Advent of Deal Value Threshold

In 2018, the Ministry of Corporate Affairs (‘MCA’) constituted the Competition Law Review Committee (‘CLRC’) to “recommend a robust competition regime by taking the inputs of key stakeholders, and suggest changes in both the substantive and procedural aspects of the law”. The CLRC prepared a report of its observations and recommendations and submitted the CLRC Report to the MCA in July, 2019. The Committee deliberated the need to introduce a new threshold (other than the existing asset and turnover threshold) to be able to adapt to the constantly evolving digital market. One of the key CLRC Report recommendations was introduced to meet this challenge enabling the Government to formulate new thresholds to notify a transaction based on broad parameters, as necessary.

The MCA then circulated a draft Competition Amendment Bill, 2020 (‘2020 Draft Bill’) to invite comments from the public. The 2020 Draft Bill enabled the vision of the CLRC Report by suggesting an amendment to empower the Central Government to prescribe, in consultation with the CCI, additional thresholds to notify a transaction. The 2020 Draft Bill formed the precursor to the bill introduced this year. The monsoon session of the Parliament in 2022 witnessed the introduction of the Competition (Amendment) Bill, 2022 (‘2022 Bill’) which ushers in significant changes in the enforcement and merger control provisions of the Competition Act, 2002 (‘Act’). The 2022 Bill (which was introduced sans a public consultation) included new amendments that were not part of the 2020 Draft Bill. One of these new amendments was the introduction of a new threshold to notify transactions – the Deal Value Threshold (‘DVT’).

What is Deal Value Threshold?

Currently, the Act only requires those combinations to be notified where the value of assets or turnover of the parties to the transaction or the group to which they belong exceeds the specified threshold limits (on a domestic or worldwide basis). The 2022 Bill introduces a new standalone threshold – DVT – based on the size of the transaction / the amount the acquirer is willing to pay as consideration in a transaction. In DVT, the value of the deal crossing ₹ 2000 crores acts as a trigger to notify the transaction to the Competition Commission of India (‘CCI’) if the enterprise (that is party to the transaction) has “substantial business operations” in India. The DVT will, for the first time, allow the CCI to scrutinise transactions based on their value.

The idea of introducing additional thresholds originated from the CLRC Report where the Committee observed that the current thresholds (being asset and turnover based) may not always be an accurate indicator of the transaction’s effect on competition. Keeping in mind the recent acquisitions and trends – especially in the digital sector (e.g., Microsoft/LinkedIn, Facebook/ WhatsApp, Myntra/Flipkart, Ola/TaxiforSure, Snapdeal/Freecharge), the CLRC believed that there are likely to be transactions that may effectively slip through the cracks of the CCI’s review even though they are likely to have a significant impact on competition. The CLRC identified that, in some cases, the value of assets and turnover would not be the most accurate metric and should instead consider the price an acquirer is willing to pay, which captures the true impact of the transaction. The purpose of suggesting DVT as a standalone threshold was to bring those transactions within the purview of CCI’s review that are used as a strategy to consolidate market positions, eliminate potential threats, or to expand into new lines of businesses.

Does Deal Value Threshold Fill a Gap?

The CCI is required to undertake an ex-ante analysis of transactions that breach the jurisdictional thresholds and do not qualify for any exemption. The purpose of the analysis is to check whether the transaction causes or is likely to cause an appreciable adverse effect on competition (‘AAEC’) in the appropriate relevant market in India. That said, given that the ultimate purpose of the CCI is to prevent any practice resulting in AAEC and to promote and sustain competition, the CCI is also adequately armed with ex-post powers.

The growth of digitalisation has gained momentum across industries, and has resulted in benefits for companies, and consumers as well as competition. There are no doubts about the benefits of the digital economy for society. However, there appears to be a consensus among antitrust regulators that the existing toolkit may not be sufficient to address concerns arising out of such digital markets. Particularly, the introduction of a DVT appears to be consistent with the legislation adopted in other jurisdictions.

In Germany and Austria, regulators introduced the transaction value threshold to include transactions that were not previously captured by the existing thresholds. The threshold is applicable to transactions where the target has significant activities in Germany. To provide further clarity, the Federal Cartel Office in Germany (Germany’s antitrust regulator) also published guidelines on the transaction value and the local nexus requirements. Similarly, a transaction value threshold was also introduced in Austria. Notably, neither jurisdiction has been able to conclusively establish that the introduction of DVT has assisted in addressing potential competition concerns.

Antitrust regulators in the European Union (‘EU’) and the United States already have residuary powers of assessing non-notifiable mergers, the CCI has no such power if the transactions do not meet the assets and turnover thresholds.

The US has “size of the transaction” threshold which also includes a limb measuring the size of the parties. The threshold includes an assessment of the value of the transaction as well as the size of the parties.

Despite this, internationally, the evidence of a transaction value-based threshold being effective is limited. For instance, the May 2020 written contribution from Germany to the Organisation for Economic Cooperation and Development (‘OECD’) reveals two key findings – (i) the paltry number of additional notifications from the introduction of deal value thresholds^[1]; and (ii) as of 2020, the German Federal Cartel Office (‘FCO’) was yet to deal with a critical case notified based on the transaction value threshold. Similarly, in Austria, none of the transactions that were notified under the deal value thresholds were found to be anti-competitive. In the US as well, the Federal Trade Commission’s (‘FTC’) review of Facebook’s acquisition of WhatsApp was cleared, warning the parties to continue their privacy practices. Reinforcing the observation that Facebook’s acquisition of WhatsApp and Instagram poses no anti-competitive concerns, the District Court of Columbia dismissed the FTC’s antitrust lawsuit on the ground that FTC failed to “plausibly establish” that Facebook has monopoly power in the market for “Personal Social Networking Services”.

Therefore, the question that arises is whether a DVT would result in any additional benefits to the existing regime, especially given that the CCI has powers (even suo motu) to inquire into a combined entity’s conduct even if the combination itself was non-notifiable.

The empirical evidence supporting the need to introduce a new threshold to fill an apparent enforcement gap is unclear. Even in the CLRC Report, the reference to digital transactions implemented with the sole purpose of consolidating market position and eliminating competition^[2] did not suggest that these transactions (i.e., ones that “passed through the sieve”) were ones that were likely to cause AAEC. In fact, the report itself indicates that the recommendation of filling the enforcement gap in reviewing mergers is forward-looking without significant empirical evidence – “To demand empirical validation on the basis of (a) the number of transactions that escaped scrutiny of the CCI owing to asset/turnover falling below the thresholds and (b) their anti-competitive effects on markets, would mean to wait until a large number of such transactions take place and their anti-competitive effects play out in the market and only thereafter plug the legislative gap which is already evident.”

The CCI’s recent findings in the PVR/Inox case underlines the robust ex-post powers to examine an anti-competitive conduct at a later stage. The PVR/Inox merger witnessed the amalgamation of two of the largest film exhibition industry players being exempted from CCI’s review power. In the case filed by the Consumer Unity and Trust Society (‘CUTS’) in 2022, the CCI found that – (i) there was no entity to examine the conduct of, as the transaction had not yet been consummated; and (ii) even if the transaction resulted in the establishment of a dominant entity, dominance per se is not anti-competitive. The CCI also observed that it was equipped with sufficient ex-post powers to examine abusive conduct in terms of the provisions of the Act.

By underscoring the principle that dominance per se is not anti-competitive (and only conduct of the entity abusing its dominant position is anti-competitive), it highlights that an ex-ante review of the PVR/Inox merger would also have resulted in a similar outcome. Even if the ex-ante apprehension was that the merger would be the catalyst in establishing a behemoth, the principle that the mere establishment of an entity with dominant position (without any conduct abusing its position) does not result in AAEC would continue to hold true. It would have been likely that the transaction would have been cleared by the CCI for not being likely to result in AAEC. A DVT may unnecessarily burden the regulator as more transactions will be needlessly notified. This would impact both, the parties and the CCI itself, particularly given that the 2022 Bill also contemplates reduced review timelines. Moreover, as the DVT’s effectiveness or proportionality is yet to be tested, it may be that the robust ex-post investigative regime in India is itself sufficient to address any concerns arising from non-notifiable transactions.

The DVT in its current form also leaves significant gaps in the interpretation of the elements of DVT – particularly on the value of the transaction, and interpretation of “substantial business operations”. By transferring the burden of interpreting the DVT elements to the businesses, it reduces the ease of doing business in India. The lack of clarity only disincentivises investment.

Conclusion

The purpose of introducing a new threshold is to arm the regulator with teeth to prevent anti-competitive conduct. However, if there is no empirical data that indicates an enforcement gap, we may be looking at the DVT unnecessarily squeezing itself into an already robust framework. Both in India and internationally, the data suggests that a transaction value-based threshold may be trying to dig up perfectly well laid roads. The CCI’s counterpart in the EU – the European Commission (‘EC’) – also had wide-reaching powers. The EC can review non-notifiable transactions (under Article 22 of the EU Merger Regulation 139/2004) if member states request the EC to examine a merger. Similar to the concerns raised by the CLRC, the applicability of Article 22 was also widened to include “killer acquisitions” particularly in the digital and pharma/biotech sectors. That said, this wide-reaching power has been utilised only twice by the EC so far – prohibiting Illumina/Grail transaction and conditionally clearing the Facebook/Kustomer transaction. This is an almost unfettered power of the EC as a member state can also refer those transactions to the EC that it itself does not have jurisdiction over.

The 2022 Bill was referred to the Joint Parliamentary Standing Committee on Finance (‘Committee’) to provide its report. This provided an opportunity for industry members/ stakeholders to present views/ suggestions to bring changes to the 2022 Bill. The Committee – after consulting stakeholders – prepared and presented its report before the Lok Sabha and Rajya Sabha on 13 December 2022. The Committee has suggested the following recommendations for DVT – (i) limiting the applicability of the local nexus test to the ‘target’ enterprise; (ii) giving the CCI power to clarify the method to compute deal value and elements constituting “substantial business operations” (however, the Committee itself did not define these parameters); and (iii) reviewing the turnover, value of assets, and value of transaction thresholds each year.

A key question for Parliament to contemplate on is whether the potential ex-ante regulation of the digital market without adequate empirical evidence is placing the cart before the horse. If introduced, the DVT requires better definition of its elements to provide more clarity to the investors and enterprises to prevent false positives from being unnecessarily notified. Currently, the definition of the DVT is ambiguous (e.g., the ambit of which entity would constitute the “enterprise” and of “substantial business operations” is unclear). To this extent, adopting the Committee’s recommendation of CCI regulations clarifying the elements of “substantial business operations” is helpful. However, it remains to be seen what parameters the CCI will define for “substantial business operations”.

For the DVT to be effective, it is crucial that the transactions caught under the DVT must have a strong and apparent nexus to India, and that there is a real likelihood of an AAEC being caused as a result of the transaction. One such approach could be to provide clarity on the metric “substantial business operations” in a manner that reflects the local nexus of the enterprise. The test of “substantial business operations” should encompass factors that are definitive and verifiable such as market shares, turnover, or the location of customers.

There’s also a need to clearly determine what constitutes the value of a transaction as the ‘deal value’ is likely to exceed the value of consideration on account of the multiple elements of any M&A transaction. Therefore, it is necessary for the CCI to provide a list of elements, factors, and components that would constitute “value of transaction” – particularly, non-monetary consideration.  If the recommendations of the Committee are indeed accepted, the ball would then lie in the CCI’s court to expeditiously define these terms for the DVT to contribute meaningfully to regulatory certainty and maintain ease of business in India.

^[1] In 2017, eight mergers were notified and 10 in 2018. Out of these 18, seven were withdrawn once it became clear that the transaction actually did not meet the threshold. The remaining 11 cases were cleared in Phase 1.

^[2] Facebook/WhatsApp, Snapdeal/Freecharge, Flipkart/Myntra.