Testing the Waters: Pre-Implementation Evaluation of the 2024 CCI Combination Regulations

Summary – The Combination Regulations 2024 issued by the CCI regulates mergers and acquisitions to strengthen competition and align with global standards. While aiming for fair competition, the regulations may increase compliance costs, slow processes, and challenge startups. Ritima Singh in her latest blog post writes about the challenges arising from the new rules for businesses and the impact on the judiciary. The rules expand CCI’s scrutiny, likely leading to more cases before the CCI, NCLAT, and even the Supreme Court. This raises concerns about whether these institutions are equipped to handle the expected surge in caseloads effectively or not?

The Competition Commission of India (CCI) recently introduced the “overhauled” Combination Regulations in 2024 to regulate mergers, acquisitions, and amalgamations to ensure that such transactions do not result in the creation or strengthening of a dominant position, thereby harming competition in the market. This article is an attempt to review the regulation through the pre-implementation evaluation lens, which is a regulatory tool. As the Judicial Impact Assessment Report (arising from a task force committee chaired by Justice M. Jagannadha Rao) highlights, the introduction of new legislation has a direct impact on court workloads, making it necessary to anticipate the judicial system’s resource needs. The focus of the assessment here is to look into how the regulation might impact the judiciary and legislation in India.

An ideal piece of regulation should be baked through various stages, which usually starts from identifying “what is broken?” and ends at post implementation evaluation. One crucial stage during regulation formation is “pre-implementation evaluation” wherein the regulators or the law makers test the provisions of the regulations based on anticipated impact of the regulation on the market and stakeholders.

The important question here is, did the policy makers, before notifying the regulation, sufficiently analyze the potential impact of the regulations on various market components like, litigation, NCLAT, start-ups, big companies, investment cycle, foreign investment, and international transactions, to state a few? And most importantly are CCI, NCLAT and courts equipped to handle the impact the regulation is all set to bring?

Impact of the regulations on Startups

The combination regulations will possibly have a significant impact on startups. Often, small startups are acquisition targets for larger companies looking to either expand their market share or to access new technologies.

The newly introduced Deal Value Threshold (DVT), may directly impede the ability of startups to pursue mergers and acquisitions as a means of growth and expansion. While the introduction of DVT may have been primarily driven by concerns over large-value acquisitions in the digital space, where the target companies might have had small assets or turnover but significant growth potential. For instance, at the time of Instagram acquisition, the application had an impressive user growth but no revenue. Facebook paid $1 billion, a considerably high price for a company with no proven business model. This acquisition raised concerns about Facebook neutralizing a potential competitor in the photo-sharing space.

The new regulations carry an intent to “correct” such above deals by introducing DVT that cover a broad range of transactions within the deal, raising the DVT, and thereby creating more scope of deal falling under the ambit for scrutiny by CCI. Such deals earlier would have sought approval either through green channel or the regulator would not have a chance to evaluate the deal based on transactions within the deal. Another aspect of introduction of these regulations is the added layer of compliance for start-ups and more legal cost. However, the regulations do provide some relief which exempts acquisitions involving less than 25% of shares or voting rights from pre-merger notification requirements, potentially simplifying the investment process for startups and facilitating their access to capital and growth opportunities.

However, the deal value threshold might not significantly impact budding startups seeking acquisitions for recouping investments, as their sale value might not exceed the threshold.

Moreover, the substantial increase in filing fees has been increased by approximately 38 % – 50 % for different forms. for merger notifications, could create a substantial financial obstacle for smaller startups seeking to engage in strategic M&A activities.

Impact on Litigation and NCLAT

The CCI Combination Regulations might also eventually have a significant impact on litigation and proceedings before the National Company Law Appellate Tribunal (NCLAT). The regulations have empowered the CCI to scrutinize and approve a wider range of transactions. NCLT also deals with mergers, acquisitions and amalgamations, insolvency and corporate management disputes. This, in turn, will result in a rise in the number of cases before the CCI and NCLT, as well as appeals against its decisions and its relevant processes being filed before the NCLAT and Supreme Court. Is the current bench strength in both the institutions sufficient to handle the expected surge in caseload?

In addition, the regulations introduce new concepts and thresholds, such as the DVT, which could lead to more complex legal arguments and interpretations. This complexity could make it more challenging for the NCLAT to adjudicate on these matters and might require a deeper understanding of the economic and market dynamics involved.

In previous such similar circumstances, it is not just the tribunals whose doors have been knocked for interpretation or substantive delay issues, but also other higher courts. For instance, Amazon’s 2019 acquisition of a stake in Future Coupons faced a CCI investigation for non-disclosure of key details, leading to a fine and revoked approval. The company first appealed the matter before NCLAT and eventually before the Supreme Court. While the apex court direction to Amazon to return to the CCI might not be just enough to stop other litigants approaching the apex court, which is already overburdened with cases.

Impact on deals yet to be consummated

The CCI Combination Regulations could also have a significant impact on deals yet to be consummated. The revised regulations, effective from September 10, 2024, applies to all qualifying transactions, even those where the trigger event (board approval or signing of documents) occurred before this date, if they haven’t been fully completed.

The regulation departs from the common practice of allowing parties a transition period, which could lead to parties approaching the tribunal to either grant them more time or exempt them from the added compliance requirements.

Additionally, the retrospective application of the new regulations could also raise concerns about legal certainty and the predictability of the regulatory environment. Parties involved in deals that were already in advanced stages will now have to face unexpected delays or even the risk of the transaction being blocked due to the new requirements.

Impact on Foreign Investment and International Transactions

The regulations are also likely to have a significant impact on foreign investment and international transactions involving Indian companies. The new deal value threshold, if applied to global transactions, could lead to several cross-border M&A activities coming under CCI’s scrutiny. This is in addition to the impact of the regulation on pre-approved deals.

Conclusion

The impact of the CCI Combination Regulations 2024 on the Indian market and its stakeholders is multi-faceted and complex. While the CCI Combination Regulations 2024 aim to strengthen competition oversight, and be at par with international practice, their implementation could pose significant challenges for startups, big companies, CCI, NCLAT, and the overall investment climate including dispute resolution.