Jio and Disney Merger: from the Lens of Competition Due Diligence

February 7, 2024
Merger Jio Cinema Disney Hotstar

By Rupin Chopra and Shantam Sharma

Introduction

In the ever-evolving world of entertainment and media, Over-The-Top (OTT) platforms have emerged as the new frontier, reshaping how audiences consume content. India, with its burgeoning market, is witnessing a seismic shift in the OTT landscape. The upcoming reported[1] between Disney and Jio has the potential to redefine the industry, creating the largest OTT platform in the country. In this article, we delve into the intricacies of this merger, exploring its implications, the competitive landscape, and the legal aspects surrounding it.

The OTT Boom in India

As of now, the OTT market[2] in India stands at a robust ₹105 billion, including subscription revenues, and is projected to reach ₹120 billion by FY 2024 and a staggering ₹300 billion by FY 2030, with a 20% year-on-year growth. This exponential growth underscores the significance of the OTT sector in the Indian entertainment industry.

The Merger: A Game-Changer in the OTT Landscape

The reported upcoming merger between Jio Cinema and Disney+ Hotstar is poised to create the largest OTT platform in India. However, amidst the excitement, it is crucial to acknowledge the potential challenges and regulatory considerations. The Competition Commission of India’s role in reviewing and approving such mergers becomes paramount in ensuring fair competition and preventing any adverse effects on the market.

For the Jio-Disney merger specifically, regulatory scrutiny is expected to focus on their streaming businesses and the considerable power they wield over advertising during cricket events. Cricket, a sport that enjoys fanatical devotion in India, holds immense value in the country’s media landscape. Disney Hotstar, India’s largest streaming app with a user base of 38 million[3] , holds the rights for International Cricket Council’s matches in India until 2027. In contrast, Reliance’s JioCinema app has secured the rights for the immensely popular Indian Premier League (IPL).

Competition Law: A Crucial Aspect of Mergers

In the legal realm, mergers of such magnitude invite scrutiny from competition authorities. Compliance with the provisions of Section 3[4] of the Competition Act is paramount to ensure that the merger does not result in appreciable adverse effects on competition (AAEC) in the Indian market.

Anti-Competitive Agreements and Due Diligence

Section 3 of the Competition Act prohibits anti-competitive agreements and emphasizes the importance of due diligence in assessing potential competition issues. Enterprises involved in a merger must avoid discussions, agreements, or joint actions with competitors on matters such as pricing, quantity, production, development, marketing, distribution, and sharing of markets or customers. Anti-trust provisions prohibit any arrangements that may have an AAEC.

Initiating Due Diligence on a Competitor[5]

Due diligence plays a pivotal role in assessing the viability of a merger. When conducting due diligence on a competitor, certain considerations must be taken into account to avoid anti-competitive risks:

  • Due diligence should be conducted by the legal department of the enterprise or a third party, not by individuals associated with day-to-day operations.
  • Confidentiality/Non-Disclosure Agreements should be in place to safeguard commercially sensitive information.
  • Exchange of forward-looking planning documents or details of pipeline projects must be approached cautiously to avoid anti-competitive risks.
  • Cost data, pricing, and discount policies not publicly available should not be exchanged during due diligence.

Merger Control: Navigating the Regulatory Landscape

The Competition Act mandates the Competition Commission of India (CCI) to regulate combinations, including mergers and acquisitions, to ensure there is no adverse effect on competition in India. Trigger events, timelines for filing, and thresholds under Section 5 of the Act are crucial aspects of merger control.

Trigger Event and Timelines for Filing

Section 6(2) of the Act stipulates that a notification must be filed with the CCI within 30 calendar days of the occurrence of a trigger event. For acquisitions, this includes the execution of agreements conveying an agreement/decision to acquire control, shares, voting rights, or assets. In the case of a merger, the trigger event is the date of approval by the boards of the merging enterprises.

Thresholds under Section 5 of the Act

The Act establishes asset/turnover thresholds for parties involved in a merger, providing a framework to assess the potential impact on competition in India. As of now, these thresholds are as follows:

a) Parties Test: The acquirer and target enterprise, jointly in the case of an acquisition or the merged entity post-merger, must meet one of the following criteria:

  • Assets exceeding INR 2,000 crores in India or turnover exceeding INR 6,000 crores in India.
  • Worldwide assets exceeding USD 1 billion, including at least INR 1,000 crores in India, or worldwide turnover exceeding USD 3 billion, including at least INR 3,000 crores in India.

b) Group Test: The group to which the target entity will belong post-acquisition or the group to which the merged entity would belong post-merger, must meet one of the following criteria:

  • Group assets exceeding INR 8,000 crores in India or turnover exceeding INR 24,000 crores in India.
  • Worldwide assets exceeding USD 4 billion, including at least INR 1,000 crores in India, or worldwide turnover exceeding USD 12 billion, including at least INR 3,000 crores in India.

Furthermore, Regulation 5(9) of the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 stipulates considerations in cases involving a series of inter-related steps or transactions. In such scenarios, where assets are transferred to an enterprise for the purpose of entering into an agreement related to an acquisition, merger, or amalgamation with another entity, the value of assets and turnover of the transferor enterprise shall be attributed to the value of assets and turnover of the transferee enterprise for the purpose of calculating thresholds under Section 5 of the Act.

When a portion of an enterprise, division, or business is being acquired, taken control of, merged, or amalgamated with another enterprise, the value of assets and turnover attributable to that portion, division, or business becomes crucial. This relevant subset of assets and turnover is considered for the purpose of calculating the thresholds under Section 5 of the Act.

Understanding and adhering to these thresholds is essential for enterprises involved in mergers, ensuring compliance with the regulatory framework, and mitigating potential adverse effects on competition in India.

Available Exemptions

The ‘De Minimis’ exemption, a significant provision under the Competition Act, offers relief for enterprises involved in certain types of mergers. This exemption, introduced through a notification by the Central Government on March 29, 2017[6], is designed to provide flexibility and ease regulatory burdens for transactions that are of lesser significance in terms of their impact on competition.

The ‘De Minimis’ exemption applies to three specific scenarios:

  • Acquisitions (Section 5(a)): This exemption covers acquisitions referred to in Section 5(a) of the Competition Act. In simple terms, it includes transactions where an enterprise acquires control, shares, voting rights, or assets of another enterprise.
  • Control over Similar Enterprises (Section 5(b)): The exemption also encompasses situations where a person, already having direct or indirect control over one enterprise engaged in the production, distribution, or trading of similar or identical goods or provision of similar or identical services (as outlined in Section 5(b)), acquires control over another such enterprise.
  • Mergers or Amalgamations (Section 5(c)): The ‘De Minimis’ exemption extends to mergers or amalgamations as described in Section 5(c) of the Competition Act.

For the exemption to apply, the value of assets being acquired, taken control of, merged, or amalgamated must not exceed INR 350 crores in India. Similarly, the turnover associated with the transaction should not exceed INR 1,000 crores in India. This monetary threshold is a crucial determinant, and transactions falling within these limits are exempted from certain provisions of Section 5 of the Competition Act for a period of five years from the date of the notification.

The ‘De Minimis’ exemption aims to strike a balance between regulatory oversight and facilitating transactions that may have minimal impact on competition. By providing this exemption, the regulatory framework acknowledges that certain mergers, acquisitions, or control transactions may not pose significant threats to competition in the market. This not only streamlines the compliance process for enterprises involved in smaller transactions but also allows competition authorities to focus their resources on scrutinizing more substantial and potentially anticompetitive transactions.

However, it is crucial for enterprises to carefully evaluate whether they fall within the purview of the ‘De Minimis’ exemption and to ensure that their transactions meet the specified criteria.

Conclusion

The merger between Jio Cinema and Disney+ Hotstar, if brought to fruition, holds immense potential to reshape the Indian OTT landscape. However, as with any major business transaction, it necessitates careful consideration of competition law provisions and adherence to due diligence practices. By navigating the regulatory landscape and ensuring compliance, the merged entity can not only revolutionize the entertainment experience for consumers but also set a precedent for responsible and competitive business practices in the Indian market.

[1] Available at: https://www.hindustantimes.com/business/reliances-jio-cinema-may-soon-merge-with-disney-hotstar-heres-what-the-ott-can-offer-101703639060962.html
[2] Available at: https://www.thehindubusinessline.com/news/indian-ott-market-set-to-reach-30000-crore-by-2030/article66760012.ece
[3] Available at:
https://www.business-standard.com/entertainment/viewership-of-premium-videos-up-in-india-disney-hotstar-most-dominant-123051800170_1.html
[4] Anti-Competitive Agreements; Available at: https://www.indiacode.nic.in/show-data?actid=AC_CEN_22_29_00005_200312_1517807324781&sectionId=640&sectionno=3&orderno=3#:~:text=(1)%20No%20enterprise%20or%20association,adverse%20effect%20on%20competition%20within
[5] Available at: https://www.cci.gov.in/images/publications_compliance_manual/en/compliance-manual1652179683.pdf
[6] Available at: https://www.cci.gov.in/combination/legal-framwork/notifications/details/9/0

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