Corporate groups worried over the impending competition regulation on mergers and acquisitions (M&As) can breathe easy. Under the new norms notified by the corporate affairs ministry last week, if a corporate group has less than 50% voting rights in the target company, the group?s size ? as measured in terms of turnover or assets ? won?t be reckoned to determine if the transaction requires approval of Competition Commission of India (CCI). Also, a group?s size won?t include that of companies in which it has less than 50% voting rights, when it comes to regulatory clearance.
The relaxed norms essentially mean that in most cases, the more liberal enterprise-based criteria would apply, rather than the group-based ones, which would have brought a large number of M&As under regulation.
As per the Competition Act, a group means two or more enterprises which, directly or indirectly, are in a position to either exercise 26% or more of the voting right in the other enterprise (the target company) or appoint more than half of the board of directors. This threshold has now been raised to 50%, meaning that the group-based regulation would rarely apply. The move comes as a big relief to conglomerates like Tatas and Birlas where cross-holding is the norm with the stakes often exceeding 26% but remain below the halfway mark.
As per the Act, regulatory approval for a deal is needed if the merged entity belongs to a group that has Rs 4,000 crore asset or Rs 12,000 crore turnover in India or $2 billion worldwide assets or $6 billion worldwide turnover. Individual companies doing M&A deals, on the other hand, need CCI’s clearance if they have Rs 1000 crore combined assets or Rs 3,000 crore combined turnover in India or $500 million world-wide assets or $1500 million world-wide turnover.
The change in group concept has been brought about through a notification under section 54 of the Competition Act which gives the regulator powers for exemption. The new norm would be valid for a period of five years, after which it would be reviewed. The notifications would kick in from June 1 this year.
Explaining the rationale behind the move, a senior government official said, ?The idea is to encourage competition which would benefit consumers in the longer run. Retaining the definition of 26% stake for a group company would have meant that virtually every M&A deal of some of the big corporate firms required the Competition Commission of India?s approval,? he said.
Associate partner at Economic Laws Practice Samir Gandhi said that the change in the definition of group would be welcomed by corporate houses. ?The move becomes relevant for large business houses which have more than 26% controlling stake but less than a 51% shareholding in affiliate companies,? he said.
?Had the change not been effected, these companies would have been treated as part of the same group and their combined asset and turnover value counted while determining whether an acquisition made by any one of them, crossed the asset/turnover threshold and necessitated the merger to be notified to the CCI. The change would rectify this,? he said.
Head of competition law and policy at Vaish Associates, MM Sharma said while the move would send the right signal to India Inc, the corporate affairs ministry should have ideally amended the Act itself rather than issuing a notification. Over the last two years, the government has sought to address industry concerns pertaining to the M&A clauses in the Act. While the ministry has already set a limit for a target firm to a turnover of Rs 750 crore, it has also reduced the maximum time period for an M&A approval to 180 days from 210 days as outlined in the Act. FE was the first to report in its edition dated February 28 that the government was going to notify sections of 5 & 6 of the Competition Act with the committee of secretaries having cleared it. On Friday, the ministry through three notifications finally cleared the decks .
