespective of the benefits that the CCI’s scrutiny would present for such sectors, the government could bear in mind that the CCI’s has powers to investigate abuses of dominance as well as to divide an enterprise enjoying a dominant position in the relevant market. The government must also balance its options against the general sentiment in the economy and the fact that business is looking for brighter green signals from it.
Lastly, the exemption has not been extended to transactions which have been structured as “mergers or amalgamations” and is restricted to “acquisitions”. Currently, a transaction structured as an acquisition takes benefit of the exemption but, a court approved merger or amalgamation is unable to avail the benefit—this is because of the manner in which the exemption is worded—it seems to preclude acquisitions that are court-approved. There is no reason why this exemption cannot be extended to acquisitions that are structured as mergers or amalgamations for it is not the structure that determines the impact that a transaction will have on the competitive landscape.
Co-authored with Anshuman Sakle, senior associate, Khaitan & Co.
The author is partner, Khaitan & Co.
Views are personal