By Rupin Chopra and Apalka Bareja
In today’s day and age, mergers and acquisitions are considered to be the key drivers of growth and innovation. With an increase in such transactions and changing times, the Competition Law Review Committee (CLRC) prepared a report of its observations and recommendations deliberating and elucidating the need to introduce a new threshold in order to be able to adapt to the evolving and dynamic digital market considering deals in the digital industry are expensive not only in terms of monetary value but because such deals also bring with them a wealth of knowledge, expertise, and resources. With the intent to address combinations that have an appreciable adverse effect on competition, even if they fall within the de minimis exemption The Competition (Amendment) Bill 2023 received the President’s assent on April 11, 2023, to become The Competition (Amendment) Act, 2023 (“Amendment”).
Competition Law- India
The provisions of the Competition Law govern the combinations/amalgamations/mergers of entities which can hamper competition and create an appreciable adverse effect in the relevant sector. These transactions were subject to certain thresholds under The Competition Act of 2002. If the transactions were above the prescribed threshold then the parties involved in such transactions had to take approval from the Competition Commission of India (CCI) by giving a notice. If the notice was not given then parties were subjected to the penalties under the law.
Before the Amendment, the Act provided ‘De Minimis Exemption’, where a transaction was exempted from the notification requirement under the law if the targeted company had assets less than INR 350 crore or a turnover of less than 1000 crore.
The Amendment introduces a new standalone threshold called Deal Value Threshold (DVT). DVT is based on the size of the transaction or the amount the entity (acquirer) is willing to pay as a consideration in a transaction. The deals crossing 2000 Crores will require the entities (party to the transaction) to inform CCI. Additionally, this Amendment will cover international enterprises that have “Substantial Business Operations in India” (SBOI). The rules and regulations for the qualifications for an SBOI awaits clarification and shall be informed soon.
History of DVT
In 2018, the Ministry of Corporate Affairs (MCA) constituted CLRC to “recommend a robust competition regime by taking the inputs of key stakeholders, and suggest changes in both the substantive and procedural aspects of the law“. The committee then submitted the report where they discussed the need for the introduction of a new threshold for CCI to have the power to scrutinize deals that have a substantial impact on the market. The present Amendment derives it source from the report presented by the committee.
Observations by CLRC with respect to New Threshold
The Committee in its report observed that the thresholds based on assets and turnovers were not accurate for indicating the transaction’s effect on the competition in the market. They reported:
- Acquisitions in tech/digital markets derived value from data or some business innovation held by the target.
- In such acquisitions, the target did not have a huge asset base and may be offering products/services that are either free or generate insignificant turnover.
- This is because the business model of companies in tech/digital markets is often such that they do not generate any significant revenue for a number of years, focusing initially on user growth. In such instances, the value of the target’s sales is a rather poor indicator of the transaction’s significance for competition.
- Thus, a need for a threshold based on the deal value was the need of the hour.
The recent Amendment can see its origin from the WhatsApp/Facebook merger of 2014 when Facebook acquired WhatsApp for USD 19 billion. WhatsApp’s turnover was less than the asset/turnover thresholds under the Indian Competition Law. During the time of the merger, the thresholds were INR 750 Crores in assets or INR 2250 crores in turnover. It was WhatsApp/Facebook merger which created apprehension and raised a question in the mind of the regulators if the law was doing enough to prevent acquisitions of ‘nascent competition’ and ‘killer acquisitions’.The merger triggered the following concerns all around the world even though it did not match the threshold:
- Reduced Competition for Facebook: WhatsApp and Facebook both were rivals in the instant messaging market. The merger led to a reduction in competition and overall increase in Facebook’s influence in the market.
- User Base concerns: Both Facebook and WhatsApp had large user base. There were some concerns regarding consumer’s interest.
- Higher barrier for new players: The merger not only strengthened the position of Facebook which is Meta now but it also increased the entry barrier for new players. The competition hardly survived after the merger and many other player were wiped out.
This trend was further seen in other acquisitions in Microsoft/LinkedIn, Myntra/Flipkart, Ola/TaxiforSure, and Snapdeal/Freecharge. The report pointed out that these transactions slipped through the cracks of the CCI’s review even though they had a significant impact on competition.
Impact on Tech-Industry
The value of assets and turnover is not an indicator of impact with respect to tech industry. Therefore, the price or the value which the acquirer is willing to pay is the right indicator of the transaction. Now, DVT will bring those deals under the purview of CCI which is based on the value of the deal which the acquirer is willing to pay. As a consequence of this, the Tech Industry will have a tough time consolidating market positions, eliminating potential threats, or expanding into new lines of business. Overall, it will allow room for more competition and protect acquisition of new players by Tech Giants.
DVT in other Jurisdictions
Many countries have felt the need to bring digital markets under the scrutiny of their Antitrust Laws. Austria and Germany also have DVT in their competition law regime. The threshold in these jurisdiction are as follows:
- Germany: In Germany, the Deal Value Threshold is triggered when the transaction value exceeds EUR 400 million. Additionally, if the combination of the aggregate exceeds EUR 500 million worldwide and EUR 25 million in Germany.
- Austria: In Austria, the Deal Value Threshold is triggered when the transaction value exceeds EUR 200 million. Additionally, if the combined aggregate turnover exceeds EUR 300 million worldwide and EUR 15 million in Austria.
The eruption of internet markets has gained speed all over the world. The benefits of the growth is noteworthy but to expatiate innovation, competition is a must. There is a consensus all over the world that digital companies’ show anti-competitive behavior and the antitrust regime should be strong enough to tackle them. The introduction of DVT in India is consistent with the practices around the world and will help in curbing anti-competitive behavior.
The goal of adding a new threshold is to provide the regulator more power to stop anti-competitive behavior. There is also a need to clearly define what constitutes the value of a transaction because the “deal value” of any M&A transaction is likely to surpass the value of consideration. As a result, it is important for the CCI to provide a list of the elements, variables, and parts that would make up “value of transaction” – in particular, non-monetary consideration. If the Committee’s suggestions are adopted, it will be up to the CCI to swiftly define these words so that the DVT can continue to contribute significantly to regulatory certainty and sustain India’s business-friendly environment.
Piyush Kumar Singh,Assessment Intern at S.S. Rana & Co. has assisted in the research of this Article.