Merger Thresholds under the Draft Competition (Amendment) Bill, 2020: A Digital Perspective

[Shrey Aggarwal is a 4th Year B.A. LL.B (Hons.) Student at Jindal Global Law School, O.P. Jindal Global University, Sonipat, Haryana]

The Draft Competition (Amendment) Bill, 2020 (“Amendment Bill”) has proposed to introduce substantial changes in the Competition Act, 2002 (the “Act”) through several amendments. One change in particular, being the focus of this analysis, is the addition of two ‘provisos’ to section 5 of the Act. These provisos aim at regulating the digital markets by prospectively analysing the mergers and acquisitions of enterprises that may cause appreciable adverse effect on competition (“AAEC”), based on the manner and volume of data processed by such entities. The provisos essentially dilute the powers of the Competition Commission of India (“CCI”) by conferring upon the Central Government with disproportionate authority to regulate and revise the existing thresholds or introduce any other criteria for assessing whether a particular acquisition, amalgamation or merger will constitute a combination under section 5 of the Act.

The introduction of new thresholds for notification and assessment of combinations was contemplated with a view to address the business models in digital markets. The Report of the Competition Law Review Committee, based on which the Amendment Bill was introduced, acknowledged a need to optimise the competition law framework to meet the challenges in the digital markets. However, as this post will argue, the provisos in their current manner and form add no value to the competition framework for governance of digital markets.

The Need for a New Framework

Digital markets are characterised by their research and innovative capabilities, wherein a business may not generate significant revenue for a number of years. This is because the primary focus of such platforms is to attain a critical mass of users for them to enjoy the benefits of network effects in the market. The objective of amassing a critical mass of users is also coupled with goal of collecting as much data as possible since, through the consolidation of data, businesses in digital markets can not only increase the efficiency of their products and services that would aid them in achieving economies of scale, but also provide more choices and personalised experience for the consumers.

The concept of reservation price will further provide an insight into the importance of data and data collection. Since every consumer has a different value associated with a certain product or service, the estimation of reservation price is a real challenge that business face. It may not, therefore, come as a surprise that it is almost impossible to determine the reservation price in a totally physical market. However, concept of reservation price is different in the digital space as the threshold to estimate the reservation price for a consumer is lowered. Digital marketplaces are able to understand the consumer better as the volume of traffic on their web pages enable such players to analyse consumer needs and preferences by processing the data they collect. The ability to adapt in real time marketplace, by analysing collected data, is another value addition that is often ignored. Targeted advertising is yet another way, among others, through which digital platforms generate revenue. At this point a simple cycle can be observed wherein, once a platform attains critical mass of users, it can collect and process data and through which it can improve the efficiency of its business and add way more value than a traditional business based in a physical space can.

Further, it is not altogether surprising that data aggregation comes with its own set of problems with the major and evident one being privacy concerns. While data privacy is more of a constitutional concern, the consolidation of data by a few businesses creates entry barriers in the digital space. The Big Five (Google, Amazon, Facebook (Meta), Apple and Microsoft) have been in operation for a long time and have already collected and processed an unquantifiable amount of data in almost ever sector possible. While the mere existence of the Big Five or their subsidiaries in any market has a chilling effect on other players that limits the present and sequential competition in the given market, the deliberate growth choices made by existing players pose a real challenge for the current merger thresholds.

The growth trajectory of the Big Five clearly represents that these players adopt a ‘copy-acquire-kill’ strategy wherein they acquire innovative digital platforms before killing them to stop other platforms from having access to them. This further allows the dominant players to obtain the data and analytics from the acquired platforms. Such acquisitions are usually made at the initial stage of such innovative platforms wherein they do not have sufficient revenue or assets to bring them under the competition radar, particularly considering the asset-turnover based merger control thresholds under the Act. One prime example for this is the acquisition of ‘Instagram’ and ‘WhatsApp’ by FaceBook wherein the value of assets and turnover of both ‘Instagram’ and ‘WhatsApp’ has increased multifold when compared to their acquisition value. Furthermore, especially in India, businesses can avail of the de-minimis exemption from notifying the CCI about the combination that would probably cause significant impediment to effective competition in a given market.

The Shortcomings of the Proposed Amendments

The current asset-turnover based evaluation of enterprises employed by section 5 of the Act to determine a ‘combination’ has certain flaws, with the major one being the inability to scrutinise those transactions that ultimately lead to consolidation of data through a horizontal or vertical merger or acquisition. In addition, the current threshold mechanism also fails to incorporate the potential value of assets and turnover of such enterprises that have a pipeline product. By just taking into account the current value of assets and turnover, the data and technologically driven enterprises are able to escape the notification requirement under section 6 of the Act as, even though the current value does not meet the threshold requirements, the introduction of new products and services have an exponential effect on the value of assets and turnover for such enterprises. Further, as explained above, as the operations of the enterprise expand and they attain more users, digital platforms grow at much faster rate than their competitors.

While the introduction of a new threshold mechanism to tackle the above-mentioned problem would have been a welcome move, the updated merger control criteria, instead of actually reforming the current mechanism or provide the CCI with increased power to review transaction, has introduced vague amendments that effectively vests the power in the Central Government. The proviso to section 5 provides that the Central Government, in consultation with the CCI, may prescribe any other criteria other than the current thresholds for notifying a transaction to the CCI. Further, such introduction of new criteria will be based on ‘public interest’, the parameters for which have not defined. The failure to define public interest in the context of competition law or to prescribe basic principles that may be considered by the government while introducing new merger control criteria, leads ambiguity in the digital markets with respect merger control enforcement. Updated criteria are likely to be based on subjective parameters creating uncertainty in the digital market ecosystem with respect to the data processing activities and how such activities will be affected by the new criteria. The broad parameter of ‘public interest’ may lead to retrospective application of law, since the absence of any guidelines provides the Government with absolute authority to come up with any criteria based on its convenience and needs. This will likely create an anti-competitive ecosystem wherein an enterprise could be in violation of notification requirements without even being aware of the applicable rules and regulations. Further, without striking a proper balance between the assessment of a combination based on competition and public interest criteria could very well lead to a situation wherein the two criteria of competition assessment and public interest assessment may lead to strikingly opposite results. This situation has been well documented by the Ministerial Exemption cases in German Merger Control wherein the Federal Minister of Economic Affairs overruled prohibition of several mergers by the Federal Cartel Office on the grounds of general public interest.

Additionally, in light of the consistent criticisms received by the CCI and the Government for having an ineffective merger control framework suited to regulate the transactions in digital markets, handing over the reins of prescribing any criteria for assessment of combinations, to the Central Government, may not be best idea. The bill proposes to form a Governing Board with wide ranging powers including assisting the Central Government in developing National Competition Policy and any other function that may be prescribed by Central Government. Needless to say, the increased involvement of the Government in merger control assessment with such powers as the Amendment Bill prescribes raises a lot of concerns with respect to subjective parameters that may not be in public interest or rather create new entry barriers with respect to investment.

Conclusion

In the current form, the Amendment Bill poses certain questions that have largely remained unanswered and have created ambiguity instead of providing effective solutions to problems posed by digital markets. Detailed parameters that govern the introduction of new criteria for merger control must be published to unburden the current and future stakeholders of the digital market as the inefficient and vague compliance requirements may act as an entry barrier for potential efficient competitors.

Shrey Aggarwal

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