Abstract
The concept of Deal Value Threshold stands as a pivotal stride in reshaping competitive dynamics. This paradigm shift from traditional valuation methods stems from the recognition that transactions can carry profound competitive implications beyond mere asset and turnover benchmarks. Inspired by global jurisprudence, this threshold seeks to capture the true essence of transactions by scrutinizing the price an acquirer is willing to pay. While heralding enhanced precision, it also presents challenges, such as sector-specific variations and potential start-up hindrances. Through a delicate balance, this framework strives to nurture competition while fostering innovation, heralding a new era in business regulation.
Introduction
Amidst the complexities of the corporate realm, the Competition Act 2002 emerged as a shield for maintaining healthy competition. But, some high-profile cases like Flipkart-Myntra, Facebook-WhatsApp and Microsoft-LinkedIn resulted in anti-competitive activities eradicating competition in the same industry, unveiling the gaps in the Act. To dilute these vulnerabilities, the Competition Act of 2023 was introduced, wielding a potent weapon – the Deal Value Threshold (hereinafter DVT). This revolutionary addition is based on the size of the transaction/the amount the acquirer is willing to pay as consideration in a transaction. The DVT, a game-changer, triggers when the deal's value surmounts 2000 crores, compelling notification to the Competition Commission of India (CCI) if the involved enterprise wields "substantial business operations" within the nation. Remarkably, the DVT empowers the CCI to evaluate transactions based on their value, an uncharted territory that amplifies regulatory oversight with distinction.
The inception of the idea of additional thresholds finds its root in the Competition Law Review Committee where it was observed by the committee members that the existing threshold might not always prove to be the accurate indicator of the effects of a particular transaction on the competition. The preceding concept predominantly centred around these transactions crossing a desired asset and turnover threshold, a model that stood the test of time until certain high-profile cases, such as the noteworthy instances of Facebook-WhatsApp, Myntra-Flipkart, and Microsoft-LinkedIn, jolted the committee members to a realization. It dawned upon them that this threshold might allow certain transactions to slip through the eyes of CCI which might result in a game-changer in the world of competition. Instead of focusing on the value of assets and turnover, their focus turned towards an alternative prism of analysis – the price the acquirer was willing to pay. This very price, they asserted, unveiled the genuine magnitude of the transaction's influence, leaving no room for ambiguity.
This transformative concept found its legal spot under Section 5(d) of the Competition Act which clearly says that any transaction in connection with the acquisition of any control, shares, voting rights or assets of an enterprise, merger or amalgamation which exceeds rupees two thousand crore will create a combination, falling under the scope of competition law in India, if the business being acquired or merged has ‘substantial business operation in India’.
However, there remains some confusion about what exactly constitutes "substantial business operation," a term that the legislation does not clarify. This article aims to remove this ambiguity by analysing the DVT with foreign jurisprudence while also shedding light on the challenges linked with this concept.
Analysing ‘Substantial Business Operation’ with Foreign Jurisprudence
Given the lack of a clear definition for "substantial business operation," it becomes crucial to delve into foreign legal precedents to gain a better understanding of this concept. Although new to India, the notion of "Substantial Business Operation" has already been integrated into the competition frameworks of countries such as the USA, Austria, Germany, the EU, and South Korea. These nations have successfully implemented and integrated this concept into their competitive markets, operating without complications.
The European Union has many measures to identify the combinations and one of them is by determining if the company holds a strong position in the market. EU uses the term ‘Gatekeeper’, similar to India’s label, to describe the company. Section 3 defines ‘gatekeepers’ as a company which holds a great influence in the internal market and this decision is backed by the reasoning that the gatekeepers serve as a main entry point for many users.
The United Kingdom also uses a similar terminology. If a company has a strong and firmly established presence in the market along with other significant criteria like being in a position of great importance, it will amount to a company having a strategic market status. This means that the company plays a key role in that market and has a significant impact on how things work there. It is like being a big player in a game – you have a strong position and can influence what happens in that market.
India seems to have taken inspiration from the jurisdictions of Austria and Germany. In order to meet the prescribed DVT, the law mandates the target company to have a ‘significant domestic operation’. This means that the target company has to have a ‘significant paramount importance’ in their country to cross the prescribed DVT. The term ‘significant domestic operation’ is similar to the ‘significant business operation’ used in the Indian Legislation. In order to give more clarity about ‘substantial business operation’, Austrian and German competition authorities published a Joint Notification Guidance Paper.
Certain factors that can help understanding the term ‘substantial business operation’ as mentioned in the paper are as follows:
First, the factor of Different Criteria for Different Sectors can be deemed to be most useful since it considers that different sectors need to be handled with specific different criteria. The paper suggests that it is important to use distinct measures for various industries when defining 'substantial business operation.' This prevents easy manipulation and aligns with the standards commonly accepted in different sectors. For instance, in the technology sector, the criteria might include factors like the number of active users or the level of innovation while on the other hand, for the manufacturing industry, criteria might involve the market share of the company or the geographical spread of their operations.
Second, the factor of Assessing Local Nexus. Since India has a large population and different living conditions in different cities, this factor might not prove to be of use in the jurisdiction. Instead of focusing on how many people use a service, focusing on the assets of a company is a better option. This will help in determining the paramount importance of a company in a jurisdiction.
Third, the Marketability of Domestic Activities serves to be one of the utmost useful factors for determining the meaning of ‘substantial business operation’. Marketability of domestic activities refers to how well a company's products or services are received and sought after by customers within the local market. It assesses the appeal, demand, and competitiveness of what a company offers in its home country. This aspect plays a vital role in determining the substantiality of a business operation, reflecting its ability to contribute significantly to the local economy and competition landscape.
Much like Austria and Germany, it would prove advantageous if the CCI delineates precise criteria for diverse vital industries via regulations or guidance notes. This step would introduce an element of assurance when implementing this evaluation for varying sectors. Such elucidations and well-defined benchmarks would enhance the usability and practicality of the DVTs, streamlining their application and efficacy. It will also inculcate confidence in the market operators as it will ensure them of fair practices and clarity.
Challenges Linked to the Concept
No idea is without its difficulties. While the DVT could bring significant change to the competitive market, the author believes that there could still be certain gaps or issues within it. Some challenges that the concept of DVT might face are:
The DVT is a bit subjective, as the worth of a company bought can vary based on the buyer. It might not always reflect a deal's importance for competition. Even a small-priced purchase could reshape the market significantly. Determining a deal's true value is complex due to changing prices during negotiation, diverse industry valuations, and other factors. For example, Facebook's purchase of WhatsApp began at $19 billion but ended at $22 billion due to increased Facebook value. It is like gauging a toy's worth when prices shift and perspectives differ.
The International Competition Network (ICN) emphasizes straightforward and measurable criteria for when companies should report a merger. During the past three years, there has been 11 Recommended Practices developed which the ICN has adopted such as timing of merger notification, merger review periods, requirements for initial notification, review of merger control provisions etc. However, the deal-value threshold can lack clarity, hindering efficiency and creating ambiguity in legality assessments. Unclear rules might lead authorities to examine unnecessary cases, burdening them further. This complexity could complicate matters rather than streamline them.
In the emerging Indian digital market, small startups often rely on support from larger companies. Implementing DVT could subject startups to prolonged approval procedures, eroding their competitive advantage which may also deter investor participation. CCI recognized in the Flipkart case that the nascent digital market requires cautious rule-making to avoid stifling innovation. Introducing excessive regulations at this early stage risks impeding both innovation and healthy competition.
Conclusion
The introduction of the DVT marks a pivotal advancement in competition regulation, aiming to foster equitable and competitive markets. It centres on transaction value and business significance, effectively gauging the impact of mergers in today's digital era, where traditional metrics might be insufficient. Aligned with global standards endorsed by the International Competition Network (ICN) such as nexus between the merger's effects and the reviewing jurisdiction, clear and objective notification thresholds, interagency coordination, conduct of merger investigations etc, this approach underscores transparency and objectivity. Yet, as with any significant shift, challenges emerge. Adapting the criteria to various industries, potential burdens on startups, and the delicate equilibrium between rules and innovation requires careful thought. Solutions must be pragmatic, preserving competition while nurturing innovation. Balancing these elements is essential for a successful implementation. In essence, DVT holds the power to positively transform how competition is upheld. Its ongoing refinement requires a careful balance between fostering competition and encouraging innovation. By addressing its challenges and capitalizing on its benefits, this threshold can play a pivotal role in creating a strong and dynamic market environment where both healthy competition and innovation thrive.
This article has been authored by Ananya Tewari, a student at the Bharati Vidyapeeth (Deemed to be University) New Law College, Pune. This blog is part of the RSRR’s Rolling Blog Series.