This article has been published on Mondaq at Key Indian Antitrust Consideration For Private Equity Dealmakers In 2024 – Antitrust, EU Competition – India.

After a period of subdued deal activity in H2′ 2023 and H1′ 2024, the private equity (PE) deal activity is beginning to rebound in India.

After a period of subdued deal activity in H2′ 2023 and H1′ 2024, the private equity (PE) deal activity is beginning to rebound in India. Buoyed by a relatively stable political landscape on the domestic front, and other geo-political considerations, India remains a bright spot for PE attracting as much as USD 17 billion worth of investment in the first half of 2024.

Keeping up with this trend, till October 2024, about 40 PE deals were notified to the Competition Commission of India (CCI).

Piling on to the plate of deal makers’ numerous concerns amidst the frenzied deal activity are the slew of regulations and rules (dubbed as, Merger Control Framework 2.0) introduced by the Indian Government and CCI to give effect to the 2023 amendments to the Indian Competition Act, 2002 (Act).

If you are a PE dealmaker, here are the critical deal considerations that would help you navigate the Merger Control Framework 2.0, and also some insights and trends based on the CCI’s current thinking.

Deal Value Threshold (DVT)

Till 9 September 2024, one had to contend with ascertaining whether the target entity / business was simply de-minimis in India (i.e., assets or turnover below INR 4.5 billion and INR 12.5 billion, respectively) to rule out an Indian antitrust clearance. Only if this exemption was not available, did parties have to worry about whether the jurisdictional thresholds were met and/or other exemptions were available? Effective, 10 September 2024, the new reality is that the DVT is the principal merger control threshold (incidentally making India amongst a handful of jurisdiction to have such a notification criteria). Here are the key take-aways:

• If one were to throwback to July 2019 (i.e., when the DVT was initially mooted) it appeared that the objective for DVT was to catch digital / tech sector deals which crept under the traditional asset / turnover criteria. However, DVT in its final shape applies to deals in all sectors (i.e., sector / theme agnostic).
• DVT is tested basis the consideration (and not the target’s valuation – a common misunderstanding). In essence, if the global value of consideration exceeds INR 20 billion (approx. USD 240 million / EUR 220 million) and the target meets the prescribed local nexus test, the DVT is set to have been breached.
• The law has a retrospective operation i.e., deals signed but not closed prior to 10 September 2024 needs to be re-assessed.
• The CCI has laid down certain indicative criteria for assessing DVT and requires one to consider all forms of consideration (direct / indirect / immediate / deferred / cash and non-cash). Scenario-wise, one must look beyond the simpliciter value paid to acquire the shares and consider any non-compete fee paid to the seller or similar arrangements, consideration for inter-connected deals, consideration that may be paid for acquiring additional shares in the future under a call option etc. Cognizant of the potential for “transaction engineering”, the CCI has also added other measures such as requiring the parties to determine the deal value by including consideration paid for past investments between the same acquirer and its group and the target anytime in a two-year period. In other words, pay attention to your transaction documentation, and if you fail to notify or have wrongly estimated the deal value, you may mostly likely stare down the barrel of a gun-jumping violation.
• The local nexus test applies to the target and is effectively the new de-minimis principle. There are three relevant criteria – turnover, gross merchandise value (GMV) and user base. Turnover and GMV are similar – whether the target generated 10% or more of its global turnover / GMV from its Indian operation, which is a minimum of INR 5 billion (USD 60 million / EUR 56 million). Whilst turnover criteria is sector agnostic, GMV will apply specifically to e-commerce platforms and like businesses. The third criteria is premised on the number of business users / end-users and is relevant for businesses that provide digital services and applies if 10% or more of the global user base (average over last 365 days) is from India. While there are no formal clarifications from the regulator, it appears that this criterion will strictly apply for businesses with core digital offerings as opposed to a traditional business which may have an omni-channel sales presence (i.e., sales through brick-and-mortar, and online sales channel).
• Even if the DVT doesn’t apply to a transaction it is not necessarily exempt as other existing notification criteria continue to apply, and one would have to run a check against those criteria as well to rule out a filing requirement.

Minority Investment Exemptions

Through the Merger Control Framework 2.0, the CCI has also introduced some changes to the deal-specific exemptions. Largely these changes were to coalesce the text of these exemptions in the 2011 Combination Regulations (defined below), and changes to CCI’s interpretation and decisional practice between 2011 and 2024. Chief amongst them are the changes introduced to Item 1 to the Schedule I of the CCI’s Combination Regulations, 2011 (2011 Combination Regulations) – a favorite amongst PE. Under its new avatar this exemption can be found in two parts as Items 2 and 3 to the Competition (Criteria for Exemption of Combinations) Rules, 2024 (Exemption Rules).

The minority investment exemption has perhaps been the most widely contested exemption shaping the CCI’s discourse on critical concepts such as control and in the recent years the evolution of the “material influence” standard (i.e., the current ‘control’ threshold). The key changes may be surmised as follows:

• The old minority investment (Item 1, Schedule 1 to the 2011 Combination Regulations) exemption applied to non-controlling acquisition of shares which were either, “solely as an investment” or “ordinary course of business”. Whilst the CCI clarified what entails as “solely as an investment”¹, it had, for the longest time, left the interpretation of “ordinary course of business” to the imagination of parties.
• Given that investment is PE’s raison d’etre – some of the investors had interpreted that even if their investment did not fall within the confined parameters of “solely as an investment”, such investor should get the benefit of “ordinary course of business”, provided they acquired less than 25% shares or voting rights, and no control. Only in 2022, the CCI had clarified the exact scope of “ordinary course of business” in the context of PE investment² and it had come late for some investors who were penalized for gun-jumping due to these uncertainties.³
• The new minority investment exemption (Item 2 to the Exemption Rules) applies to sub-25% non-controlling acquisitions of shares / voting rights that are “solely as an investment”. Within this broader framework, the CCI has clarified “solely as an investment”, and there are two-baskets:
  • Sub-10% investment: The conditions to claim the exemption are: (i) no control; (ii) no board representation, either as a director or an observer; (iii) no ability to gain commercially sensitive information (CSI) – not defined under the Act / Exemption Rules⁴
  • Sub-25% investment: The conditions to claim the exemption, include the condition listed for sub-10 investment and includes another criterion akin to the green channel requirement (i.e., the acquirer/ its group / their affiliates are not engaged in any business activity that is either competes / vertically linked / complementary, to the business activity of the target).
• The old minority investment exemption was not equipped to deal with additional acquisition of shares⁵ – and this resulted in palpable uncertainty for the regulator and the parties, often resulting in “filings out of abundant caution”. To address the gap in the old minority investment exemption and promote certainty in interpretation, the CCI has introduced – Item 3 to the Exemption Rules. An additional acquisition of shares below 25% threshold is exempt if:
  • The acquirer before and after such additional acquisition does not acquire control.
  • Such additional acquisition are exempt if such rights (such as board representation as a director or an observer or CSI) were available prior to such additional acquisition, and does not change as a result of the additional acquisition.
• In addition to the above, the CCI has also introduced a sub-set within Item 3 to the Exemption Rules that caters to a scenario where the acquirer / its group / their affiliates have competing / vertically linked / complementary business activity vis-à-vis the target (also extends to PE’s with competing portfolio companies). In such situations, the acquirer can acquire a maximum of 5% shareholding per tranche upto a maximum of 24.99%. While there are no formal clarifications from the regulator, current reading of this exemption indicates that:
  • the acquirer needs to file with the CCI before crossing the 10% shareholding limit.
  • the acquirer can acquire between 10% and 24.99% shareholding in a target without requiring another CCI approval, provided the acquirer does not: (a) acquire control (assuming that it did not have this before); (b) there is no change in quality / degree of control; and (c) each tranche of acquisition does not exceed the 5% shareholding threshold.

Green Channel Route (GCR)

GCR is unique to the Indian merger control regime and sets it apart from rest of the world – and literally borrows its name and function from the green channel queue at an airport for clearing customs (i.e., nothing to declare). To be eligible for GCR, the acquirer must declare that the acquirer / its group / their affiliates do not have any business activities that either, competes with the target’s activities, or have activities that are vertically linked / complementary vis-à-vis the target’s business activity (GCR Condition). If the acquirer can convince the CCI that they meet the GCR Condition, they can receive a deemed spot approval as opposed to enduring the post – facto review period of 30 calendar days.

GCR regime has been in place since 2020, and between 2021-2023, GCR filings represented between 25% to 30% of all merger filings received by the CCI. The story is very different in 2024, of the 91 merger filings received by the CCI as of 31 October 2024, only 12 were GCR. Put differently, GCR represents only 13% of all merger filings made to the CCI in 2024. The significant drop in the number of GCR filings is attributed to the CCI’s paradigm shift to a textual approach towards interpreting the GCR Condition as opposed to a purposive approach – this was the focal point of gun-jumping proceedings against certain PE investors.⁶ Despite the change in CCI’s stance, most PE investor at least attempt to rule out a filing under GCR before considering other options (13 out of the 14 GCR filing in 2024⁷ were made by investment funds).

That said, it now becomes more imperative than ever to thread the GCR carefully and file under this route strictly if the GCR Condition is satisfied or as the CCI has shown in couple of instances that it won’t shy away from chasing the investor for gun-jumping violation.

Timelines

Optically, the transaction review timelines have been shortened under the Merger Control Framework 2.0. Broadly, the 30-working day clock is now a 30-calendar day clock, and the outer time limit has also reduced from 210 days to 150 days. Unlike the previous regime where the clock stopped from the date of issue of a formal request for information (RFI)⁸, under the new regime, the CCI can potentially reset the review clock to day zero within 10 working days of filing the notice, if the CCI finds the application defective in any manner and keep the parties there till defects in the application are cleared. Even after the clearance of preliminary defects, the CCI can still issue routine RFIs (as before) if they feel it is necessary.

The next question one must contend with is what does the review timeline really look like? On an average, in 2024, the CCI took more than 50 calendar days to clear a deal (as compared to about 40 days in CY 2020). When seen from a PE investor’s lens, it takes a similar time frame as the broader average to receive a clearance. However, as they say, devil is in the details, in 2024, it takes about 60 days to receive a clearance for vanilla PE transaction⁹ and co-investment deals¹⁰, about 70 days for a buyout deal¹¹, and similar time-period as the overall PE average for a controlling investment.¹² While not altogether dispensing its approach, the CCI typically cleared vanilla investments faster as compared to other deals.¹³ However, even that unwritten norm is being replaced in favor of a uniform approach that is guided by the need to scrutinize deals by keeping up with emerging antitrust issues in this area (such as interlocking directorate / sectoral consolidation etc.). Other issues that affect deal clearance timelines include, increase in the volume of reported deals and capacity issues.

Seen absent context, the CCI may appear as the “lone wolf” that is perhaps bucking the trend of speedy clearance by mature regulators on either side of the Atlantic who have introduced measures to speed-up clearance for simpler cases.¹⁴ However, one must appreciate couple of key facts: firstly, unlike other regulators the CCI does not have a mandatory pre-notification regime and in most cases the entire review period in India is post facto. Therefore, a shorter post facto review period in other regimes may appear in contrast with the scenario in India, when one does not factor the time spent on mandatory pre-notification consultation. Secondly, unlike many other antitrust regulators, the CCI has preferred a cautious approach of performing detailed competition assessment while clearing its cases. That said, CCI’s is no longer the lone serious regulator championing the cause of detailed scrutiny, and other mature regulators are also pressing for the same, for example the revised HSR rules issued by the FTC to take effect from January 2025 requires a host of additional information from filing parties and is set to double the time to file with the regulator.

In the Indian context, CCI approval is amongst the key gating item for a deal closure, given that many sectors are now under the automatic FDI route, except a few that may still require such approvals. Typically, the popular pitch of a PE deal maker for prospective targets are attractive valuation and faster deal closure. Given the increasing competition amongst PE houses for deals, notwithstanding strategic buyers in the fray, faster deal clearances and less burdensome regulatory process have become unique selling points, and at times, even outweighing valuation. Considering that the CCI has set a high bar to vault over for a GCR clearance, the deal planners must consider this aspect keenly for winning the deal, and other aspects of negotiation such as planning long stop date etc.

Review

As all active antitrust regulators, the CCI is alive to key antitrust themes being pursued by mature antitrust regulators such as, inter-locking directorate, sectoral consolidation etc. The CCI has also shown glimpses that it will probe such issues when reviewing a notification. For instance, in 2020¹⁵ and later in 2023¹⁶, the CCI had evinced concerns relating to information exchange on account of a common investor, and interlocking directorate, as the investor(s) in question had investments in competing businesses (vis-à-vis the Target or its downstream affiliates). Factors that guided the CCI’s assessment were: (a) market concentration: the portfolio businesses and the target were amongst the top players in a given market / market segment and high market shares, the market was saturated or had high entry barriers; (b) information access: the investor(s) had access to non-public information in the target and the portfolio business, and potentially they could become a conduit for information exchange; and (c) the rights available to such investor(s): granted them the ability to “materiality influence” the affairs of the target and the investors’ portfolio business through board representation or affirmative rights etc., thereby putting the investor in a position to exercise rights that may throttle competitive spirit of the target and its competitor.

Certain ancillary themes that we are noticing play out more often than before are:

• Reliance on internal documentation: Since the very beginning of merger control in India, as part of the application, parties are required to provide internal documentations (presentation / reports / plans / studies) considered by the board of directors or senior management of the parties in relation to the deal. In its formative years, the CCI did not push the parties to submit such documents, making a response to this question optional. Increasingly, the CCI is demanding for such documents if the parties do not provide such documents at the first instance. Even then, the requests are benign and limited to final board presentation / investment committee memo and not ordinary course documents covering investment thesis / strategy as seen in US and increasingly in EU. However, the CCI may push for an exhaustive document production directive, if they pursue claims for gun-jumping or materially non-disclosure, and have done this in couple of instances.¹⁷ Therefore, it is important for the deal teams to be wary of what they put in their internal documentations.
• Full-fledged review / strict approach to mapping overlaps: When assessing a PE transaction, the CCI no longer takes it easy on the investor it is only a “financial investment”. Increasingly, the lines have blurred and the assessment parameters for a PE deal are similar to a deal pursued by a strategic player. Long gone are the times, where a PE player can throw up their arms for not being able to furnish market information to the fullest. The CCI has recently reiterated that investors (like all filers) must follow the same principle for identifying overlaps and cannot devise new set of criteria or improvise on the existing criteria.¹⁸
• Sector-consolidation and roll-ups: The CCI is well aware that certain PE’s tend to have sectoral focus. However, it has assessed each application on their merits. The noise surrounding the recent revision to the merger guidelines in the US which requires an investor to disclose pattern or strategy followed in a preceding 10 year-period may not have gone unnoticed by an active regulator such as the CCI. That said, luckily there are no such disclosure requirements in India yet.
• Co-investment / syndicated deal structures: It is typical for buyout PEs to “tag team” with other investors to acquire a large business or finance such acquisitions, and the CCI has examined a few deals of such nature. In such transactions, the CCI wants all investor(s) who receive rights on a look-through-basis in the target to join as a co-notifying party in the application filed by the lead investors. It is typical for the CCI to raise queries as part of their RFIs to gain insight on such structures and ascertain whether the co-investor or financing investors are receiving any participative rights in the ultimate target.
• Mapping Overlaps with the Limited Partner (LP): In a typical PE transaction, parties map overlaps between material¹⁹ portfolio company of the investor and the target. The overlaps are not mapped vis-à-vis LP and the target. However, in a recent order²⁰, the CCI noted that a LP was a member of the management board of the investor and given the rights / access it had at that level necessitated mapping overlaps between the LP and the target deviating from the established norm. Given this, it appears that a call to exclude LPs would have to be made based on specifics of a case.

Footnotes:

1] In 2016, “solely as an investment” was clarified to mean a sub-10% investment without acquiring: (a) any control; (b) right to appoint a director / observer to the board; or (c) rights other than those available to an ordinary shareholder.

2] The CCI explained that share trading (i.e., benefitting from short term price movements) is in the “ordinary course of business”, as opposed to long term investments with an intent to participate in the management of the target.

3] CCI’s order dated 23 March 2022 in TPG Growth V SF Markets Private Limited, and its orders dated 30 September 2022 in PI Opportunities Fund-I & Pioneer Investment Fund and Trian Partners AM HoldCo, Ltd. and Trian Fund Management, L.P.

4] To offer some guidance on CCI’s thinking regarding CSI, one can refer to the CCI’s Compliance Manual, where it has considered CSI to include information pertaining to pricing strategy, sales quantity, marketing strategy, terms of consumer contracts, etc.

5] Considering the nature of the old minority investment exemption, certain scenarios that routinely confounded investors, include share acquisition of less than 25% with no control but where the acquirer / its group / their affiliates had competing / vertically linked / complementary business activity vis-à-vis the target, additional share acquisitions crossing the 10% threshold (below 25%) with no change in control, additional share acquisitions (below 25%) but with change in nature or quality of rights, etc.

6] Order of the CCI in C-2022/12/995 in Platinum Jasmine A 2018 Trust, acting through its trustee Platinum Owl C 2018 RSC Limited, and TPG Upswing Ltd dated 18 August 2023. This position was re-affirmed by the CCI in its order in C-2023/04/1121 in India Business Excellence Fund – IV dated 16 August 2024.

7] Since 2020 (i.e., when the GCR was introduced), PEs / investment funds are responsible for more than 50% of the GCR applications filed with the CCI in each year.

8] By way of an explanation, if a RFI was issued on the 10^th working of the review period, the clock restarts on 11^th working day when the response is filed.

9] We have considered deals where the investor is picking up less than 20% stake with investor protection rights.

10] We have considered deals where multiple investors are filing for an investment in the same target through a single application and such investments are inter-connected.

11] We have considered deals where the investor is either picking up sole control or 100% stake in the target.

12] We have considered deals where the investor is picking up more than 25% stake in the target.

13] In 2020, on an average the CCI took 40 days to clear a vanilla PE investment as compared to about 60 days in 2024, an increase of almost 50%.

14] See, Global Trends in Merger Enforcement by A&O Sherman, 2024 (available here)

15] Order of the CCI in C-2020/04/741 in Canary Investments Limited, Link Investment Trust II and Intas Pharmaceuticals Limited dated 30 April 2020

16] Order of the CCI in C-2023/04/1017 in General Atlantic Singapore ACK Pte. Ltd, Singapore dated 6 June 2023.

17] Orders of the CCI in Amazon.com NV Investment Holdings LLC dated 17 December 2021 and Canada Pension Plan Investment Board dated 21 November 2019

18] Order of the CCI in C-2024/01/1102 in TPG Growth V SF Markets PTE. Ltd., Waverly PTE. Ltd., Asia Healthcare Holdings PTE. Ltd., dated 12 March 2024.

19] The CCI has set out the criteria for what it consider as a material affiliates, namely entities where the investor has either: (i) 10% or more of shares/voting rights; (ii) board representation through a director or an observer; or (iii) right or ability to access commercially sensitive information.

20] Order of the CCI in C-2024/05/1154 in Citrine Inclusion Limited dated 3 September 2024.