The Ministry of Corporate Affairs of the Government of India (MCA) has clarified on the exemptions provided to enterprises from application of section 5 that regulates combinations under the Competition Act, 2002 (Act) vide notification dated 27 March 2017 that was published in the official gazette on 29 March 2017 (Exemption Notification). The MCA also rescinded an earlier notification dated 4 March 2016 (Earlier Notification) that exempted an enterprise fulfilling certain criteria from the applicability of section 5 of the Act (Rescinding Notification).
The Earlier Notification had provided exemption from applicability of section 5 of the Act to enterprises whose control, shares, voting rights or assets are being acquired either have assets of the value of not more than INR 3,500,000,000 (Indian Rupees three billion and five hundred million) in India or a turnover of not more than INR 10,000,000,000 (Indian Rupees ten billion) in India, for a period of 5 (five) years commencing from 4 March 2016. The Rescinding Notification sets out that the exemption under the Earlier Notification would no longer apply, except things done or omitted to be done before such rescission.
The Government noted that the Earlier Notification was being applied to combinations which resulted only from acquisition but was not extended to merger/ amalgamation and acquiring of control cases.
The Exemption Notification, inter-alia, provides clarity on the applicability of the threshold exemption limits to all forms of combinations under the Act. It exempts enterprises being parties to:
• any acquisition referred to in section 5(a) of the Act;
• any acquisition of control by a person over an enterprise when such an acquiring person already has a direct or indirect control over another enterprise engaged in identical or similar business or service, as is referred in section 5 (b) of the Act; and
• any merger or amalgamation referred to in section 5 (c) of the Act,
where the value of assets being acquired, taken control of, merged or amalgamated is not more than INR 3,500,000,000 (Indian Rupees three billion and five hundred million) in India or a turnover of not more than INR 10,000,000,000 (Indian Rupees ten billion) in India from provisions of section 5 of the Act for a period of 5 (five) years from the date of publication of the Exemption Notification in the official gazette.
The MCA also noted that where only a segment/portion/business of an enterprise was being combined with another enterprise, the relevant assets and turnovers attributable to the target segment/portion/business were not being considered but the transferor’s total assets and turnover were being considered for determining the applicability of the exemption.
In view of the above, the Exemption Notification seeks to clarify as to which method may be adopted for calculating the relevant assets and turnover of the target entity when only a portion or segment or business of an enterprise is proposed to be combined with another. Accordingly, the Exemption Notification states:
• The value of assets that may be attributable to the portion or division or business and/ or attributable to it shall be the relevant assets and turnover to be taken into account for calculating thresholds under section 5 of the Act for transactions where only the portion of an enterprise or division or business is being acquired, taken control of, merged or amalgamated with another enterprise;
• The value of the said portion or division or business shall be determined by taking the book value of the assets as shown in the audited books of accounts of the enterprise or as per the statutory auditor’s report where the financial statement have not yet become due to be filed, in the financial year immediately preceding the financial year in which the date of the proposed combination falls, as reduced by any depreciation. It is also provided that the value of assets shall include the brand value, value of goodwill, or value of copyright, patent, permitted use, collective mark, registered proprietor, registered trade mark, registered user, homonymous geographical indications, design or layout-design or such other commercial rights similar to the aforesaid, if any, as are referred to in section 3 (5) of the Act; and
• The turnover of the said portion or division or business shall be as certified by the statutory auditor on the basis of the last available audited accounts of the company.
This reform by way of issuing Exemption Notification providing sufficient clarity is in pursuance of the Indian Government’s objective of promoting ease of doing business.
The full text of the Exemption Notification and the Rescinding Notification may be accessed at the following link: