Deal Value Threshold and its' impact on India
By Vedanti Singhal
Abstract: Over the last decade, the global economy has witnessed some high-value mergers. However, owing the traditional turnover-asset based regulatory framework, such combinations did not call for pre-merger approval giving way to concentration of market power with a few dominant players and threw light on harm theories. This paper attempts to elucidate the idea of deal value or transaction value threshold as an addition to the present regime as an effort to reassess and make the present merger regime in India more dynamic. A segment of the paper also proposes a reliable implementation of DVT alongside a post-review provision so to leave no scope of misuse or error.
Traditional Merger Control Regime in India
Mergers, acquisitions, and amalgamations, referred as combinations, are governed by the Competition Act, 2002 (“the Act”) and its corresponding regulations in India. Section 5 of the Act prescribes the notifiability criteria for combinations. The notification thresholds are essentially based on the cumulative asset and turnover of the involved parties. The competition authority, Competition Commission of India (“CCI”), is vested with the role of reviewing the notified combinations to examine whether the proposed transaction could cause an appreciable adverse effect of competition (“AAEC”) and to prevent or modify such a combination before consummation. A corollary of such merger review is that merger notification thresholds should sieve those transactions that are unlikely to cause AAEC. For this reason, the Ministry of Corporate Affairs (“MCA”) has granted an exemption to certain transactions below a specified threshold from the CCI’s gaze. This exemption is noted as de minimis exemption or small target exemption. It lays down an either/or criteria, per which transactions are exempt from notifying the CCI if the target or acquiree has assets in India not exceeding INR 350 crore, or turnover in India not exceeding INR 1000 crore.
The idea was introduced in 2011 with the purpose of reducing regulatory burden on the CCI. In March 2022, the MCA extended this exemption for another five years to enhance India’s. “ease of doing business” in the post-COVID-19 world. India has witnessed a spurt in mergers and acquisitions (“M&A”) in the recent years with a 40% hike in M&A deal value and 60% increase in deal volumes in 2021. However, with the upshot of digitization, certain high-profile deals have evaded the CCI’s review because of this exemption and have raised. anti-trust concerns as the present merger control regime fails to regulate digital mergers, that do not breach the asset or turnover threshold.
Digitization and an Apparent Enforcement Gap
The effectiveness of merger control thresholds in the digital market is contentious. Business models in digital platforms aim at expanding their consumer base by extending low-cost, oreven free, services. Digital markets prioritize amassing a critical user-base as their objective is to collect, consolidate and process as much data as possible which is valuable in expanding their commercial footprint. Big data refers to large, diverse sets of information that is constantly growing and its notable source is consumer’s online activities. By consolidating data, companies can increase their product/service’s efficiency thereby, achieving economies of scale and meeting consumer requirements. Since digital markets prioritize creating a user-base, they burn cash in initial years and don’t generate substantial revenue till they reach a critical mass. Due to their minimal turnover in the budding phase, targets involved in acquisitions in the digital market slip under the requisite merger threshold. However, the incumbent acquirer recognizes the potential and threat posed by these nascent target firms. These firms are valued significantly owing to their degree of innovation, technical know-how and access to data and the same is evident in their acquisition price. The aggregation of data by a few businesses creates entry barriers in the digital space and result in AAEC concerns which might go unaccounted due to the existing threshold regime.
These kind of acquisitions pave way for two probable theories of harm, killer acquisitions and nascent potential competitors. Killer acquisition is the practice of established firms acquiring nascent competitors to ward off future competition with the sole intention of terminating target’s product/service. Whereas as per nascent potential competitors theory of harm, the acquirer eliminates potential competition by buying the target firm and continuing its product. Digital companies, globally, have resorted to these practices in the past decade. Between 2008-2018, Google acquired 168 companies, Facebook 71 companies, and Amazon 60 companies.
Some incidents of prominent killer acquisitions in India include Zomato’s USD 350 million acquisition of Uber Eats in January 2020; Ola Cabs’ USD 200 million acquisition of TaxiForSure in the taxi aggregator space in March 2015; and Flipkart’s USD 70 million acquisition of the Indian fashion e-commerce portal, Jabong.com through its subsidiary, Myntra, in 2016.
On similar lines, a more recent merger of PVR and Inox Leisure in March 2022, triggered the de-minimis exemption and allowed automatic approval imminently after the government announced its exemption. This deal will lead to the creation of single dominant player in the multiplex chain with approximately 50% market share, without attracting antitrust review. As a general practice, a merger of this nature would’ve required CCI’s approval but the post- merger turnover of PVR-Inox is under INR 1000 Crores (small target exemption requirement). Despite an apprehension of potential AAEC or the evident anti-competitive nature of the merger, it does not attract an inquiry under Section 3 and 4 of the Act as was ruled in Consumer Unity & Trust Society v. PVR Ltd.
These combinations underscore the need to consider abuse of competitive powers that come with the appetite to maintain a data advantage. Existing merger regime may be inefficient as revenue/asset cannot be the exclusive metric, but the competition authority has to choose a middle ground to combat anti-competitive activities without hampering innovation.
Deal Value Threshold: A Panacea?
Deal Value Threshold (“DVT”) or transaction value threshold digresses from the tradition asset-turnover criteria by considering the economic value of a transaction and the domestic presence of the target company. One of the major jurisdictions, United States, has adopted the transaction size test for merger reviews where transactions valued above a threshold value are to be notified to the regulatory agency, the Federal Trade Commission. The test has been relatively more successful than revenue-asset criteria in bringing transactions in the digital space within the purview of merger review. Some other jurisdictions that have considered DVT as a replacement or as a complementary threshold to the traditional merger regime include Canada, Germany, Austria, Sweden and South Korea. For instance, the German DVT model prescribes that if a transaction exceeds EUR 400 million, has substantial operations in Germany, it has to be notified to the competition authority. A guidance note released by the Austrian and German competition regulators expounds on the meaning of ‘value of consideration’ to mean accumulation of ‘all assets and other monetary benefits’ that the acquirer may receive from a target in a transaction.
Competition Amendment Bill 2020: Identifying Indian Merger Regime’s Blind Spot
The Competition Law Review Committee (“CLRC”) in its 2019 report recommended the introduction of DVT along side the present merger control regime. This was followed with the Draft Competition (Amendment) Bill, 2020 (“the Bill”). The Bill introduced an enabling proviso under Section 5 of the Act, which provides that the Central Government may, in consultation with CCI, lay down new sector-specific thresholds, other than the ones already present, for notifying purposes. The prescription of new criteria is to be made in ‘public interest.’
Potential Challenges
At face value, this amendment may appear fructuous and in accordance with effective foreign merger regimes, but it is not devoid of loopholes. For starters, the Amendment does not define ‘public interest’ or provide clarity on what factors must the Government consider while prescribing new thresholds. This inconsistency creates ambiguity and accords the Central Government substantial power under the garb of ‘public interest.’ It could also lead to potential power imbalance as the authority of the CCI will get diluted while simultaneously handing over the reigns to the Central Government. However, India can take inspiration from the South African regime which is known to be effectively based on public interest considerations. In June 2021, the South African Commission stayed the proposed acquisition of Burger King South Africa by a private equity fund, ECP Africa, as the merger would’ve had a significant impact on the shareholding of the historically disadvantaged people in the target firm.
Second, DVT as a concept is subjective and prone to variation as the valuation of a target firm may vary across acquirers. It is also difficult to measure the competitive significance of a transaction. A start-up may be acquired at a low value, but the subsequent effect of the merger may cause AAEC and disrupt the market and the same cannot be gauged at the outset. A delineation of this proposition is the Facebook-WhatsApp deal where Facebook completed its acquisition for USD 22 billion as opposed to the initial offer of USD 19 billion due to rise in Facebook’s share value. This example highlights how the actual value of transaction is contingent upon multiple factors and is susceptible to fluctuations. The CLRC report has acknowledged and cautioned policymakers of such fluctuations.
Third, direct appropriation of DVT may not be context sensitive owing to Indian digital market’s infancy. Cash-strapped start-ups often need investment from incumbent players in the market and introduction of DVT may be counter-intuitive by exposing them to prolonged procedures and resultantly, disincentivize them. CCI observed in the Flipkart case that intervention in digital market should be done carefully lest it may stifle innovation.
Is DVT Salvageable?
The challenges discussed above don’t negate the possibility of DVT’s implementation in India, it just stresses on the need to make it context specific. The uncertainty attached with nascent acquisitions can be dealt with the measures discussed below.
For DVT to be effective, there needs to be an explicit and unambiguous definition of ‘value of transaction.’ This is also in line with the International Competition Network’s (“ICN”) requirement of having clear and understandable merger thresholds which are based on quantifiable criteria. Without procedural clarity, the competition authority would get loaded with false-positive cases. Even the CLRC recognizes the ICN recommendation, it fails to suggest measures on its actual execution. The CLRC Report suggests that DVT must apply to those entities that have ‘substantial business operations’ in the country. However, the phrase has not been defined and is unclear on whether it would cover the digital market. The concept of network effects is specific to digital markets and helps in determining potential market power. Network effect can be plainly understood as a phenomenon where the use of a product or service increases the value of the product/service for other users. Network effect works in a manner that once a digital firm becomes dominant, owing to which it attracts most users, it neutralizes competition in the market. Since, the nature of network effect is fundamentally anti-competitive, the proposed amendment must clarify whether the same would be accounted in determining the ‘value of transaction’ and ‘substantial business operations’
Like some foreign competition authorities, CCI could be vested with enhanced powers to review transactions post-merger. It is pertinent to acknowledge the uncertainties attached with nascent acquisitions and predict the impact on the market. Ex-post assessment allows the competition authority to intervene and break-up consummated mergers which may have appeared benign initially but turned out to be anti-competitive post consummation. Ex-post assessment essentially vests the regulatory body with the power to review an acquisition post-completion. As an ex-post review is conducted post-merger, it gives the regulatory body a buffer period to assess the actual effects of a merger. Some notable jurisdictions that have implemented this provision include US, Japan, UK, Brazil, Canada. In a recent OECD Secretarial Note, ex-post review to assess a merger’s impact on market was recommended to counter killer acquisitions. This provision prevents the competition authority from being handicapped by quaint or inefficient merger provisions. Therefore, ex-post review is needed in the Indian regime to enable the CCI to revoke its grant to a merger which may cause AAEC but previously, side-stepped its scrutiny. As a natural corollary, an effective ex-post assessment provision calls for a flexible time period to judge the impact of mergers along with a thorough framework which lays down guidelines for circumstances demanding ex-post review.
Conclusion
India’s merger regime has a blind spot which does not cater to the constraints of digital economies like limited turnover and asset value, network effects and hence, is not equipped to deal with combinations in the digital market. Implementation of sector-specific threshold, with definitive guidelines, may prove to be effective if coupled with facilitating provisions like post-merger review. India has previously borrowed and adapted foreign legislations to suit its requirements and relying on this trend could help foster effective anti-trust laws.
Relevant keywords: Deal Value Threshold (DVT), Competition Commission of India (CCI), Mergers, Digital, Appreciable Adverse Effect on Competition (AAEC)