[By Viplav Agrawal]
The author is an Associate at AP & Partners.
Introduction to the combination thresholds
Competition law governs the combination which has the potential to hamper the competition in a relevant market. The combination, as per the Competition Act, 2002 (“the Act”), is referred to as the acquisition of one or more enterprises or merger or amalgamation of enterprises. The combinations taking place are subject to certain thresholds prescribed under the Act. It means that if the combinations taking place are beyond the thresholds, the entities involved will have to take approval from the Competition Commission of India (“CCI”) by way of giving notice. If the entities do not take approval from the CCI, they are subsequently subject to competition law proceedings and penalties.
The thresholds are of two types, turnover and asset. These thresholds are in place to categorize certain companies which can have possible appreciable adverse effects on the market on combinations. The Act also provided for the de minimis exemption, wherein a transaction is exempt from the notification requirement under the Act if the target company has assets less than Rs. 350 core or a turnover of less than Rs. 1000 crore. Earlier it was till 28 March 2022 but with a recent notification dated 16 March 2022 by MCA, the exemption is extended till 28 March 2027.
On account of multiple mergers and acquisitions happening between the tech companies, an enforcement gap from CCI has arisen despite the thresholds above in place. As the internet became a medium to transact and reduced the requirement of assets, the companies are becoming dominant in the market without heavy investments in the assets and focusing on data collection. Due to the presence of non-price factors in the entity i.e., data and other similar factors, there were certain combinations that did not require the approval of CCI as they were not crossing the threshold. Yet, they had potential adverse effects on the market. On the consideration of such mergers, competition authorities are likely to bring deal value threshold for the combinations.
Some countries have given a clear intention to address the potential adverse effects emerging from evolving tech-driven business models. Based on the prospective change that Indian legislators may bring, the author highlights the incidents where the deal value could have been considered for scrutiny by CCI. The author also highlights the Indian legislator’s inclination to consider the deal-value threshold and how two foreign countries have applied the deal value in their competition laws. Lastly, the author analyses the deal value threshold and makes few suggestions for the policy formation.
The incident leading to the consideration of the deal-value threshold
WhatsApp/Facebook merger was the spark of the controversy when the existing threshold failed to look at the combination from the competition law lens. WhatsApp’s turnover was less than the asset/turnover thresholds under the Indian Competition Law. At the time of the merger, the thresholds were Rs. 750 crores in assets or Rs. 2,250 crores in turnover. The following concerns were found even though it did not match the threshold:
- Reduction in competitive constraint. Since both Facebook and WhatsApp were heavy competitors in terms of instant messaging apps, their merger led to reduction in the competitive constraints in the market
- Increase user base. As both the apps had a large user base of consumers, it could significantly harm consumer interests.
- Higher entry barrier to market. By 2014, WhatsApp had already created high entry barriers for its competitor in the Indian mobile-messaging market. It was giving tough competition to mobile apps like Line and Hike as they had lesser active users in the market. Thus, the combination of Facebook and WhatsApp makes the barriers to enter into the market even higher as both of them are unpaid mobile-messaging apps.
The other deals significant deals which escaped CCI scrutiny are Zomato’s acquisition of Uber Eats in 2020, Flipkart’s acquisition of Jabong.com through its subsidiary Myntra in 2016, and Ola Cab’s acquisition of TaxiForSure in 2015. These deals were significant because the entities involved were tech aggregators with dominance in the e-commerce sector where the deal value was of at least USD 70 million or more than at least Rs. 550 crores. This could be an important deal for CCI to scrutinize as the entities acquired were innovative tech aggregators which were already giving competition to the acquirers in the online food ordering, online shopping, and app-based cab services.
Findings of competition law review committee
The combination thresholds involve only assets and turnover under section 5 of the Act. After consulting with various experts, the Competition Law Review Committee (“CLC”) which was set up by the Government of India in 2018, made wide-ranging sets of recommendations with the objective of aligning India’s antitrust enforcement regime with the new age of the market. A recommendation on the merger threshold was allowing the Government to introduce alternate mergers and acquisitions thresholds, such as ‘deal value thresholds’.
The above recommendation is reflected in the Competition (Amendment) Bill, 2020 which proposes to allow the central government to introduce other criteria for merger threshold, such as deal value, market share or other criteria to be notified. The government, thus, by way of notification can set a particular deal value as the threshold under Section 5 of the Act. Some of the countries have already set the deal value in their threshold limit for the combinations to notify the competition authorities.
Countries applying the deal-value threshold
The countries that have applied the deal-value threshold in their competition laws are Austria and Germany. Austria in its competition law prescribes the following threshold for the deal value:
- Transaction value exceeds EUR 200 million
- Combined aggregate turnover exceeds EUR 300 million worldwide and EUR 15 million in Austria
- Target company as significant domestic activities
Germany, on the other hand, prescribes the following thresholds:
- Transaction value exceeds EUR 400 million
- Combined aggregate turnover exceeds EUR 500 million worldwide and EUR 25 million in Germany.
As a result, the entities acquired at a high value and with little assets or turnover can be scrutinized. The is to bring under the ambit, those cases in which the difference between deal value and the turnover or assets become significantly disproportionate. The high acquisition price is indicative of innovative business ideas along with competitive restraint in the market.
Challenges in implementation of the deal-value threshold
The implementation of the deal-value threshold is subject to the dynamics of the emerging digital-technology-driven entities. The dynamics give does not provide both competition authorities and the entities enough space to avoid false positives as elaborated below:.
- The subjectiveness of the valuation. The valuation of a target firm may differ of acquirer firms due to the different valuation methods, fluctuation of prices of securities, and several other factors. For example, the valuation of the transaction changed when Facebook-WhatsApp Deal took place. It changed from 19 Billion USD in 2014 to 22 Billion USD as a result of rise in the value of Facebook’s shares.
- Increase of burden on the regulator. There is a lack of judicial precedence and consultation papers for CCI. It multiplies with the different factual circumstances of prevalent market conditions for combinations. For example, the market conditions for favourable for mergers during the pandemic of Covid-19 in the pharmaceutical industry. Since the market conditions during Covid-19 were different from the market conditions prevalent before the pandemic, it would have put the burden on CCI to review combinations based on deal-value thresholds with a lack of judicial precedence, along with layers of subjectivity in the market analysis.
- Another hurdle of legal compliance for the start-ups. Let’s say the government fixes a deal of value above Rs. 500 crores must be notified. All the deals above that value will now be subject to review even though the assets and net turnover might be less. Given the digital technology rise in India, the investments in start-ups from both domestic and foreign investors is increasing exponentially. The start-ups might be caught in unnecessary review by CCI because of the deal value, even though it has no AAEC effects on the face of the combination taking place.
Expectations and way forwards
The thresholds in the Act have worked well to scrutinize deals that could have AAEC effects in the relevant market. The Act has been, however, bricks-mortar enterprise-centric where the entity invests heavily in assets and aims to get a higher turnover. However, the world is changing, and new players are emerging and taking roles in innovative ways which involves lesser investment in assets and not much gain in turnover. Yet, the plan to tackle the AAEC effect of their merger remains the same. Thereby, a new plan needs to be formulated.
There are two methods through which the deal value-based transaction can be dealt with. First, by introducing the addition to the already existing thresholds as done by some of the countries. The reason is to scrutinize the combinations where a dominant company acquires a small company in a concentrated market or a dominant company acquired a new company which is a competitive constraint in the market. Second, by expanding the scope of the existing threshold but narrowing the additional threshold to make it in such a manner that it is invoked in an ‘exceptional’ circumstance. The exceptional grounds help in reducing the uncertainty of circumstances when a combination should be notified to CCI. It is not necessary that India should follow a particular method adopted by another country as the market conditions might be less homogeneous with that of the country adopting the method.
After reading through the recommendation of the CLC committee and the Indian competition law amendment bill, it could be inferred that the government will most likely bring a threshold value on the merger as the mergers between digital companies and tech companies are increasing, whose important assets are more in the nature of data collected rather than assets in the form of land, machinery, and other accessories. As a course of action, some qualifiers should be attached for a transactional value to be given as a threshold so that it refines those entities whose acts can affect the large consumer base.