New Delhi: Hostile takeovers in India just got a fillip from the country’s competition watchdog. Companies will not need approval anymore from the Competition Commission of India (CCI) for buying up to 25% shares of a target company in the secondary market before making a formal bid. This provision was among several changes in merger and acquisition (M&A) rules notified last week by the CCI.
The CCI Criteria for Exemption of Combinations Rules, 2024 also lists instances like acquisition of shares as part of bonus issue, stock splits, consolidation of face value and group restructure, which do not lead to change in control, as transactions that do not require its prior approval.
Earlier, companies could be penalized for not taking CCI approval before making such secondary share purchases, explained a former official of the watchdog, who spoke on condition of not being named.
“Seeking CCI permission for incremental stock market transactions, which are dynamic by nature, was not feasible,” this person said. “The government has corrected this anomaly, and it is a move in the direction of improving ease of doing business.”
Any business acquiring 25% stake in a listed company is required to make an open offer to public shareholders as per regulations of market regulator Securities and Exchange Board of India (Sebi).
Rahul Rai, partner and co-founder of law firm Axiom 5 Law Chambers, said that such secondary transactions need to be notified to the CCI within 30 days of initial on-market acquisition. “This is important for certain unsolicited investments in listed enterprises and their acquisitions (hostile takeovers) as it helps to preserve the strategic nature of the transaction and addresses a gap in the law,” he said.
However, Rai pointed out the rider that although the investor could receive dividends, voting rights with respect to management can be exercised only after CCI approval.
Shweta Shroff Chopra, Partner at Shardul Amarchand Mangaldas & Co, explained that most exemptions are linked to the absence of a shift in control, defined in the Competition Amendment Act as the capacity to exert material influence over management or affairs or strategic commercial decisions. That is a lower threshold than the decisive influence standard in other laws and jurisdictions. Thus, exemptions may no longer apply if the nature of control changes, said Chopra.
Global transactions
Among other changes notified by the CCI last week, experts pointed out that the requirement for CCI approval for global transactions involving businesses with substantial business operations in India, could have an impact on funding cycle of start-ups.
As per this norm, if an Indian company is being acquired for ₹2,000 crore and it meets the local nexus criteria, CCI approval will be needed. Rai of Axiom 5 Law Chambers said this threshold is not low and that there are very few venture capital fundings that hit the ₹2,000 crore mark.
“However, CCI requires investors to look back at the investments made in a company for the past two years,” Rai pointed out, adding that VC funds keep topping up their investments in companies doing well and it could breach the ₹2,000 crore threshold at some point in time.
“So, some funding cycle may get impacted for some young companies,” Rai said, adding that the speed and scale of start-up funding was critical.
The new merger review norm based on deal value comes without a grandfathering clause. It covers deals signed before 10 September but were not still closed. So, the timeline for closing those deals could go off track. “This is a bugbear for M&A lawyers, investment bankers and everyone involved in transactions,” said Rai.
A grandfathering clause added to legislative changes protects persons and businesses complying with an old regime from any hardship due to changes in the regime, as a transition arrangement. Businesses expect legislative changes to take place prospectively and not retrospectively.
However, the deal value threshold-based merger review was publicly debated for a long time and was introduced into law more than a year ago.
