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05 Apr 2017

Enhanced Scope of De-Minimis Exemption for Combinations

The Central Government vide various notifications[1] has introduced from time to time exempted class of Combinations from the provisions of Section 5 of the Competition Act, 2002 (“Act”).

In its recent notification[2] on the De-Minimis exemption[3] the Central Government has further enhanced the scope of the exemption of Combinations. The De-Minimis exemption in the first two notifications intended to bind only acquisitions under the exemptions; the language of the third notification was extended to include within its purview transactions structured as mergers and amalgamations. Further, the notification stipulates that in transactions involving merger/amalgamation/acquisition of a portion of an enterprise, only that portion of the asset/turnover value of business/division which has been acquired/merged/amalgamated shall be considered in calculating the exemption thresholds. The exemption threshold remains untouched and is at par with the 2016 notification.

Hence from an industry perspective, this notification does further liberalize the compliance regime applicable for any acquisition/ merger/ amalgamation, as explained below:

  1. Previously, in case of transactions involving acquisition of an enterprise/a part/ division of an enterprise, there was no scope of taking into consideration only that portion/part of the enterprise which was acquired for the purpose of calculation of exemption threshold. The new notification clarifies that for the purpose of determining the exemption thresholds, only the specific business/division which is being acquired/merged/amalgamated is to be considered.
  2. The notification further states that the value of such portion/business/division shall be determined by taking the book value of assets as shown in the audited books of accounts or as per the auditor’s report in case the audited financial statements are unavailable/ not yet become due to be filed, in the financial year immediately preceding the financial year in which the date of proposed combination falls.
  3. The value of assets shall include brand value, value of goodwill, copyright, patent, permitted use, collective mark, registered proprietor, registered user, registered trademark, homonymous geographical indication, geographical indications, designs or layout designs or other similar commercial rights.
  4. The turnover of the said portion/business/division shall be as certified by the statutory auditor on the basis of the last available audited accounts of the company.     

In case of joint venture transactions, the Competition Commission of India (“Commission”), in its FAQs refers to the principle of attributability, stating that for the purpose of calculation of thresholds under the Act, the value of assets and turnover of the transferor enterprise shall be attributed to the value of assets and turnover of the transferee enterprise. In the light of this notification, the value of assets and turnover attributable to that portion of the enterprise which is being transferred by the parties to the joint venture transaction shall be considered. 

Through this notification, the Government will be able to keep a large number of the transactions out of the purview of the Commission since the concept of calculation of the value of assets and turnover on the basis of portion/part of business/division being transferred is introduced. It has also clarified that the exemption notification includes combinations such as mergers and amalgamations along with acquisitions whereby providing this exemption benefit to all the combinations. The legislative intent behind the exemption notification is to exclude small enterprises from the Commission’s notification regime since the small enterprises have no significant effect on the market. Further, this is a significant amendment conferring an exemption status to most of the small enterprises thereby providing a relief from the combination notification regime by saving transactional costs for notifications and also from extended timelines for the necessary approval required by the Commission for the combinations.

  

 

Disclaimer: The above note is provided for general informational purposes only and should neither be considered a legal opinion of Fox Mandal & Associates nor relied upon in lieu of specific advice.

 

[1]S.O. 482(E)” dated 4th March, 2011 – specifies that an enterprise, whose control, shares, voting rights or assets which are being acquired having a value of not more than INR 250 crores and turnover of not more than INR 750 crores fall under the exempted class. Valid for a period of 5 years from 04-03-2011 to 04-03-2016.

(http://www.cci.gov.in/sites/default/files/notification/SO479%28E%29%2C480%28E%29%2C481%28E%29%2C482%28E%29240611.pdf)

S.O. 674(E)” dated 4th March, 2016 – the exemption thresholds were increased from INR 250 crores to 350 crores for the value of assets and turnover from INR 750 crores to 1000 crores. Valid for a period of 5 years from 04-03-2016 to 04-03-2022.

(http://www.cci.gov.in/sites/default/files/notification/SO%20673%28E%29-674%28E%29-675%28E%29.pdf)

[2]S.O. 988(E)” dated 27th March, 2017.

(http://www.mca.gov.in/Ministry/pdf/Notification_30032017.pdf)

[3] The Combinations not crossing the minimum threshold prescribed under the notifications mentioned above.

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