Deal Talk: Deal Breaker or Deal Maker?: Deconstructing the “Deal Value Threshold” Under The Competition Act, 2002

Deal Breaker or Deal Maker?: Deconstructing the “Deal Value Threshold” Under The Competition Act, 2002

A. Introduction

On September 9, 2024, the Competition Commission of India (“CCI”), Government of India and the Ministry of Corporate Affairs collectively unveiled a ground-breaking set of updates to the merger control regime in India, effective from September 10, 2024. This significant overhaul comes through the notification of amendments to the Competition Act, 2002 (“Act”) and new sets of rules and regulations operative under the framework of the Act.

At the heart of these changes is the notification of the widely anticipated “deal value threshold” (“DVT”), which now forms part of the Indian merger control regime through a conjoint reading of the Act, the Competition (Amendment) Act, 2023 (“Amendment Act”), and the Competition Commission of India (Combinations) Regulations, 2024 (“2024 Combination Regulations”).

In our most recent edition of the “Deal Talk”, we deconstruct this critical concept in the following manner:

• we delve into the rationale for introduction of the DVT in the Indian merger control regime;
• we outline the key parameters that are to be considered during assessment of applicability of the DVT to transactions; and
• we set out a framework of the manner in which the DVT shall operate within the existing merger control regime.

At each point across this Deal Talk, we have set out certain critical noting points (relevant for parties at the time of structuring transactions) through a corresponding “Note to Deal Teams”.

B.  Why was DVT introduced?

The DVT is an additional criterion that has been introduced under Section 5 of the Act, which assesses the requirement of prior notifiability of transactions to the CCI through a “value of the transaction” test. Through the amendments proposed in the Amendment Act, DVT has been codified in the form of Section 5 (d) of the Act, which is in addition to the Section 5 (a), (b) and (c) threshold analysis that has been prescribed in the existing regime. It is to be noted that while the DVT itself has been added to the Act, detailed criteria to be met to satisfy the DVT are also set out within the 2024 Combination Regulations.

This is in stark contrast to the existing Sections 5 (a), (b) and (c) thresholds, each of which provides an “enterprise level” or “group level” asset or turnover threshold as the basis for calculation.¹

The following components are to be met for a transaction to be considered notifiable to the CCI due to application of DVT under Section 5 (d) of the Act read with the 2024 Combination Regulations:

• The “value of the transaction” (in connection with an acquisition of shares, voting rights, assets or control or a merger or amalgamation) being analysed must exceed INR 2,000 crores (i.e., approximately USD 238.4 million or EUR 215.1 million);² (“Value Test”) and
• The enterprise being acquired, taken control of, merged or amalgamated must have “substantial business operations” in India (“Business Test”).³

(the Value Test and Business Test, collectively, the “DVT Framework”).

Before delving into a detailed assessment of how the Value Test and Business Test are to be calculated and met (which has been set out in the next section), it is important to understand why the DVT was introduced.

DVT was first conceptualised in the Competition Law Review Committee’s Report released in 2019, which noted that: (a) under the Act, the CCI did not have the residuary power to review non-notifiable transactions to assess “appreciable adverse effect on competition”; (b) foreign jurisdictions such as Germany, Austria, etc. utilise a transaction value criterion in order to assess transactions in digital markets; and (c) a large number of transactions having a larger deal value were not being notified to the CCI as the enterprise was able to avail exemptions under the then applicable merger control regime.⁴

Major exempt deals under the old merger control regime

In order to understand point (c) above in greater detail, let us take examples of a few transactions that had large deal values but were not notified to the CCI due the availability of the Previous De Minimis Exemption (as defined below):⁵

• Zomato’s Acquisition of Blinkit: On August 10, 2022, Zomato Limited (“Zomato”) completed the acquisition of Blink Commerce Private Limited (formerly known as Grofers India Private Limited) (“Blinkit”). The consideration paid by Zomato was through issuance of 628,530,012 fully paid-up equity shares of Zomato worth INR 55.45 per equity share for a total of 91.04% shareholding of Blinkit, which amounted to INR 3,485 crores (i.e. approximately USD 415.4 million or EUR 374.8 million).⁶ In effect, the transaction was structured as a share swap.

  This transaction was not notified to the CCI since the transaction was able to avail the previously applicable de minimis exemption thresholds⁷ (“Previous De Minimis Exemption”).⁸ 

• Zomato’s Acquisition of Uber Eats: A similar transaction structure was also utilised by Zomato for the acquisition of Uber Eats in January 2020.⁹ The Uber Eats acquisition was an all-stock transaction where in lieu of their shares, the existing shareholders of Uber Eats were issued 9.99% ownership in Zomato. The approximate deal value for the deal was USD 350 million (i.e. approximately INR 2,485 crores or EUR 315.7 million).

  This acquisition was not notified to CCI given that it could also avail the Previous De Minimis Exemption.

• Facebook’s Acquisition of WhatsApp:  The killer acquisition of WhatsApp by Facebook was the talk of the town in 2014. Facebook acquired 100% of WhatsApp for a deal value which was touted to be approximately USD 19 billion (i.e. approximately INR 159378 crores or EUR 17 billion).¹⁰

  While antitrust regulators in the European Union and the United States of America got the opportunity to scrutinize and assess whether the acquisition impacted competition in their respective jurisdictions, the CCI could not assess this acquisition.

• PVR-Inox Merger: In 2022, PVR Limited (“PVR”) and INOX Leisure Limited (“Inox”), popularly known for being rivals in the film exhibition industry, merged via a court-sanctioned amalgamation of Inox into PVR as per the Companies Act, 2013. The resultant entity that was to be created was called “PVR Inox Limited”. As a result of the transaction, existing shareholders of Inox were to receive shares of PVR based on a swap ratio set out within the scheme of amalgamation.¹¹ The merger was intended to assist PVR and Inox with maintaining their long-term operations in order to survive the increasing threat posed by the growing popularity of OTT platforms. Further, it was also likely to lead to the resultant entity becoming one of the largest players in the film exhibition industry in India.¹²

  Despite the transaction leading to a tremendous consolidation of the market share of PVR and Inox (as mentioned above), it was able to avail the Previous De Minimis Exemption and was not notified to the CCI. PVR and Inox’s respective turnovers did not breach the turnover thresholds specified under the Previous De Minimis Exemption due to the reduction in revenues caused by the shutdown of theatre entry during the pandemic.¹³

C. How to analyse a transaction to assess whether it crosses DVT?

Now that we have understood the intent for enactment of the DVT and its potential impact on transactions, let’s deep dive into understanding how the Value Test and Business Test shall practically operate:

Limb 1: Value Test – How to determine the value?

The “value of the transaction” is supposed to include all forms of direct or indirect “valuable consideration” that may also be immediate or deferred, cash or otherwise.¹⁴ Thus, the DVT intends to capture within its ambit all forms of cash and non-cash deal structures (such as a share asset swap, purchase price adjustment mechanisms, etc.), where the consideration value may not be prima facie ascertainable or the transaction may not otherwise breach the asset or turnover thresholds specified under Sections 5 (a), (b) or (c) of the Act.

The line items that are to be included within the calculation of the “value of the transaction” have been set out within the 2024 Combination Regulations¹⁵ and are reproduced below.

Importantly, these line items may be read with the “General Statement on the Competition Commission of India (Combinations) Regulations, 2024” released by the CCI,¹⁶ which sheds light on the potential intent of CCI in respect of certain provisions added to the 2024 Combination Regulations (“CCI Interpretative Guidance”).

In addition to the above line items, certain explanations have also been provided to aid with their interpretation. The critical explanations are as set out below:

• Explanation (c): The value of the transaction must include the consideration of any acquisitions by one of the parties / their group entities in the enterprise at any time between 2 years prior to the relevant date.
• Explanation (f): In cases of mergers / amalgamations or where the true and complete value of the transaction is not recorded in the transaction documents, the value of the transaction or such component shall be such as may be considered by the board of directors or any approving authority of the acquirer.
• Explanation (g): In case the transaction value cannot be established with reasonable certainty by the board of directors or any approving authority of the acquirer, the value shall be deemed to exceed the Value Test.
• Explanation (h): “Best estimate” is to be determined through an estimate set out by the board of directors or any approving authority of the acquirer. In case they do not record the best estimate, the “maximum payable amount” shall be considered as the best estimate.

A spectrum of the way the look-back periods under #2 and #3 of the above table shall operate for a specific transaction have been captured below:

Limb 2: Business Test – Does the enterprise have substantial business operations in India?

An enterprise has “substantial business operations” in India, in case if either of the conditions set out in (a), (b) or (c) below are met:

• For digital services²⁰ provided, the business users / end users²¹ in India should be 10% or more of the total global users (“User Test”); or
• The gross merchandise value²² for 12 months preceding the relevant date must be: (a) 10% or more of the total global gross merchandise value; and (b) more than INR 500 crores (i.e. approximately USD 59.5 million or EUR 53.7 million) (and this part (b) not applying to digital services) (“GMV Test”); or
• The turnover during the preceding financial year in India is: (a) 10% or more of the global turnover derived from all products and services; and (b) more than INR 500 crores (i.e. approximately USD 59.5 million or EUR 53.7 million) (and this part (b) not applying to digital services) (“Turnover Test”).

It is to be noted that the 2024 Combination Regulations do not currently specify how the Business Test is likely to be applicable and calculated in respect of such enterprises that are providing digital and non-digital services, and it will be interesting to see how this calculation will occur in practice.

A pictorial representation of the Business Test is as below:

A diagrammatical representation of how the DVT Framework would work is as below: 

Let’s simplify how a deal team should analyse a transaction for merger notification.

The addition of the DVT will lead to parties assessing their transactions through recourse to the following step chart:

Part 1 – Transaction Type Analysis

• Step 1: Check whether the transaction involves: (x) an acquisition of control, shares, voting rights, or assets; (y) acquisition of control by an acquirer having direct or indirect control over an enterprise involved in a similar or identical business; or (z) a merger or amalgamation. This will help assess whether the transaction may fall under Section 5 (a), (b) or (c) of the Act.
• Step 2: Once the transaction qualifies the test of Step 1 above, check whether the transaction meets the enterprise or group level thresholds set out within Sections 5 (a), (b) or (c) of the Act.²³ If yes, the transaction may become a notifiable “combination” unless it is exempt from notification under Part 2 (A) below (“Non-DVT Case”).
•  Step 3: Irrespective of whether the transaction falls within Step 2 above, check whether the “value of the transaction” meets the criteria set out in the DVT Framework. If yes, the transaction may become a notifiable “combination” unless it is exempt from notification under Part 2 (B) below (“DVT Case”).

Note to Deal Teams: Given the overarching nature of Step 3 (i.e. DVT Case), deal teams may consider assessing Step 3 first in case their transactions have a considerably higher value.

Part 2 (A) – Exemption Assessment for Non-DVT Case 

• Step 4 for Non-DVT Case: Check whether the transaction is eligible to obtain any exemptions. The potentially available exemptions are as under:

  Non-DVT Case: Exemptions from notification, if any, to be available either under: (i) the Schedule to the Competition (Criteria for Exemption of Combinations) Rules, 2024 (“Exemption Rules”); or (ii) the thresholds set out under the revised Section 5 (e) of the Act (as amended by Section 6 of the Amendment Act) (popularly called the “De Minimis Exemption”).²⁴

Part 2 (B) – Exemption Assessment for DVT Case

• Step 4 for DVT Case: Check whether the transaction is eligible to obtain any exemptions. The potentially available exemptions are as under:

  DVT Case: Exemption of notification, if any, is available only under the Exemption Rules.

Note to Deal Teams: A DVT Case cannot avail the De Minimis Exemption that is available to a Non-DVT Case under the revised merger control regime. This is in line with the legislative intent to assess transactions (particularly within digital markets) where enterprises may have lower turnover and assets (and can avail the De Minimis Exemption), but the true value of such enterprise lies in non-monetary factors such as the number of digital users, business models, etc. which is captured in the high valuation of the enterprise through a high valuation multiple.

D.  Let’s reanalyse the previously exempt transactions under the new merger control regime!

Now that we know how to analyse whether your deal exceeds the DVT, let us apply the analysis practically to ascertain whether the transactions mentioned above would be notifiable to CCI if DVT existed at that time:

• Zomato’s acquisition of Blinkit: 
  • The total consideration for the acquisition of 91.04% shareholding of Blinkit by Zomato (through the share swap) was INR 3,485 crores. This would mean that the “value of the transaction” would satisfy the Value Test (i.e. INR 2,000 crores or above).
  • Blinkit is a quick-commerce business with operations across all major cities in India,²⁵ which would imply that Blinkit would satisfy the Business Test.
  • Considering that the criteria set out in the DVT Framework are being met, the Previous De Minimis Exemption would not have been available to Zomato for the acquisition of Blinkit.
  • By acquiring 91.04% shareholding of Blinkit, Zomato acquired nearly 100% shareholding of Blinkit, there by acquiring “control”²⁶ over Blinkit. Therefore, given the structure of the deal, Zomato could also not have been able to avail any exemption under the Exemption Rules.

  Based on the above, the Zomato-Blinkit acquisition under the DVT Framework would be notifiable if it was undertaken in the context of the revised merger control regime that includes the DVT.

• Zomato’s acquisition of UberEats:

  The Zomato-Uber Eats acquisition would be notifiable under the DVT Framework if it was undertaken today. Interestingly, CCI had undertaken an investigation into the Zomato-Uber Eats acquisition to assess if the acquisition caused an “appreciable adverse effect on competition”, given that Zomato’s market share in food delivery market went up to 55% post the acquisition.²⁷ The above acquisition is an important example of the lacunae within the erstwhile thresholds under the previous merger control regime, and how recourse to the DVT may be important to assess the competition impact of such transactions.

Note to Deal Teams: In cross-border share swap deals, where an Indian company acquires a foreign company in lieu of issuance of its own shares as consideration, it is also very important to assess the Business Test holistically with respect to both the companies.

• Facebook’s acquisition of WhatsApp:

  In the event that the DVT was applicable in 2014, Facebook would have had to undertake the Business Test (given that the Value Test is getting satisfied due to the high deal value) for WhatsApp in India to ascertain whether a notification to the CCI was required. If WhatsApp satisfied the Business Test,the transaction would have been notifiable to the CCI owing to the DVT.

Note to Deal Teams: In case a transaction has been structured as a global level acquisition (involving Indian subsidiaries and operations), the “value of the transaction” for the purposes of notifiability to the CCI under the DVT would be the total deal value and not just the value of the Indian asset or operations, given that each step in the global transaction would be considered as interconnected to the acquisition of the Indian asset / operations.

• PVR-Inox Merger:

  Interestingly, the non-notification of this merger to the CCI was challenged before the CCI on grounds that such transaction would lead to a potential abuse of dominance of the resultant entity in the relevant market under Section 4 of the Act. The CCI rejected these allegations, noting that: (a) the mere existence of dominance (without any abuse of such dominance) is not punishable under Section 4 of the Act; and (b) if such abuse of dominance is demonstrated by the resultant entity, the same would be examined post facto, as the transaction had not been consummated as on the date that the information had been filed before it.²⁸ This order was subsequently appealed before the National Company Law Appellate Tribunal (“NCLAT”) and the appeal was rejected.²⁹

  If the DVT was in effect at the time of structuring of this deal, the parties may have had to assess whether the merger was likely to exceed the Value Test, considering that the transaction would, in all likelihood and basis the business operations of PVR and Inox, cross the Business Test. If the transaction would have satisfied the Value Test, it would have been notifiable to the CCI owing to the DVT.

Note to Deal Teams: While mergers (structured as a share swap of shares of the resultant entity) will not have a specific consideration set out within the scheme filed with the regulator (given that they will only specify a share swap ratio), a deal value will have to be arrived at using the Value Test, in order to ensure that the transaction is not notifiable on account of DVT.

Further, another softer concern to be kept in mind during the structuring of such transactions is that even if such transactions may otherwise be non-notifiable due to availability of exemptions, the resultant impact on market share may led to the CCI taking investigating such transactions. Accordingly, all backing information to justify the availability of an exemption must always be maintained by all parties.

E. Final Thoughts

The deal examples examined above make it clear: the introduction of the DVT was crucial for the CCI to evaluate transactions that could influence market competition but previously slipped through the cracks due to the recourse to the Previous De Minimis Exemption or De Minimis Exemption, and their lack of residual powers for scrutiny of such non-notifiable deals.

Concepts similar to the DVT are in place worldwide, such as the “size of the transaction threshold” in the United States.³⁰ Though still in its early stages, the DVT is expected to become more refined as the CCI’s decisional practices evolve and as further clarifications (such as FAQs) are released. Despite being in its infancy, the DVT is poised to have a substantial impact on how deals having an Indian nexus are structured and negotiated going forward.

Author:

Parina Muchhala, Anurag Shah, Nishchal Joshipura and Viral Mehta

You can direct your queries or comments to the relevant member.

¹These thresholds were recently revised through a circular released in March 2024. Our analysis of this development is available at: https://www.nishithdesai.com/NewsDetails/14949.

²We have converted the Indian Rupee values across this Deal Talk to United States Dollar (“USD”) and Euro (“EUR”) based on the conversion rates publicly available as on September 14, 2024.

³Section 6, Amendment Act (which inserts Section 5(d) and a proviso to the Act).

⁴https://www.ies.gov.in/ pdfs/Report-Competition -CLRC.pdf.

⁵The information in this section is based on publicly available information as on September 14, 2024.

⁶Outcome of board meeting held on August 3, 2023, available at: https://nsearchives.nseindia.com/ corporate/ ZOMATO_03082023151908_ ZomatoOutcomeSigned.pdf.

⁷The previous de-minimis exemption thresholds are available at: https://www.mca.gov.in/ Ministry/pdf/Notification _30032017.pdf. According to these thresholds, in case the assets of the target were below INR 350 crores, or the turnover of the target was below INR 1,000 crores, the transaction was exempt from notification to the CCI.

⁸https://www.cnbctv18.com/ business/companies/ exclusive–zomato-board-to-sign-off- blinkit-acquisition-on-june-17 -13731672.htm.

⁹https://investor.uber.com/ news-events/news/ press-release-details/2020/ Zomato-Acquires-Ubers-Food- Delivery-Business-in-India/ default.aspx.

¹⁰https://www.forbes.com/ sites/parmyolson/2014/ 10/06/facebook-closes- 19-billion-whatsapp-deal/.

¹¹https://s3.ap-southeast-1.amazonaws.com/ cdn.inoxmovies.com/ Downloads/ 6ffdee4d-1839-41e6- a2be-95a14f8985d1.pdf.

¹²See generally: https://www.businessinsider.in/ business/news/pvr-inox-now-fifth- largest-listed-multiplex-chain- globally-awaits-good-movies/ articleshow/98621386.cms.

¹³In Re: Consumer Unity & Trust Society and PVR Limited and Inox Leisure Limited (Order under Section 26(2) of the Act, Competition Commission of India, Case. No. 29 of 2022).

¹⁴Regulation 4 (1), 2024 Combination Regulations.

¹⁵Regulation 4, 2024 Combination Regulations.

¹⁶https://www.cci.gov.in/ images/whatsnew/en /general-statement- combination- regulations1725954145.pdf.

¹⁷According to Regulation 2 (1) (c) of the 2024 Combination Regulations, the “relevant date” means the date on which the approval of the proposal relating to merger or amalgamation is accorded by the board of directors, or the date of execution of agreement or the date of such other document for acquisition or acquiring of control referred to in sub-section (2) of Section 6 of the Act.

¹⁸See generally, Regulation 3.137 (Part II: Notion of Undertaking Concerned), Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004.

¹⁹Paragraph #7 (e), Order under Section 43A of the Competition Act, 2002, Combination Registration No. C-2015/02/249.

²⁰As defined within Explanation 2 (d) to Regulation 4 (2), “Digital service” means the provision of a service or one or more pieces of digital content, or any other activity by means of an internet whether for consideration or otherwise to the end user or business user, as the case may be.

²¹As defined within Explanation 2 (e) and 2 (f) to Regulation 4 (2) respectively, “business user” means any natural or legal person supplying or providing goods or services, including through the use of digital services; and “end user” means any natural or legal person using digital services other than as a business user, for informational or transactional purpose. The proportion of business users or end users is to be computed on the basis of average number of such users for 365 days preceding the relevant date.

²²As defined within Explanation 2 (a) to Regulation 4 (2), “gross merchandise value” means cash, receivables, or other consideration either for or facilitating, sale of goods and / or provision of services, by an enterprise, on its own or as an agent or otherwise.

²³These thresholds were recently revised through a circular released in March 2024. Our analysis of this development is available at: https://www.nishithdesai.com/NewsDetails/14949.

²⁴Ibid.

²⁵https://blinkit.com/aboutus.

²⁶The definition of “control” applicable for the purposes of the Act has been modified through the Amendment Act.

²⁷https://www.livemint.com/ companies/start-ups/ zomato-acquires-uber-eats -business-in-india-to-consolidate -position-11579578326776.html.

²⁸In Re: Consumer Unity & Trust Society, Case No. 29 of 2022 (Competition Commission of India).

²⁹https://www.business- standard.com/ companies/news/ nclat-set-aside-cuts-petition- seeking-cci-probe-in-pvr-inox -merger-123081000932_1.html.

³⁰https://www.ftc.gov/ enforcement/premerger-notification-program/ hsr-resources/steps-determining- whether-hsr-filing.

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