Authors:
Third-year law students at Dr. Ram Manohar Lohiya National Law University, Lucknow
I. Introduction
At a time when digitalisation has conquered the world, it becomes crucial for countries to foster competition in their respective regimes. This may be achieved by strategies aimed at facilitating the growth of new companies and encouraging innovation for the existing ones. The dominance of the key players in the global market is explicit in the fact that the big five tech firms have made over 400 acquisitions globally. India being one of the largest digital hubs in the world, its digital market is susceptible to the anti-competitive effects of such transactions. Therefore, there is a need to augment India’s antitrust framework in order to effectively regulate its burgeoning digital markets.
Recently, the Competition (Amendment) Bill, 2022 was introduced in the Parliament. The Bill, inter alia, seeks to enhance the Competition Commission of India’s (“CCI”) regulation over the digital sector, by amending Section 5 of the Competition Act 2002 (“the Act”). In addition to the existing value of assets and turnover-based thresholds prescribed by the Act, it introduces deal value thresholds to determine whether a transaction constitutes a ‘combination’. In this piece, the authors seek to analyse the implications of the above amendment, the challenges in its implementation, and the ways to overcome these challenges. The authors further attempt to examine the future course of digital markets in India and the methods that may be adopted by the CCI to effectively regulate such markets.
II. Need for the Amendment
Prior to the amendment, there was a vacuum in the regulation of transactions in the digital market even when such deals were anti-competitive in nature. This was because most of the digital companies could not meet the asset and turnover thresholds amidst getting involved in high transaction value, specifically data-driven companies. A number of deals have successfully escaped the scrutiny of the CCI. For instance, the acquisition of Myntra by Flipkart, TaxiforSure by Ola, and Freecharge by Snapdeal. Even the very controversial Facebook-WhatsApp deal not only led to a decrease in competitive constraints but also created a high entry barrier for other competitors in the market.
Taking note of this loophole in the Indian anti-competitive framework, the Competition Law Review Committee in its 2019 report appreciated the need to regulate transactions taking place in the digital space. It suggested the introduction of deal value thresholds as an additional threshold for determining whether the deal entered into is a combination under the Act. The introduction of deal value thresholds signifies that where the value of the transaction exceeds Rs. 2000 crores and either party has ‘substantial business operations’ in India, a notification to CCI would be required. Consequently, this amendment would bring the transactions taking place in the digital sector under the purview of CCI.
III. Challenges in Implementing Deal Value thresholds
The introduction of the deal value thresholds may potentially serve the purpose of eliminating unfair advantages accrued to the big digital players. However, it is likely to unfold a series of challenges for the CCI as well as the parties to the transaction. Some of these challenges have been discussed below:
Valuation
One of the major challenges in formulating deal value thresholds is the computation of the valuation of the target and the acquirer firms. This is owing to the wide nature of the term ‘value of transaction’ provided under the Bill. The term encompasses every valuable consideration, whether direct or indirect, or deferred for any acquisition, merger or amalgamation.
It becomes even more problematic when parties in the transactions have different valuation methods. Other factors such as instability in securities can also lead to change in the value of the transaction. For instance, in the Facebook-WhatsApp deal, there was a tremendous rise in the value of Facebook’s shares due to which the value of the transaction increased to 22 billion USD from 19 billion.
Therefore, the authors suggest drawing inspiration from other jurisdictions such as Austria and Germany which have issued a ‘joint guidance paper’ clarifying the calculation of deal value. While it is not desirable to issue an exhaustive list to compute this calculation, it is pertinent to issue guidelines regarding what securities should be included or excluded in computing deal value.
Decoding the ‘substantial business operations’
The interpretation of the term ‘substantial business operations in India’ is also a grey area. The conditions for determining whether an entity has substantial business operations in India is required to be prescribed by the CCI. Therefore, it would be crucial for the CCI to ensure that only those transactions which are sufficiently proximate to disrupt fair competition in the country are required to be notified.
The ‘joint guidance paper’ issued by Austria and Germany provides some clarity regarding the assessment of substantial business operations also. It states that such assessment should be undertaken only for the target and not the acquirer. It is important to valuate only the target so that the focus is on the incremental effects of such a transaction, rather than the pre-transaction situation. Since the current amendment Bill makes it mandatory for either party to a transaction (both the target and the acquirer) to have substantial business operations in India, there is a need for the CCI to provide more clarity in this respect by implementing regulations. The guidelines suggested by the ‘joint guidance paper’, tailored to the needs of the Indian competitive environment, may be adopted in this regard. This will ensure that there are no unnecessary notifications which would not only be onerous on the parties but also the regulator as well.
Furthermore, the joint guidance paper suggests parameters specific to a particular sector, to assess whether an enterprise has substantial business operations. The paper illustrates ‘monthly active users’ or ‘daily active users’ as parameters for the digital sector. For other sectors, it lists down all the possible indicators which are based on the market-related activities of the target company. Taking a cue from Austria and Germany, the CCI should issue regulations or guidance notes, in order to provide clear parameters for various sectors.
Challenges for Start-ups
The sharp rise in the number of start-ups has made India a bastion of innovation and propelled the growth of its economy. It is, therefore, important to make the present ecosystem favourable for their survival. As most start-ups initially require investment from other business enterprises, subjecting such transactions to prolonged procedures for seeking competitive approval may make them lose their competitive edge. Further, the red-tapism involved may disincentivize the investors. The CCI has recognized that digital markets in India are at a nascent stage and therefore, any intervention in such markets is untenable. The Competition Law Review Committee has failed to discuss this aspect.
De Minimis Exemption
In case of transactions wherein the cumulative value of assets/turnover jointly exceeds the notified thresholds, but the target enterprise is so small that the transaction is unlikely to give rise to competitive concerns, a de minimis exemption is granted. This exemption relieves the parties of such transactions from the need to notify the same to the CCI. The assets and turnover limits for the target enterprise to be exempted under the de minimis exemption are fixed by the government. Some of the transactions taking benefit under this exemption have the potential to hamper fair competition but evade the scrutiny of the CCI. Therefore, the introduction of the deal value thresholds would best serve its purpose if the de minimis exemption is not made applicable to transactions caught under this threshold.
IV. Digital Markets: A Way Forward
Channelising a pro-competitive approach amongst digital companies is not a problem unique to India. Countries all over the world are grappling with the issue of effective regulation of their digital markets. At this point in time, it might not be very easy to determine the future course of digital competition markets. Nonetheless, there can be a number of considerations that the CCI can contemplate at this juncture. Since, there is no direct financial interaction between the customers and the service providers, it is pertinent for the regulator to emphasize the non-price effects of businesses. This involves scrutinizing mergers and acquisitions on the basis of effects such as quality, variety, service, etc. What is also important for the legal framework to gauge upon is the intended impact of digital mergers and acquisitions on the competitors in markets on the basis of economic assessments of such deals.
A ‘balance of harms’ approach, as recommended by the report of the ‘UK Expert Panel on Digital Competition’ may be adopted in this regard. This approach takes into consideration the scale as well as the likelihood of harm in merger cases. Consequently, mergers may be blocked if it is found out that they are expected to do more harm than good. This would prohibit a larger number of deals and address the under-enforcement of antitrust law in case of digital mergers in India. The aforementioned report also recommends digital companies such as Facebook (which has already constructed a good market repo) to notify the CCI of any prospective deal and its intended consequences. Last but not the least, the CCI must conduct continuous market assessment and employ investigative tools to inspect the probable effects of deals in the market.
Note: This article has been reviewed and edited by Mr. Anshuman Sakle at Stage- II.
Comments