In doing so, the CCI relied on its past decisional practice^[3], where it had observed that the test for a transaction to qualify as in the OCB of an entity was two-fold: (i) the transaction should be a revenue transaction and not a capital transaction; and (ii) the transaction should be undertaken solely to get benefit from short term price movement of securities.

An ‘investment’ by its very definition is a capital transaction, thereby, failing the key consideration for the OCB test. Further, even in cases where the sole intention of an investment might be to ‘get benefited from short term price movement of securities’, the CCI’s decisions suggest that the OCB test would not be applicable if the investments are held for a considerably long time and the acquirer(s) are participating in the management of the investment with a view to cause appreciation of value of their holdings.This effectively renders the OCB limb of the exemption nugatory and makes it difficult to rely on this limb of the exemption in the future.

The CCI also clearly indicated its position on transactions involving a board seat. In the Pioneer Decision, the CCI observed that for a transaction to qualify as solely for investment purposes (SIP), it should meet the following criteria (as already set out under the relevant regulations):

1. There is no representation of the acquirer on the board of directors of the target, to ensure that an acquirer with minority shareholding does not become privy to competitively sensitive information (CSI);
2. The acquirer should not have a right or intention to nominate a director on the board of directors of the target, or an intention to participate in the affairs or management of the target; and
3. The acquirer should only have the ability to exercise rights that are exercisable by an ordinary shareholder of the target.

On the basis of the above observation, the CCI held that all share acquisitions which involve a board seat appointment will likely need to be notified, as such transactions will not be viewed as SIP (or based on the analysis above, in the OCB), and therefore, the Item 1 Exemption will be inapplicable to transactions involving a board seat. This overall weakening of the Item 1 Exemption is a huge blow to private equity players and is likely to result in greater number of notifications.

• A New Phase for Incremental Share Acquisitions by a Majority Shareholder – The CCI revises its approach:

In the revised responses to the frequently asked questions (FAQs) published by the CCI in September 2022,^[4] the CCI revised its approach to the exemption applicable to incremental share acquisitions (Item 2 Exemption).

Prior to the publication of the revised FAQs, Item 2 Exemption was applicable in all instances where the acquirer, prior to the acquisition, held 50% or more shares or voting rights in the target enterprise, provided that the transaction did not result in a change in the degree of control, i.e., transfer from joint control to sole control. However, through the revised FAQs, the CCI has created an artificial distinction in the change in the degree of control.

Simply put, the CCI has changed the interpretation of the exception to the Item 2 Exemption which contradicts the CCI’s past guidance on ‘control’ and creates a separate definition of ‘control’ for the purposes of the Item 2 Exemption.

While the FAQs do not possess the force of law, they do reflect the CCI’s thinking in relation to acquisitions where the acquirer, prior to the acquisition, holds 50% or more shares or voting rights in the target enterprise. As such, the FAQs provide little to no certainty in respect of the various ‘degrees of control’ which may render the Item 2 Exemption inapplicable. It remains to be seen if the CCI will provide any additional guidance on this aspect, either formally or informally, or legally formalizes the view taken in the FAQs.

• The Green Channel Route – A Sustained Success Story:

The Green Channel filing route was introduced by the CCI to facilitate the speedy and automatic (deemed) approval of combinations which posed no underlying risk of any appreciable adverse effects to competition (AAEC), owing to the lack of any horizontal, vertical, or complementary overlaps between the parties to the combination. Until December 2022, over 70 combinations were thus deemed to be approved on notification, of which more than 20 were approved in 2022.

• The CCI adopted both behavioural and structural remedies in conditionally approving three combinations:

The CCI has the power to seek and/ or impose remedies to a transaction, if it is of the view that the transaction is likely to cause an AAEC in the relevant market(s) in India. Till date, the CCI has adopted a mix of structural remedies (divestments), behavioural remedies and hybrid remedies (a combination of structural and behavioral remedies).

After a hiatus of almost two years (since the ChrysCapital/ Intas decision in 2020), 2022 saw the CCI conditionally approving three transactions. In these three instances, the CCI conditionally approved the transaction by accepting voluntary modifications offered by the parties, consisting of both structural and voluntary remedies:

1. In Google/ Airtel,^[5] the CCI conditionally approved Google International LLC’s (Google) acquisition of a non-controlling minority stake of 1.28% in Bharti Airtel Limited (Airtel) owing to Google’s stake in Jio Platforms Limited (Jio) which is also active in similar businesses to Airtel. The CCI raised concerns of a potential flow of CSI between Airtel and Jio which were allayed by certain voluntary behavioural remedies including an information firewall between Airtel and Jio.^[6] Interestingly, the remedies stemmed owing to only the minority stake of Google in Jio.
2. In Sony/ Zee,^[7] the CCI, based on its prima facie review of the transaction, expressed apprehensions that the resultant entity would be the largest broadcasting house in India with vast content and higher market shares across the channel genres of Hindi General Entertainment Channels (GEC), Hindi Films, Marathi GEC, and Bengali GEC. The CCI conditionally approved the merger subject to a voluntary structural remedy entailing the divestment of three GEC channels.
3. In Umang Birla Commercial Company/ Aditya Marketing and Manufacturing,^[8] the CCI conditionally approved the merger of Aditya Marketing and Manufacturing Private Limited (Aditya Marketing) with and into Umang Commercial Company Private Limited (Umang) subject to certain voluntary behavioural commitments. This was owing to substantive horizontal and vertical overlaps between Grasim Industries Limited (Grasim), an affiliate of Aditya Marketing, and Kesoram Industries Limited (Kesoram) and Mangalam Cement Limited (Mangalam Cement), affiliates of Umang. The behavioural commitments entailed, amongst other matters, Umang neither interfering with the composition of the board of directors, nor engaging in the management and affairs of Kesoram and Mangalam Cement. Additionally, Umang would dilute its direct and indirect shareholding in Kesoram to below 25%.

2022 also witnessed the CCI for the very first time unconditionally approve a transaction after issuing a show-cause notice in PayU/ BillDesk^[9] which involved an acquisition of 100% of the equity share capital of BillDesk by PayU Payments. Given the niche aspects of the market (which the CCI assessed in detail for the first time) the transaction was closely scrutinized. The CCI’s approval order will be determinative of the CCI’s approach towards transactions in the digital payments space in India going forward. The maturity displayed by the CCI in assessing the transaction in a new-age, digital market is likely to increase business confidence as India continues to thrive with increased domestic and foreign investments.

• The CCI, for the first time since becoming fully functional, has been inquorate:

In 2022, the CCI has been inquorate for the first time since becoming fully functional in 2009. The retirement of Chairperson Mr. Ashok Kumar Gupta in October 2022 has resulted in the CCI being reduced to two members. While the CCI has promoted member Dr. Sangeeta Verma to the position of ‘Acting Chairperson’^[10], it is yet to appoint either a regular Chairperson or an additional member to make the CCI quorate again.

The lack of quorum significantly affects the approval of combinations by the CCI, except in the case of filings made under the Green Channel route. Under the Competition Act, 2002, (Competition Act) the quorum for any meeting of the CCI where a decision has to be taken (including decisions of combinations filed with the CCI) is three members.^[11] It is unprecedented in the CCI’s history of 11 years that the CCI has remained inquorate.^[12]

• The Competition Amendment Bill was tabled before the Parliament

The Competition Amendment Bill, 2022^[13] (CAB), introduced in the Indian Parliament in August 2022, proposes to bring a slew of changes to Indian competition law, not least to the Indian merger control regime. The key changes proposed to the merger control regime are set out below:

• Introduction of deal value thresholds:

The most notable change proposed to be brought by the CAB to the Indian merger control regime is the introduction of ‘deal value’ thresholds for assessment of whether a merger, amalgamation or acquisition qualifies as a combination and requires notification to the CCI.

Presently, Section 5 of the Competition Act only prescribes asset and turnover based thresholds. In the event that either of the test is met and provided that no exemption is available, then the parties to such combination are required to notify it to the CCI. The CAB proposes the introduction of an additional threshold based on ‘deal value’, pursuant to which: (a) transactions with a deal value of greater than INR 2,000 crores; and (b) where either party has ‘substantial business operations in India’ will require to be notified to the CCI. The proposed introduction of the deal value threshold stems primarily from transactions in the digital and infrastructure spaces escaping the CCI’s radar because the assets and turnover of the parties to such transactions are below the current jurisdictional thresholds.

The Parliamentary Standing Committee on Finance, in its December report on the CAB (PSC Report)^[14], expressed concerns on the lack of clarity about the computation of the deal value threshold. It recommended that the methodology for computing the deal value threshold should be specified by the regulations, and that the deal value threshold should only apply where the target enterprise has substantial operations in India.

With the INR 2,000 deal value threshold being rather low, and the CCI yet to adopt a standard for assessing ‘substantial business operations’ in India, it remains to be seen whether the introduction of the deal value threshold will open the floodgates to additional merger filings, some of which may not have any AAEC in India.

• Shorter merger review timelines:

Presently, the CCI has 30 working days to arrive at its prima facie view on whether a combination raises any concerns of AAEC in India, and 210 calendar days for the CCI to arrive at an overall decision on a transaction. The CAB seeks to shorten these timelines – 20 calendar days for the CCI to form its prima facie view and 150 calendar days for the CCI to arrive at a decision, with a maximum extension of 30 calendar days. The CAB also expedites the timelines for all other steps in the merger review process, potentially resulting in quicker approvals but also added pressure on parties to combinations as well as the CCI case teams.

The expedited merger timelines have been met with resistance from the CCI. The PSC Report has recommended that the existing timelines be retained.

• Amendments on the definition of ‘control’:

The CCI’s definition of ‘control’ has been fluid, and the standard has significantly shifted over the years – moving from ‘decisive influence’ in the CCI’s early decisional practice to the more recent ‘material influence’, considered to be the lowest standard of control. While the CCI has time and again used the ‘material influence’ standard of control in its decisional practice, the CAB finally codifies this standard. However, lack of explicit guidance and spelling out of the matrix of factors which need to be assessed in determining whether the standard is met, potentially takes away from the clarity that the amendment intends to bring about. This has been recognized by the PSC Report, which has recommended that ‘material influence’ be specified by regulations.

It is now to be seen whether the CAB will see the light of the day in 2023.

• The CCI continued with its mission of facilitating the ease of doing business and reducing compliance burden on parties:

• • The Ministry of Corporate Affairs renewed the Target Based Exemption for an additional 5 years:

The Target Based Exemption, which exempts the notification of transactions where the target enterprise either has assets of less than INR 350 crores in India or has a turnover of less than INR 1000 crores in India, was set to expire in March 2022. The Ministry of Corporate Affairs (MCA) extended the applicability of the Target Based Exemption for an additional 5 years (up till March 2027), without changing the asset and turnover thresholds.^[15]

• • The CCI introduced a revised Form II:

In April 2022, the CCI introduced a revised, more simplified Form II (Long Form)^[16], which substantively changed the format and the scope of queries posed to transacting parties whose post-combination market shares exceed 15% in the case of horizontal overlaps and 25% in the case of vertical linkages. The revised form, which came into effect on 1 May 2022, was aimed at making the assessment process more objective and focused, and in doing so, did away with a number of onerous information requirements and duplicated queries which riddled the old Form II.

The new Form II, with its streamlined format, 6 fewer queries (7, compared to the old Form II’s 13) and subject-wise clubbing of queries, has reduced the compliance burden on filing parties to some extent. While the revised Form II does increase the duration for which market-facing data is to be provided from three years to five years and seeks additional details in relation to the vertically overlapping and complementary activities of the parties, the revised Form II has overall been openly welcomed by the industry. As part of the announcement of the revised Form II, the CCI also expressed its intention to issue a guidance note on the revised Form II in the future, another move that is sure to make the notification process more objective.

• • The MCA extended the suspension of the 30-day filing rule:

Section 6 of the Competition Act requires transactions to be notified to CCI within 30 days of the trigger event (such as the execution of transaction documents), a requirement that was suspended for five years through a notification passed in June 2017. In June 2022, the MCA extended the suspension period for another five years (until 28 June 2027).^[17]

The continued suspension of this statutory requirement, considered by most to be onerous and impractical, means that transacting parties can continue to file a notification with the CCI at any stage after the trigger event but prior to the competition/ closing of a transaction.

The Standing Committee’s Report on Anti-Competitive Practices by Big Tech Companies proposes a more onerous notification framework for Big Tech Companies:

The winter session of the Parliament in December 2022 also saw the release of the Standing Committee on Finance’s report on ‘Anti-Competitive Practices by Big Tech Companies’ (Big Tech Report)^[18] which, presented the Standing Committee’s views on mergers and acquisitions by large technology enterprises (Big Tech Companies). The Big Tech Report acknowledges that certain mergers and acquisitions are not captured by the Competition Act because they do not meet the thresholds of assets and turnover.

While the deal value thresholds have been generally recognized as one possible solution to the issue, the Big Tech Report recommends that certain Big Tech Companies (specifically recognized as ‘Systematically Important Digital Intermediaries’) inform the CCI of any intended merger/ acquisition, where the merging entities or the target enterprise provide services in the digital sector or enable the collection of data, irrespective of whether it is notifiable to the CCI. The Big Tech Report further recommends that Big Tech Companies inform the CCI of such proposed mergers and acquisitions prior to their implementation.

While these recommendations spell some arduous requirements on such Big Tech Companies, it is a matter of time to see precisely how such recommendations would be enacted and legislated upon and whether they are included in the CAB or other legislative proposals.

Conclusion

The year 2022 has been an important year for the CCI, with a number of changes being introduced by it being focused squarely on making the merger control regime more business friendly. However, concerns persist. The CCI’s revised approach on the Item 1 Exemption and Item 2 Exemption, the potential introduction of deal value threshold and shortened merger review timelines, as well as the potential ambiguity in the CCI’s standard of control, all have the potential to compromise the positive work done by the CCI to make merger notifications less burdensome and more objective. The year 2023, again, promises to be a big year for the CCI, with a new Chairperson at its helm, the CAB potentially seeing the light of the day and a potential global economic downturn.^[19] As always, it is only hoped that the CCI continues to maintain a strong balance between ensuring competition in Indian markets and making it easier for parties to undertake business in India.

Footnote

[1] Ref. No. M&A/Q1/2018/18 (30 September 2022) PI Opportunities Fund – I/ Pioneer Investment Fund/ Future Retail Limited.

[2] (30 September 2022) Ref. No. C-2021/01/810 (30 September 2022) Trian Partners AM Holdco, ltd./ Trian Fund Management L.P./ Invesco.

[3] Combination Registration No. C-2017/05/509 (11 May 2018) Bharti Airtel Limited/ Videocon Telecommunications Limited.

[4] Available here:https://www.cci.gov.in/images/whatsnew/en/faq-english-compressed-31020221664785663.pdf

[5] Combination Registration No. C-2022/03/913 (30 June 2022) Google International LLC/ Bharti Airtel Limited.

[6] While the parties also offered a second voluntary modification, it has been redacted from the public order.

[7] Combination Registration No. C-2022/04/923 (04 October 2022) Culver Max Entertainment/ Bangla Entertainment/ Zee Entertainment Enterprises.

[8] Combination Registration No. C-2022/07/952 (30 August 2022) Umang Commercial Company Private Limited/ Aditya Marketing and Manufacturing Private Limited.

[9] Combination Registration No. C-2022/04/920 (05 September 2022) PayU Payments Private Limited/ IndiaIdeas.com Limited.

[10] Available here: https://economictimes.indiatimes.com/news/india/govt-appoints-sangeeta-verma-as-acting-chairperson-of-cci/articleshow/95084896.cms.

[11] Proviso to Section 22(3), Competition Act.

[12] At the time of the publication of this article, the CCI is yet to appoint a regular chairperson.

[13] Available here: https://prsindia.org/files/bills_acts/bills_parliament/2022/Competition%20(Amendment)%20Bill,%202022.pdf

[14] Available here: https://prsindia.org/files/bills_acts/bills_parliament/2022/SC%20Report_Competition%20(A)%20Bill,%202022.pdf.

[15] Available here: https://cci.gov.in/combination/legal-framwork/notifications/details/15/0

[16] Available here: https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1813318

[17] Available here: https://cci.gov.in/combination/legal-framwork/notifications/details/14/0

[18] Available here: https://164.100.47.193/lsscommittee/Finance/17_Finance_53.pdf.

[19] Available here: https://www.worldbank.org/en/news/press-release/2022/09/15/risk-of-global-recession-in-2023-rises-amid-simultaneous-rate-hikes.

This article was originally published in Mondaq on 19 January 2023 Co-written by: Aparna Mehra, Partner; Ritika Sood, Senior Associate; Karan Arora, Associate. Click here for original article

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