The new deal value threshold (DVT) for mergers and acquisitions, introduced by the Competition Commission of India (CCI) recently, is likely to have a major impact on startup deals. According to competition experts, most startups look for funding to expand, and a slew of modifications in the list of exemptions will bring more transactions in the startups space under the CCI’s scrutiny.
“The new DVT limit of Rs 2,000 crore tries to tackle a problem that CCI could not handle previously because the traditional thresholds were not met or exemptions were available. There have been instances where a big tech firm acquired significant shareholding in a small startup which didn’t need CCI approval at that time. But over a period of time, the acquisition became big enough to impact the market, and CCI didn’t have a chance to review it. That’s going to change now,” said Ravisekhar Nair, partner at Economic Laws Practice.
For instance, the traditional thresholds, which have now been encoded in the law, include Rs 450 crore of assets and Rs 1,250 crore of turnover whereby if the target company crossed these thresholds, the transaction would require the CCI’s nod.
“The authorities are of the view that not-so-small transactions were falling off the radar and not getting the scrutiny they deserved. Till now, the criteria were asset and turnover based. Now they have stipulated deal value also. They believe that this way, they will be able to prevent certain market abuses. A key aspect is that certain sectors or segments, especially involving startups, have become oligopolistic. Food delivery is a classic example,” said Jayesh H, co-founder of Juris Corp Advocates and Solicitors.
Experts said valuations in the Indian markets are at an all-time high and therefore, DVT is likely to impact M&A deals in the startup ecosystem, particularly in the digital sector, where the turnover threshold of Rs 500 crore is not required to be met.“
Startups will have to continue to assess notification requirements based on the deal value or size (i.e., assets and turnover) of the parties involved and if the reverse-flipping meets any exemption criteria. Depending on the structure finalised, a notification under the Competition Act may be required to be provided to the CCI,” said Nair.
Another major change that’s going to impact startups is that the norms now capture the “minority” and “creeping” acquisitions. Creeping acquisition refer to a deal where the acquirer keeps buying stake in a company in small tranches. “So these series A, B, C, etc. funding in the startups which are sometimes creeping acquisitions will now require the CCI’s nod if they are meant to gain control in the target firm,” said a corporate lawyer.
Experts said the emphasis has been laid on the “control” of the target firm. For instance, if the acquirer is gaining access to commercially-sensitive information or getting to appoint directors or can have “material influence” on the target company, the deal would no longer be considered exempt and hence will be required to be notified to the CCI. “The CCI will now look into the substance of the transactions in addition to the thresholds,” said the lawyer.
From: financialexpress
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