Creeping takeovers, deals aimed at taking control of startups that will come under scrutiny by CCI – Industry news

The new transaction value threshold (DVT) for mergers and acquisitions, recently introduced by the Competition Commission of India (CCI), is likely to have a major impact on startup deals. According to competition experts, most startups are looking for expansion funding and a number of changes in the exemption list will bring more deals in the startup space under the CCI’s microscope.

“The new DVT limit of Rs 2,000 crore tries to address a problem that the CCI could not address earlier because the traditional thresholds were not met or exemptions were not available. There were instances where a large technology company acquired a significant stake in a small startup that did not require CCI approval at that time. However, over time, the acquisition became so large that it affected the market and the CCI did not get a chance to review it. That will change now,” said Ravisekhar Nair, Partner, Economic Laws Practice.

For example, the traditional thresholds that are already enshrined in law include Rs 450 crore in assets and Rs 1,250 crore in turnover, and if the target company crosses these thresholds, the transaction would require CCI approval.

“The authorities feel that not-so-small deals have been flying under the radar and not getting the attention they deserve. Till now, the criteria were based on assets and turnover. Now, the value of the deal has also been specified. They believe that this way, they will be able to prevent certain market abuses. The key aspect is that certain sectors or segments, especially those involving startups, have become oligopolistic. Food delivery is a classic example,” said Jayesh H, co-founder, Juris Corp Advocates and Solicitors.

Experts say with valuations in Indian markets at an all-time high, DVT is likely to impact M&A deals in the startup ecosystem, especially in the digital sector where a turnover threshold of Rs 500 crore is not required.

Startups will still need to assess the notification requirements based on the value of the transaction or the size (i.e. assets and turnover) of the parties involved in the transaction and whether the reversal of the transaction meets any exemption criteria. Depending on the structure finalized, a notification under the Competition Act may be required to the CCI,” Nair said.

Another major change that will affect startups is that the norms now cover “minority” and “creeping” acquisitions. Creeping acquisitions refer to deals where the acquirer buys a stake in a company in small tranches on a consistent basis. “So, Series A, B, C, etc. funding in startups, which are sometimes creeping acquisitions, will now require CCI approval if they are to gain control of the target company,” said a corporate lawyer.

Experts said the focus has been on “control” over the target company. For example, if the acquirer gains access to commercially confidential information or can appoint directors or can have “significant influence” over the target company, the transaction will no longer be considered exempt and will therefore have to be reported to the CCI. “The CCI will now look at the substance of the transaction in addition to the thresholds,” the lawyer said.