Authors: Aditya Kumar & Samridhi Singh
Third year law students at Chanakya National Law University, Patna
I. Introduction
With the publication of the revised Competition Commission of India (Combination) Regulations, 2024 (“Revised Combination Regulation”) on 9th September, 2024 by the Competition Commission of India (“CCI”), significant changes were introduced in the merger control regime of the country including the provision of Deal Value Threshold (“DVT”) for the digital and technology sector. The primary objective is to strengthen the powers of scrutinization of CCI by bringing it at par with its contemporary regulatory bodies such as Bundeskartellamt of Germany or Antitrust Division of the U.S. Department of Justice. These new regulations aim to catch deals that may have escaped scrutiny under the previous asset or turnover-based limit, especially for companies whose assets are minimal but whose market influence may be immense.
This article critically evaluates the deal value threshold, i.e., the transaction-based limit introduced in the revised regulations of CCI. Simultaneously, it discusses various provisions of the revised rules deliberating on the requisites for a company to fall within the widened ambit of CCI while briefly drawing inspiration from the German model.
For any entity to fall within the net of these revised regulations, two-fold criteria have been established. Firstly, the value of the transaction must exceed the prescribed limit, and thereafter, the target entity needs to have a Substantial Business Operation (“SBO”) in India. The onus of an Indian nexus has been limited to the target entity after the recommendations from the Expert Committee Report.
II. Value of Transaction
Under the DV threshold, the value of the transaction includes all transactions, direct or indirect, immediate or deferred, cash or otherwise. Additionally, the value of transaction or value consideration defined under Regulation 4 of the Revised Combination Regulations incorporates consideration for future payments based on the best estimates specified in the transaction document. It also extends to past transactions with a limitation of a two-year look-back period from the applicable date of the transaction. The transaction value under this expands to transactions that are interconnected and incidental to the main transaction. If the ‘ultimate intended effect’ of several small connected transactions aligns with the main transaction where one or more of them is notified to CCI, in that case, it is calculated when determining the value of the transaction. Other incidental transactions such as the supply of raw materials, usage, branding, and licensing of intellectual property rights are also covered under this.
Interestingly, the Indian model of using this consideration to determine the threshold seems to be aligned with the German model of ‘size of transaction’. This objective test of determination provides for definitive agreements as opposed to the subjective test of ‘fair market value’ in practice in the US. The test of objectivity makes it fairly easy to determine the value of a transaction as it reduces the conflicting opinions associated with the fair value of the company imagined by its operating personnel. For instance, the value ascertained objectively through financial analysis, market comparisons, and growth projections of a company stands at Rs. 450 crores. However, the founders and employees believe, keeping in consideration the cutting-edge technology or the potential for growth in their product, the value of their company to be Rs. 650 crores. This eventually results in the objectively and subjectively ascertained value locking horns with each other. The subjectivity of fair market tests ultimately does not sit well with the detached process of regulation.
Objectivity is anyway appreciated when it comes to regulating transactions and market activity. The ambiguity of fair market value which utilizes mark-to-market accounting in order to determine the transaction value can prove to be detrimental when dealing with private companies. What makes the case of private companies and small entities difficult is their stark contrast in position to the public companies. The value consideration of the public companies is calculated numerous times a day with each transaction it intakes. However, for private companies, the dealings are too minute and fluctuating to keep track of. With small digital companies and start-ups springing up in the market and the advent of the technological boom, the responsibility of ensuring a fair digital market space becomes a paramount concern.
III. Substantial Business Operation
Contrary to the draft, under Regulation 4, the Revised Combination Regulations require only the target entity to have an Indian nexus or SBO. This essentially means that the companies providing digital services should have at least 10% of their user base in India and other definitive and verifiable factors like market shares, Gross Merchandize Value (“GMV”), and turnover must be complied with. The regulations lay down this specific criterion to ensure that CCI does not get involved with global acquisitions just because they exceed the specified extent of transaction and is limited to regulating any appreciable adverse effect on competition in India as laid down under Section 19 of the Competition Act, 2002. It can be fairly inferred from the revised combination regulations that the criteria of calculating the value of consideration widens the ambit of CCI and its power to assess transactions, however, the second criterion of following the business operations test limits its ambit.
The German model or test of objectivity followed in the determination of the value of the transaction is rationally carried forward through direct domestic consumer engagement through domestically situated assets while deducing SBO. The complexity that arises with digital transactions includes including a third country’s citizen’s data in a transaction between two companies. For this, the Higher General Court of Düsseldorf in the Meta-Kustomer merger laid down the principle that while considering ‘substantial business operation’ only direct consumers are to be considered. If the companies are involved in the processing of data that involves a third country, their nexus cannot be established there on this simple involvement. Here, the proximity with the consumer or the user base acts as an ingredient to establish the nexus which excludes the third-party operators, simplifying the regulatory authority's workload by limiting the ambit of scrutiny.
IV. De-minimis exemption
The de-minimis exemption applies to transactions where the value of the assets or turnover of the target entity falls below certain thresholds exempting it from the CCI’s scrutiny. Companies with assets below Rs. 450 crore or a turnover of Rs. 1250 crore are exempt from seeking CCI’s approval under the Competition (Minimum Value of Assets or Turnover) Rules, 2024. This exemption grants a safe harbour to smaller transactions keeping in consideration their minimal effect on the competition in the market. The de-minimis exemption and DVT operate independently of each other. The regulations imposed have a prospective approach and shall apply to all pending, yet-to-be-signed, or delayed transactions and their status must be reported to CCI. This implies that transactions that were enjoying the benefit of the de-minimis exemption will now require clearance from CCI if they meet the required criteria of DVT. Additionally, transactions that qualify as an Exempt Combination under the new Competition (Criteria for Exemption of Combinations) Rules, 2024 (“Exemption Rules”) will remain immune from notifying the CCI.
V. Conclusion
The revised regulations brought forward by CCI are a welcome step as they bring a tremendous change in the mergers and acquisitions market in the country. The imposition of these regulations naturally leads the authority to the hard part of ensuring its effective implementation. Some regulatory concerns like due compliance and an increase in the capacity of CCI to regulate the transactions falling in the widely casted net of these regulations arise considering the functioning of regulatory bodies in India. Further, clarification and practical understanding of how the value of a transaction will be determined are yet to be established.
Considering the ex-ante and ex-post powers of CCI coupled with its power to take suo moto cognizance raises a critical question of whether the problems in the merger and acquisition regime in the country are a result of lack of powers with CCI or poor utilization of the same. Identifying anti-competitive activity at a later stage in the PVR-INOX case was a glaring example of the ex-post powers of CCI which indicates appropriate power with the body to curb anti-competitive activity.
Although these regulations have been brought to life, a key consideration is the absence of any empirical data indicating an enforcement gap in the pre-operative regulations. Further, the absence of empirical evidence suggesting improved regulation via transaction-based threshold in both Indian and international markets hampers the credibility of these regulations. The German and Austrian models on which these regulations rely; presented that no critical case was notified under this threshold as of 2020 in a written contribution to the Organisation of Economic Cooperation and Development. It will be interesting to note whether these regulations actually stir the way mergers are done in India or turn out to be a failed attempt at reinventing the wheel.