On October 25, 2021, CCI approved the acquisition of 100% of the equity share capital in Parexel International Corporation (‘PIC’) by Phoenix Parentco, Inc. (‘Phoenix’).^[1]

Phoenix is a special purpose vehicle, incorporated under the laws of State of Delaware, USA. It is jointly controlled by EQT Fund Management S.a.r.l. (‘EFMS’) and the Goldman Sachs Group, Inc (‘Goldman Sachs’). After the acquisition, EFMS and Goldman Sachs being the parent entities of Phoenix, will acquire joint control over PIC. EFMS and Goldman Sachs are collectively referred to as ‘Acquirers’.

PIC is engaged in providing biopharmaceutical outsourcing services to biopharmaceutical companies globally. PIC provides a full suite of services related to phase I – IV clinical research, regulatory and access consulting as well as strategic advisory services making it an end-to-end clinical development partner for pharmaceutical enterprises and biotech companies. The biopharmaceutical outsourcing services provided by PIC can be divided into: (i) Clinical Research Organization services (‘CRO Services’); (ii) real world evidence services; and (iii) healthcare consulting services. CRO Services are product development services used by healthcare companies to outsource the entire clinical research and development process for product development for healthcare products. Real world evidence services pertain to the observational studies based on data of actual patient experiences and actual use of a product in ‘real life’ clinical practice. Healthcare consulting services are analytical and advisory services provided to healthcare companies for improving product development activities and technological capabilities, reduce operations cost and improving the business model of healthcare companies.

Treatment of Intra-Group Turnover

The Acquirers submitted that PIC was predominantly engaged in intra-group activities, with almost all its turnover being generated through the sale of its services and products to its overseas group entities. PIC’s revenue for each of: (i) services provided to third party customers; and (ii) for supply of products or services to its overseas group entities was less than De Minimis exemption threshold of Rs 1,000,00,00,000. However, the De Minimis thresholds for turnover get breached if PIC’s revenue figures for third party sales and sales to overseas group entities are aggregated. The Acquirers submitted that, when assessing the applicability of the De Minimis exemption, the intra-group turnover should not be included^[2]. If such intra-group sales are included, then including the revenue derived by the overseas parent entities of PIC from third parties in India (through imports) would result in double counting and must, accordingly, be excluded. The Acquirers requested CCI to consider these submissions at the time of reviewing the merger notification. The Acquirers also requested CCI to permit it to withdraw the merger notification, in case CCI agreed with the arguments presented, and if CCI is of the view that the De Minimis exemption is applicable for this transaction.

CCI then examined whether either: (i) turnover of a target company originating from outside India and terminating in India (‘Import Turnover in India’); or (ii) intra-group turnover originating from India and terminating outside India (‘Intra-Group Export Turnover’) should be excluded while assessing the applicability of the De Minimis exemption.^[3]

CCI observed that:

i.    The Import Turnover in India relates to the rendering of services or providing of services to customers in India (through imports). Accordingly, because of this India nexus, this turnover should be included for the purpose of De Minimis exemption.

ii.   Intra-Group Export Turnover should only be excluded when the inclusion of such figures results in double counting.

CCI clarified that the decision to exclude intra-group turnover while assessing De Minimis exemption cannot be done mechanically and must be decided on a case-to-case basis. CCI also provided some illustrative examples to show different scenarios where exclusion of intra-group sales can or cannot be done. For example:

i.    In a transaction involving an acquisition of the ultimate parent entity of a group, the value of intra-group sales between the ultimate parent entity and all its group entities must be excluded to avoid double counting.

ii.   If an acquisition is made directly in only one of the group entities of the target, then the issue of double counting does not arise and the De Minimis thresholds are assessed based on the standalone financials of such target company.

iii.  If two or more companies within a group are acquired, then only the value of sales between such entities must be excluded while assessing the De Minimis

CCI also clarified that exclusion of intra-group sales would be required, only if the revenue of further sales outside the group is relatable to India. That is, if the intra-group sales are originating and terminating in India, and/or if the supply of products or services from India and the further sales by the group entity is within India. In contrast, any intra-group sales made to overseas group entities that make further sales to non-group entities outside India cannot be excluded because subsequent sales would not be accounted in India and there would be no double counting.

Notifiability of the Proposed Transaction

Applying these principles, CCI observed that turnover generated from PIC’s intra-group sales that originate from India but terminates outside India, and would thus not entail any double counting. This is because when such overseas group entities (which purchase products or services from PIC in India) makes further supply of these services outside India, then their turnover is not counted as turnover in India and is in fact accounted in the books of such group entity that undertakes such further sale outside India. Accordingly, if one were to exclude intra-group export turnover, then the economic value that is generated by PIC in India to overseas group entities goes completely unaccounted. From a review of the break-up of the turnover of PIC, CCI noted that the combined turnover through intra-group sales (to overseas group entities outside India) and turnover earned through third party sales was in excess of Rs 1,000,00,00,000 and the proposed transaction was accordingly not eligible for the De Minimis exemption.

Competition Assessment

CCI observed that one of Goldman Sachs’ portfolio companies was engaged in providing CRO Services in India. Accordingly, there was a horizontal overlap between Goldman Sachs and PIC in the CRO Services market. However, the combined market shares of Goldman Sachs (through its portfolio company) and PIC in this market were insignificant to raise any competition concern. On that basis, CCI decided to approve the proposed transaction.

[1] Combination Registration No. C-2021/08/863.

[2] CCI in its FAQs on merger control (in response to Question 39) has clarified that ‘Intra Group sales are excluded from total turnover while computing threshold limit under Section 5 of the Act’.

[3] De Minimis exemption exempts from notification those acquisitions where the target enterprise (i.e., the enterprise who’s assets, shares, voting rights or control are being acquired) has either: (a) assets not exceeding INR 350 crores in India; or (b) turnover not exceeding 1,000 crores in India (De Minimis thresholds). The De Minimis thresholds are to be assessed based on the basis of the consolidated audited financial statements of the target entity immediately preceding the year in which the proposed transaction is to take place.