New Delhi: Hostile takeovers in India have just received a boost from the country’s competition watchdog. Companies will no longer need approval from the Competition Commission of India (CCI) to buy up to 25% of a target company’s shares in the secondary market before making a formal bid. This provision was one of several changes to mergers and acquisitions (M&A) rules notified by the CCI last week.
The ICC Criteria for Exemption from the 2024 Combination Rules also lists cases such as acquisition of shares as part of a bonus issue, stock splits, consolidation of par value and group restructuring, which do not lead to a change of control, as transactions that do not require its prior approval.
Previously, companies could be penalized for failing to obtain CCI approval before making such secondary share purchases, said a former CCI official, speaking on condition of anonymity.
“It was not feasible to seek permission from the CCI for incremental transactions in the stock market, which are dynamic in nature,” this person said. “The government has corrected this anomaly and it is a step in the direction of improving the ease of doing business.”
Any company acquiring a 25% stake in a listed company must make an open offer to public shareholders as per regulations of the market regulator, the Securities and Exchange Board of India (Sebi).
Rahul Rai, partner and co-founder of law firm Axiom 5 Law Chambers, said such secondary transactions must be notified to the CCI within 30 days of the initial acquisition in the market. “This is important for certain unsolicited investments in listed companies and their acquisitions (hostile takeovers) as it helps preserve the strategic nature of the transaction and addresses a loophole in the law,” he said.
However, Rai noted that while the investor could receive dividends, voting rights with respect to management can only be exercised after CCI approval.
Shweta Shroff Chopra, partner at Shardul Amarchand Mangaldas & Co, explained that most of the exemptions are linked to the absence of a change of control, defined in the Competition Amendment Act as the ability to exercise material influence over management or strategic business affairs or decisions. This is a lower threshold than the decisive influence standard in other laws and jurisdictions. Therefore, the exemptions may cease to apply if the nature of control changes, Chopra said.
Global Transactions
Among other changes notified by the CCI last week, experts pointed out that the requirement of CCI approval for global transactions involving companies with substantial business operations in India could have an impact on the funding cycle of startups.
According to this rule, if an Indian company is being acquired by ₹2,000 crore and meets the local nexus criteria, CCI approval will be required. Rai of Axiom 5 Law Chambers said this threshold is not low and there are very few venture capital fundings that meet the ₹2,000 crore mark.
“However, the CCI requires investors to review the investments made in a company over the last two years,” Rai said, adding that venture capital funds continue to increase their investments in companies that are doing well and that it could violate the ₹Threshold of Rs 2,000 crore at some point.
“Therefore, some funding cycles may be affected for some young companies,” Rai said, adding that the speed and scale of seed funding was critical.
The new merger review rule based on the value of the transaction does not include an exemption clause. It covers transactions signed before September 10 but not yet closed. Therefore, the deadline for closing such transactions could be deviated. “This is a problem for M&A lawyers, investment bankers and everyone involved in transactions,” Rai said.
A grandfather clause added to legislative changes protects individuals and companies complying with a previous regime from any hardship arising from changes in the regime, as a transitional mechanism. Companies expect legislative changes to occur prospectively and not retroactively.
However, the merger review based on the deal value threshold was long debated publicly and became law more than a year ago.
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