[By Rajdeep Bhattacharjee and Tanishq Rahuja]
The authors are students of Symbiosis Law School, Pune.
Introduction
The Competition (Amendment) Bill, 2022 proposes the addition of sub-section d in section 5(B) of the Competition Act, 2002. This new provision requires companies to have “substantial business operations” in India to come under the act’s scrutiny. The Director General of the CCI can only launch a probe if there is suspicion of adverse effects on competition in the relevant market in India under sections 5 and 6 of the principal acts.
Without a specific definition provided in the bill, the interpretation of the term “substantial business operations” is unjustifiably wide. Hence, it is significant to note that how the term “substantial business operations” is finally construed by the Indian judicial system may determine how the parameter is applied. As a result, in instances of amalgamations, the ability to initiate a probe without any objective parameters may compromise the generality that the law is intended to promote.
Therefore, this development opens a wide ambit of interpretations and may be misused by entities as a substantive loophole in this legislation as there exists no specific and distinctive criteria which is laid down for an entity to be regarded as occupied in substantial business operations.
Addressing the Issue
The lack of a clear definition of “substantial business operations” in the Competition (Amendment) Bill, 2022, poses a threat to the objective efficacy which is sought to be bolstered by this Bill. The primary concern arising out of this ambiguity is that of objectivity and legal inconsistencies that may arise due to the lack of clarity. A probable outcome of this might be prolonged litigation as was in the case of the redundant Monopolies and Restrictive Trade Practices Commission. Hence, such an approach could potentially undermine the fundamental objective of the amendment to make India an attractive destination for foreign investment and businesses by creating unnecessary uncertainty and jeopardizing investment inflows.
Furthermore, the absence of an objective definition creates a legislative cavity that is not addressed by the subsequent sub-section/s of the amendment either. Such legislative cavity leaves room for interpretation, which could be exploited by businesses to evade scrutiny. Therefore, definition of “substantial business operations” is essential for the effective implementation of the legislation and the promotion of a level playing field for enterprises. Moreover, without a precise definition, unforeseen repercussions may arise, defeating the primary objective of the act.
Possible interpretations
Some possible objective criteria which can be employed to measure the extent of substantial business operations, are as follows:
– Geographic scope
– Market share
– Revenue
– An amalgamation of the above three factors
The manner in which a lack of objective definition may be misused by entities to escape scrutiny are as follows:
- Setting up a shell company, wherein they will have a negligible presence in India while the majority of its business operations are conducted through the parent company outside India.
- Creating complex ownership structures, by setting up multiple subsidiaries or using a network of affiliated companies which will jeopardize the ability of CCI to determine whether the company has substantial business operations in India or not.
- Misrepresenting data by understating revenue or market share in India, or by overemphasizing the significance of its operations outside India.
In furtherance of addressing this conundrum, this piece strives to briefly analyse the future possibilities and comparative models to mitigate the ensuing roadblocks which may arise due to lack of objectivity/clarity.
Locus standi of United States of America
The Supreme Court of America (SCOTUS) in the case of Goodyear Dunlop Tires Operations, S.A. v. Brown has held that mere presence of substantial sales in a particular jurisdiction does not amount to an entity having substantial business operations in a specific jurisdiction. It was further held that mere exercise of legitimate jurisdiction of a US court over a foreign enterprise, does not indicate that the enterprise necessarily owns or controls a significant amount of tangible or intangible assets there. The fact that a foreign defendant has a US subsidiary with sizeable assets typically will not be enough to “pierce the corporate veil” of the subsidiary and establish a claim against the parent, when full control is not with the parent.
Consequently, in accordance with the Horizontal Merger Guidelines, market share, customer base, and resources are evaluated to identify “substantial business operations” for a horizontal merger and weigh the effects on market competition. In the landmark case of U.S. v Waste Management, Inc, the court stated that to determine whether an entity has substantial business operations, it is quintessential to determine whether the entity in question is engaged in competitive activity in the relevant market or markets, and if the disputed activities are competitive in nature.
Despite that, it is noteworthy that the US lacks a specific definition of substantial market operations or a threshold, assessing on a case-by-case basis. This jeopardizes business operation standardization and creates investor uncertainty. Precedents have led to some standardization over time.
Generally, determination of “substantial business operations” is based on various factors such as:
- Revenue
- Assets
- Physical presence.
The German & Austrian Model
Through the Joint Guidance on Transaction Value Thresholds for Mandatory Pre-Merger Notification, issued jointly by the German Federal Cartel Office along with the Austrian Federal Competition Authority, the definition of substantial domestic operations has been clearly established. The criteria laid down by the regulatory bodies in their joint notification for assessing substantial domestic operations can be summarised as:
- Measurement of Domestic Activity;
- Geographical Allocation of Domestic Activity;
- Market Orientation and Significance of the same.
The sections dealing with the same are Section 35(1a) no. 4 GWB of the German code and its Austrian counterpart, Section 9(4) KartG. In accordance with these sections, merger control will come to the fore where the target company whose acquisition is to be done or its acquisitions have substantial operations in either of the respective jurisdictions. The criteria are also mentioned wherein the specific thresholds for domestic and global turnover have been cited. Moreover, in accordance with the same, a commercially viable assumption has been made by such authorities, that in cases where an enterprise of foreign origin is taking over a company of domestic origin, it is generally reasonable to anticipate a significant quantum of domestic operations.
It is pertinent to note that according to the regulators, the ambit of substantial business operations that are being carried out in the domestic jurisdiction by any entity or in a case of a takeover/merger, the target entity must be assessed based on the operational extent, taking into account the aforementioned factors. The operational extent is assessed in relation to the specific market or markets in which the company operates of the targeted entity. However, the litmus test of assessing operational extent in domestic jurisdiction is not only domestic turnover, but the primary impetus is given to domestic operations. Furthermore, domestic activity must be continuous. In opposition to the analysis of turnover thresholds under Section 35 (1) and (1a) no. 2 GWB and Section 9 (1), (2), and (4) nos. 1 and 2 KartG, the baseline is not the previous entire fiscal year prior to the merger, but rather the target company’s operations at the period the merger is successfully implemented. Forthcoming or projected operations are inadequate.
Conclusion
In summary, although the amendment bill is a positive move towards encouraging mergers and foreign investment in India, the lack of a clear definition of “substantial business operations” means the CCI now shoulders the humongous responsibility of defining the scope and setting out the ambit of ‘substantial business operations’ which can in turn tantamount to be a double edged sword as on one end of the spectrum it will empower the CCI to assess the market circumstances and trends but in absence of standardization and fixated rules, each case has to be dealt in proclivity of another which could possibly give rise to widespread uncertainty and other issues as mentioned above, thereby acting as a deterrent for foreign entities entering the Indian market by way of amalgamation of any sort, which could lead to uncertainty and hinder foreign entities from investing in India.
Additionally, assessing the local nexus of domestic operations and competition in line with the German and Austrian joint model presents a significant challenge for the CCI. However, if the CCI establishes clear assessment parameters in successive amendments, it could set an example for other jurisdictions that rely solely on precedents for the development of their antitrust jurisprudence.