[Avinash Kotval and Ishaan Saraswat are penultimate year students at Jindal Global Law School, Sonipat]
The Government of India, through the Competition (Amendment) Bill, 2022 (“2022 Bill”), proposed to bring about multiple changes to Indian competition law. One of the most pertinent changes is the introduction of a new thresholdfor the notification of any combination to the Competition Commission of India (“CCI”). This proposed threshold would consider the value of the eventual transaction, that is, the deal value. This amendment would have a significant impact on the merger control regime in India.
The proposed amendment comes in pursuance of the recommendations by the Competition Law Review Committee (“CLRC”). The CLRC, in its 2019 report, noted that the CCI does not have the power to assess any deals and transactions that do not meet the thresholds under section 5 of the Competition Act, 2002 (“the Act”). This has an adverse impact vis-à-vis combinations involving entities operating in the “digital sphere”.
Brief Snapshot of the Indian Merger Control Regime
With respect to merger control, India represents a mandatory notification jurisdiction. Simply put, if any combination exceeds the specified threshold requirement, the entities must notify and seek approval from the CCI. If the thresholds are exceeded, and if no exemptions provided by the Act or the Ministry of Corporate Affairs are applicable, then the consummation of any transaction may attract penalties under the Act. The thresholds specified under section 5 of the Act apply to foreign-to-foreign combinations as well, that is, in cases where both parties are non-residents, and the deal is taking place outside India.
Currently, the thresholds under Indian law are broadly along two bases: asset base and turnover base. Therefore, if the threshold of either specified bases is exceeded, then the parties would be required to notify the CCI. At the enterprise level, parties to mergers, amalgamations and acquisitions have an asset base in India of rupees two thousand crore or a turnover base in India of rupees six thousand crore. With the Competition (Amendment) Act, 2007, different bases were added to also include mergers occurring worldwide in respect of companies which have an operational presence in India. In such cases, the asset base for the parties to the merger, amalgamation or acquisition is one billion dollars, with at least rupees one thousand crore in India. The turnover base is three billion dollars, with at least rupees three thousand crore in India.
Certain exemptions to notification are available to parties, the most prominent being the ‘Small Target Exemption’ (“STE”). STE would be applicable where the target entity in the proposed transaction has assets less than rupees three fifty crore, or a turnover of less than rupees one thousand crore. STE was introduced by way of a notification dated 4 March 2011 by the Ministry of Corporate Affairs (“MCA”) and only included acquisitions within its ambit. Since then, it has been renewed by way of a notification in 2017 to include mergers and amalgamations, and most recently in 2022.
Certain other exemptions are also covered under Schedule 1 of the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011). Schedule 1 prescribes certain conditions surrounding the transactions that would exempt it from the CCI’s purview.
Effect of the Deal Value Threshold
As previously mentioned, the threshold in the Indian merger control regime only uses assets and turnover of the entities as the basis. Such a threshold ignores acquisitions where the target company does not have the eligible asset and turnover base. This occurs mostly for start-ups, data-driven companies and zero cost or negligible price service providers. It is ordinary for the prominent players without the necessary bases to absorb the innovative entrants, which in India is presumably efficient and legally not anti-competitive. Since the proposed thresholds focus on the value of the transaction and the considerable presence in the territory, it arguably fosters competition by placing a check before the incumbents can acquire the trifling companies.
The proposed amendment, presuming it would be enacted, would bring within the CCI’s domain deals in the digital economy. Since most tech companies have fewer assets and turnover, they miss the threshold despite being involved in high-value transactions. As acknowledged by the CLRC report, the asset/turnover test does not provide enough flexibility to review such combinations. Further, since most digital companies often fail to generate revenue during the initial years of their inception, solely having an asset/turnover threshold would be a significant issue. A few prominent examples in India would be the Facebook-WhatsApp deal, Flipkart-Myntra acquisition, Ola-TaxiforSure deal and the Snapdeal-Freecharge acquisition.
A threshold of 252 million dollars, while seemingly stringent, finds itself at a midpoint with liberal jurisdictions such as Austria and the United States on one side and strict jurisdictions like Germany on the other. Since the deal value threshold is an alternative requirement, matching it would bring the transaction under the scrutiny of the CCI. It may lead to a significant increase in the number of transactions captured in the regulatory web, requiring the CCI’s approval. Consequently, the competition regulator may find itself abruptly overburdened with regulatory filings. This hypothesis, of course, can only be tested post-enactment of the 2022 Amendment.
Earlier concerns of incorporating the potential value of assets and turnover of enterprises with a pipeline product have been somewhat addressed through the proposed amendment as well. By utilizing a deal value threshold, the work in progress for enterprises and the potential introduction of goods and services would come within the negotiated deal value, thereby warranting the CCI’s scrutiny.
Substantial Business Operations
Germany and Austria are prominent jurisdictions known to implement a deal value-based threshold. Their criteria involve a transaction exceeding 400 million euros and 200 million euros, respectively, and require entities to have substantial domestic operations in the jurisdiction. Following the path of such mature jurisdictions, it would not be inaccurate to presume that substantial business operations would account for the “measurement of domestic activity, geographical allocation of domestic activity (local nexus), market orientation and significance”.
The CLRC report also recommends introducing such a test to avoid ensnaring cases that may not, in fact, impact competition in India. The concern then, however, is whether the factors mentioned above would be able to cover the digital sector where the product and its users are spread across the globe. This would make the operation’s ‘substantial’ nature in the jurisdiction questionable. It would be counterproductive if the deal value threshold attempts to bring the digital space under scrutiny, but the definition allows room to evade it. Further, a vague description of the same would lead to the provision becoming catch-all. Hence, there is a fine line to balance in defining this consequential element.
Looking into the Future
Every jurisdiction has its unique deal value threshold. The chosen threshold is based on a multitude of factors. However, for India, the proposed amendment may act as a deterrent to the growth of business in the country. It may discourage combinations, ultimately reducing foreign input into the country. Prima facie, it may be beneficial for competition in the country. However, one of the objectives of the legislation is consumer welfare. This includes providing the best possible product to the end consumer at the best possible price. The past is a testament to this effect. In 2018, Qualcomm had backed out of a 44 billion US dollar bid for NXP Semiconductors NV, a competitor, since the Chinese regulations prohibited it. This was purported to be the biggest deal in the semiconductor industry and could have benefitted the end consumer. The question that the regulator, and the public, must consider is whether any amendment to the thresholds should bolster the regulations at the cost of consumer welfare and allocative efficiency.
There are some other concerns that would have to be addressed as well. Although trigger events for worldwide foreign-to-foreign deals exist, a deal can take extensive time to finalize. As noted by the CLRC in the 2019 Report, deliberations would have to be undertaken to determine how to accommodate fluctuating share values if they form a part of the transaction. Further, the deal valuation may also get affected in cases of earn-outs or deferred consideration provisions which take effect years after closing.
At the moment, the Bill is merely at the stage of deliberation. It is anticipated that these concerns could be addressed once the 2022 amendments are enacted.
– Avinash Kotval & Ishaan Saraswat
Very Insightful Article!