– layout: post title: “Regualting Killer Acquisitions in India” date: 2023-01-11 categories: [Tech, News-Reels] featured: true image: https://unsplash.it/1200/800?image=1065 — REPORT TITLE

By Sanath Rajesh INTRODUCTION

The emergence of digital markets have had a notable impact on competition law regimes, with an an increasing number of incumbent companies acquiring their nascent competitors in order to stifle competition or subsume the business of the target entity as a whole. Such acquisitions – commonly labelled as killer acquisitions – have arguably resulted in a consolidation of market power that discourages competition. While the EU and the US have started to deliberate on finding solutions to these challenges, India lags behind in effectively regulating such killer acquisitions.

Briefly put, killer acquisitions refer to the practice of established corporate entities or businesses acquiring smaller, nascent competitors within a given market. Post the merger, the business activities of the target entity get subsumed within those of the acquirer, thereby allowing the acquirer to avert the possibility of the target entity giving it any competition in the future. Instances of killer acquisitions are widely witnessed in many developing – and developed industrial economies, especially in India where the growth of digital, asset-light start-ups have proliferated with exponential growth. With the pre-emption of competition, killer acquisitions widely affect consumer welfare by strengthening the already dominant position of the acquiror in the market, and by preventing innovative activities of the target entity.

Bulk of the current academic writing surrounding killer acquisitions suggests reforms that relate to threshold value requirements and an increase in ex-ante scrutiny by competition authorities. However, the recent OECD Secretarial Note on killer acquisitions and merger control has suggested ex-post assessment as a valuable method to curb killer acquisitions. This article seeks to analyze the important aspects of ex-post assessment pertaining to killer acquisitions while highlighting the need for legislative amendments to India’s competition law regime to adopt an efficient ex-post assessment framework with regards to killer acquisitions that suits our domestic context and needs.

THE ISSUE WITH THRESHOLDS

The traditional approach of merger control revolves around scrutinizing acquisitions and mergers and looking into whether the assets/turnover of the combined entity is in breach of the statutory thresholds. In India, such thresholds are mentioned within Section 4 and 5 of the Competition Act, 2002 (Competition Act). When the transaction does not meet the set turnover thresholds, Competition Commission of India (CCI) does not have the jurisdiction to scrutinize the deal, thereby enabling the parties to freely go ahead with the acquisition. In the context of killer acquisitions, the assets/turnovers usually do not meet the thresholds mentioned within the Competition Act and are therefore not subject to the scrutiny of the CCI. While existing turnover thresholds could be reduced, doing so would result in a heavy volume of low-turnover transactions being unnecessarily notified.

On the other hand, transaction value thresholds offer a viable solution to this problem as the effective criteria of imposing thresholds is based on the value of the transactions. Unlike asset or turnover values, transaction values can reflect the future strength of the combined entity. The European Commission recently issued a new guidance pertaining to the application of transaction value thresholds, which permits the Commission to encourage Member States to refer transactions falling belowrespective merger thresholds that adversely effect competition. While the EU has evaluated the scope of transaction value-based thresholds, they have simultaneously decided not to adopt them due to the risk of additional administrative burden that would be placed on developing businesses. Moreover, such transaction value-based thresholds would incentivize developed firms to acquire start-ups earlier in their development phase.  

In India, the Competition Law Review Committee recommended the introduction of deal-value based thresholds, which subsequently found its way into the draft Competition (Amendment) Bill, 2022. However, a major drawback of introducing new thresholds in the Indian context is the increase in the delay of transaction timelines, thereby disincentivizing potential investments into prospective firms/businesses.

EFFICACY OF EX-POST ASSESSMENTS

In simple terms, an ex-post assessment is essentially the examination of an acquisition after its completion. The efficacy of ex-post assessments vis-à-vis killer acquisitions is of relevance as such assessments would reveal the effects of the killer acquisitions after a certain period of time.

While conducting an ex-post assessment on killer acquisitions, the most important aspect to consider is the ability of the incumbent/dominant acquirer entity to raise prices and curb innovation/quality of the goods or services available in a given market. The focus of the assessment in such considerations should be on the current and future life-cycles and substitutability of the existing products/services of the target entity. If the products or services of the target entity are not substitutable in the given market, the probability of the acquisition by the incumbent acquiror being a killer acquisition, is thereby higher. Considerations in ex-post assessments of killer acquisitions must also pay attention to disruptive entities providing disruptive goods/services in a given market, or disruptive markets themselves. Further, the likelihood of killer acquisitions is inversely proportional to the existing level of competition in a certain market. Therefore, ex-post assessments must also be conducted in seemingly competitive markets.

UNDERTAKING LEGISLATIVE REFORMS IN INDIA

The Competition Act does not have an explicit provision for prohibiting killer acquisitions, although Section 4 prohibits entities from abusing their dominant positions in the market, whereas Section 5 defines combinations and provides statutory thresholds for exemptions from combination requirements. Under the ambit of Section 4 of the Competition Act, practices such as restricting the production of goods and services and its technical and scientific development are considered to be an abuse of the dominant position irrespective of whether the combination between the entities meets the statutory thresholds prescribed under Section 5 of the Competition Act. If the statutory thresholds for exemptions under Section 5 are crossed, the combining entities are required to notify the CCI of any adverse affects on competition (AECC). Following this, the CCI will conduct an investigation into the potential AECC and accordingly decide to approve or reject (or even conditionally approve) the transaction. Therefore, regulating killer acquisitions through the existing framework under Section 4 and 5 of the Competition Act would be time consuming and a cumbersome administrative process.

Section 20 (1) of the Competition Act empowers the CCI with powers to regulate combinations within one year of being effectuated. Combinations, on the other hand, are defined under Section 5 of the Competition Act. As most killer acquisitions fall below the threshold limits specified in Section 5 of the Competition Act, the  CCI is effectively without recourse in regulating killer acquisitions besides attempting to regulate it through the existing threshold framework under Section 4 and 5.

To address the inherent drawbacks within the Competition Act, the scope of Section 20 (1) should be widened to include non-notifiable and exempt combinations. This can be done by inserting a proviso to the exemption clause under Section 5. The proviso can invalidate the aforesaid exemption clause in instances where the CCI reasonably suspects or believes that a killer acquisition has taken place. Simultaneously, the ambit of ‘reasonable’ belief or suspicion must be amply defined without placing overt discretion upon the autonomy of the CCI. Providing the CCI with arbitrary powers to exercises reasonable belief would lead to discouraging bona fide combinations.

Furthermore, Section 20 (1) stipulates that an ex-post assessment must be carried out within one year of the combination taking place. Such a time frame is too short to properly gauge the effects of a killer acquisition due to the lack of data to ascertain the market effects of the combination. On the contrary, too long of an ex-post assessment time frame would result in adverse effects on the market and consumer welfare along with the challenge of identifying the impact of the merger independent of other market conditions. While different jurisdictions have different time frames for conducting an ex-post assessment, a possible ‘middle-ground’ could be the introduction of a comprehensive framework of instances and circumstances which would validate the need for an ex-post assessment, and the relevant procedure for carrying out the same. Businesses contemplating mergers or acquisitions can therefore factor the circumstances and instances into their decision making, and accordingly carry out a transaction.

CONCLUSION

India’s competition regime faces an imminent need for incorporating an effective ex-post framework that not only regulates killer acquisitions, but also ensures innovation and growth for industries – especially digital enterprises and marketplaces – operating in their nascent stages. However, such a need does not imply or suggest that ex-post assessments must replace threshold requirements. Threshold requirements are intrinsic to India’s competition law framework in their role in addressing acquisitions that are prima facie anti-competitive. Rather, what is ultimately required is an effective threshold notification system that reduces the number of combinations that require the CCI to conduct ex-post reviews whilst simultaneously tackling the problem of killer acquisitions.