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ANALYSIS OF DEAL-VALUE EVALUATION UNDER COMPETITION LAW BILL, 2022

Updated: Feb 8

by Abha Singhal, Arnav Srivastava*


INTRODUCTION

Over the past decade, with liberalized trade practices and globalization, the Indian economy has grown into a full-fledged market economy. There has been a paradigm shift in the way Indian markets operate, especially after the spike in digital marketing companies. A vibrant economy where businesses may prosper and innovate while keeping up with contemporary changes in digital markets to ensure healthy competition is essential to gain benefits with optimal use of resources and ensuring fair chances for all consumers.

Competition law governs Mergers and Acquisitions (“M&A”) to maintain healthy competition in the market and to restrict cartelization in the economy. Recently, it was noticed that certain digital transactions and acquisitions that could negatively affect the market escaped scrutiny by antitrust authorities therefore the Parliamentary Standing Committee under the Finance Ministry of India has come out with a Competition Law Amendment Bill (“Bill”) to address this issue. To provide a remedy for the same, Deal-Value Thresholds have been introduced by this amendment. These thresholds indicate that the parties concerned must request approval from the Competition Commission of India (“CCI”) by giving notice if the proposed combinations are greater than the specified limit under the new Bill.


COMPETITION ACT 2002- A BRIEF OVERVIEW

The Competition Act was introduced in the year 2002 to govern and regulate commercial competition in India. Section 5 of the Competition Act 2002 (“Competition Act) defines combinations, which refer to M&A or amalgamations among enterprises that cross the jurisdictional limit prescribed by the CCI. Under Section 6, these combinations have to seek CCI’s approval if they cross a certain threshold level based on their volume of assets and turnover. The factor for the change is the fact that after the market entry of digital companies, the value of a company is no longer determined by its assets but by its data volume, which was also pointed out for the first time by the Competition Law Review Report 2019. Subsequently, with a low value of assets and a high value of data, these companies escape the CCI’s scrutiny and engage in combinations that eventually lead to negative competition in the market.


WHAT IS THE DEAL-VALUE EVALUATION?

The combination threshold is valued based on the company’s asset or turnover value, which is known as Deal Value Evaluation. Under the Bill, deals with a global transaction value of more than Rs.2,000 crores and having “substantial business operations in India” will require the CCI’s approval, as opposed to earlier acts where acquisitions under Section 5 of the Competition Act required only the CCI’s approval. Additionally, for every acquisition, merger, or amalgamation, the value of the transaction is intended to comprise all valuable considerations, whether immediate, indirect, or deferred.


MAJOR FACTORS LEADING TO THE DEAL-VALUE EVALUATION

What led to the insertion of the deal value threshold are the recent acquisitions that were not submitted to the CCI due to their data-based valuation in the digital and technological sectors, such as the acquisition of WhatsApp by Facebook and of Uber Eats, and Blinkit by Zomato. Due to the lack of huge asset size, these acquisitions do not require any prior approval. Not only this, but these tech giants tend to acquire small start-ups with relevant market structures. For instance, in 2013, Facebook acquired Onavo, which was an Israeli start-up, followed by Oculus VR, another software gaming company. In return, these big techs invest huge amounts of capital in these start-ups. While such capital investments from these big techs in start-ups help them succeed at a global level, a balance needs to be struck to check the adverse effect these acquisitions can have on the competition in the market.

Ever since the rise of these big tech companies, major acquisitions have occurred, having an impact on the market structure. A UK report stipulates that in the last decade, the five largest technology companies have made over 400 acquisitions globally. These digital acquisitions derive their value from either data or innovation held by the target; hence, their assets and turnover never meet the threshold level. The current scenario concerning jurisdiction is that unless the notification threshold limits are met, CCI has no power to access transactions, despite causing an Appreciable Adverse Effect on Competition (“AAEC”). The wording of the current legislation is such that it only enables the CCI to assess transactions that meet the asset and turnover thresholds given under Section 5 of the Competition Act. Consequently, these big tech acquisitions escape the scrutiny of the CCI.


CRITIQUE OF DEAL-VALUE EVALUATION

Upon research, it was noticed that there are certain setbacks in the proposal of Deal-Value Evaluation that could effectively hamper the execution of the said amendment.

Firstly, the usage of “substantial business operations” in India is not defined. This ambiguity can lead to errors in determining the “deal value” in the country, as it would lead to difficulties as to which company or group of companies constitutes having substantial business operations in India as the term “substantial” is not quantitively defined.

Another issue with the deal value threshold is that it will subject all acquisitions falling under the Rs 2,000 cap to scrutiny, subject to either party having “substantial business operations” in India. While it might subject big acquisitions to scrutiny, however, certain acquisitions are unlikely to impact competition, like investments that are purely financial and non-strategic in nature. For instance, antitrust regulations in the United Kingdom may investigate any agreement that results in the parties acquiring or providing at least 25% of the specific goods or services in the nation, regardless of their impact on competition. In India, subjecting such acquisitions to CCI’s strict scrutiny will unnecessarily stretch time and be against the ease of doing business initiatives. Moreover, the Bill does not clarify whether such transactions, which the CCI does not recognize to cause AAEC, will be notifiable if they meet the deal value threshold. To support the same line of reasoning, it has been observed that the European Union, in its Competition Policy for the Digital Era Report 2019, also criticized the introduction of the Deal Value Threshold, stating it would encapsulate unnecessary transactions while increasing administrative burden if the transactions that are needed to be regulated are not specified.

The deal value barrier's applicability to all transactions or only those on digital exchanges is not obvious from the Bill, which is another issue Without such clarity, the deal value barrier can have a cascading effect on notices that are filed out of acute caution due to the severe penalties linked with "gun-jumping" and the non-notification of transactions under the Competition Act.


CONCLUSION AND WAY FORWARD

The Bill is a welcome move as a whole that will surely modernize the existing competition law regime in the nation. However, for the step to be truly successful, the CCI will need to come out with detailed and thorough guidelines on the Deal Value Threshold to bring out its maximum benefits. For instance, one proposed solution is to not subject every transaction to scrutiny, the Deal-Value Threshold may be read with Section 19(3) of the Competition Act, which lays down certain factors to be considered in determining the overall competition effect on the market.

Additionally, while different indicators, such as the acquirer's market influence, can be used to determine the substantive business operation depending on the relevant market structure, as they are in countries such as the UK and Germany, the authors believe that an exhaustive list of indicators may be inappropriate in the digital sector due to different circumstances in each country. On the other hand, focusing on the number of active users, the location of the target, and the geographical location of research and conduct may ascertain whether a party has a substantial operation in a country. The ultimate form and shape of the modifications under the Bill are still up in the air.


*Abha Singhal and Arnav Srivastava are both 2nd-year students at Rajiv Gandhi National University of Law, Punjab at the time of publication of this blog.


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