Deal Value Threshold: A Critique of India’s Latest Competition Regime
[Aditi is a student at National Law University Delhi.]
A recent development in the realm of competition law is the proposed changes to the deal value threshold under the Competition Amendment Bill 2023 (2023 Bill). Recently, the Rajya Sabha approved the bill in April 2023 which is aimed at modernizing the two-decade-old anti-trust law to align with changes in the economy. It seeks to enhance competition and promote economic growth, and has been the subject of much debate and speculation among industry experts and stakeholders alike. The proposed amendments are poised to have far-reaching implications for businesses operating within the jurisdiction, and as such, understanding their potential impact is essential.
De Minimis Exemption
The recent approval of multiple high-value acquisitions of firms in the digital realm without merger control examination has prompted antitrust regulators worldwide to review their regulatory regimes. Although the purchases of Uber Eats and Blinkit by Zomato for USD 350 million and USD 570 million, respectively, and WhatsApp by Facebook for USD 19 billion in 2014 raised concerns about competition, they were not reported to the Competition Commission of India (CCI). In all these cases, the target was under the exemption limit called as de minimis exemption. Certain transactions that fall below a certain threshold are excluded from notification to the competition authority under the de minimis exemption. The concept of deal value threshold was introduced as per the recommendations of the Report of the Competition Law Committee (2019) (Committee). It was done so as to cover those combinations also which though fall within the ambit of de minimis exemption, but they have an appreciable adverse effect on the competition. The transactions worth INR 20 billion or more will require the permission of the CCI provided that the party has “substantial business operations” in India.
Analysing the Competition Law Committee Report 2019
The Committee was informed by the CCI that, at a stakeholder consultation on "digital markets and competition challenges" held by the CCI on 24 July 2018, industry leaders had acknowledged the urgent need for ex-ante review of acquisitions in the digital arena. The Committee highlighted how the majority of these acquisitions in digital marketplaces generate value from either the target's data or some form of business innovation. In such acquisitions, the target may not have a huge asset base and may be offering products/services that are either free or generate insignificant turnover. The business models of such companies are such that they initially focus on increasing consumer base. In light of this, the Committee debated whether the asset- and turnover-based thresholds for notice of combinations specified in Section 5 of the Competition Act were enough.
The Committee highlighted that unlike many other countries, the CCI lacks the authority to evaluate transactions unless the notification thresholds are met, even though their potential for affecting competition is clear. This is because the CCI lacks any residual authority to evaluate non-notifiable transactions under the Competition Act 2002 (Competition Act). Even Section 20(1) is not sufficient to cover such transactions.
In countries like Brazil and Ireland, the competition regulators have used residuary powers to evaluate transactions when thresholds were not satisfied. Such powers have been exercised in US as well where the merger notification threshold is based on the size of transaction test. Certain other countries rather than relying on residuary powers have more concretely dealt with this lacuna by the introduction of a deal-value threshold for merger notification.
Germany and Austria have incorporated such threshold for notification. After an extensive consultation with the concerned stakeholders, Section 35 was included to the German Act against Restraints of Competition. This clause establishes a USD 400 million deal value barrier as the minimum for merger notice. If a purchase costs more than EUR 400 million and the target company has "significant activities" in Germany, subject to certain turnover-based threshold requirements, such a deal is subject to the merger control examination of the German antitrust authority. Similarly, in Austria, a provision was added to the law which provides that if a transaction is valued more than EUR 200 million and the entity is “active to a large extent in the domestic market”, the merger notification requirement has to be satisfied.
New Changes: The Looming Uncertainty
There was an enforcement gap regarding the ability of the CCI to review transactions in digital markets to test their anti-competitiveness under the earlier merger control regime. The CCI did not have any residuary power of review like Brazil or the US, referral mechanism like the EU, share of supply test like the UK or a deal value threshold like Germany and Austria.
The deal value threshold in its current format also has a lot of interpretative holes. Parliament has to carefully consider whether ex-ante regulation of the digital economy without sufficient factual support is putting the cart before the horse. If implemented, the deal value threshold needs greater clarification of its components to give investors and businesses more clarity and prevent false positives from being unnecessarily notified.
Substantial business operations
The definition of deal value threshold is unknown as of now (e.g., the ambit of which entity would constitute the "enterprise" and of "substantial business operations" is unclear). This will be particularly confusing in cases wherein an Indian company has acquired another Indian company. The 2023 Bill seeks to clarify that substantial business operations are to be looked at from the viewpoint of the target entity. This would be against the Ease of Doing Business. Adopting CCI regulations that clarify the components of "substantial business operations", as recommended by the Committee, would be beneficial in this regard. It is essential that the transactions covered by the deal value threshold have a strong and evident nexus to India and that there is a genuine possibility that an appreciable adverse effect on competition will be caused as a result of the transaction for the deal value threshold to be effective. One such strategy may be to define the term "substantial business operations" in a way that takes into account the enterprise's local nexus.
Value of transaction
Since the Rajya Sabha has approved the amendments, the ball to swiftly define what constitutes the “value of transaction” lies in the CCI’s court. The questions include whether non-monetary considerations can be included or not. The method of calculation must be specified in the Competition Act itself rather than being left to delegated legislation. These modifications have always been meant to be dynamic. There is no denying that the regulator will need to be flexible and have the authority to step in when needed. The intervention should have little to no impact on routine transactional activity and little to no influence on the market or consumers.
If the CCI adopts the approach similar to that of Germany and Austria, global transactions, regardless of their effect on Indian markets, will be subject to merger review if one party has a presence in India. In fact, the European Commission criticised the implementation of a deal value criterion in its Competition Policy for the Digital Age Report 2019, arguing that regulators will catch "too many" transactions that meet the requirements, increasing the administrative burden. When creating a deal-value threshold, the following factors may need to be taken into account. This includes (a) determination of the method of accounting for variations in the value of the shares provided they form a part of the transaction, (b) computing a deal value threshold in complex situations (such as when earn outs and deferred consideration provisions are based on performance during a time period that may be years after closing), (c) varying deal value based on the date of calculation of value, and (d) establishing a local nexus test in accordance with international standards, in order to prevent capturing situations that would not genuinely have an impact on competition in India. Thus, while the government has certainly tried to plug the legislative gap, there are more elements that the authorities need to look into.