Sanskar Modi, Akshat Shukla
Are Indian Anti-trust laws equipped to deal with Nascent Acquisitions? This piece analyses the current target exemption thresholds under the Indian competition regime to identify the anti-competitive implications of excluding the CCI’s investigation into such exempted combinations – to propose a deal-value oriented exemption framework that mitigates such anti-competitive effects.
The Zomato-Uber Eats deal which took place in February, 2020 raised several pertinent questions of law in the Indian Antitrust regime. Food delivery giant Zomato’s acquisition of Uber Eats should ideally be scrutinized under the Section 5(a) of the Competition Act, 2002 (“the Act”) but it escapes combination assessment by availing of the target exemption or de minimis threshold exemption under the Act. This case prompted a critical revision of the current existing legislative framework on combination assessment, as the CCI has initiated a probe in this non-notifiable deal despite the de minimis exemption. This blogpost deals with three major aspects of antitrust law vis-á-vis the present combination – first, the analysis of the current thresholds, target exemptions and ex-post reviews as per which the combinations are assessed considering the legislative intent behind the existence of such thresholds; second, the need to consider the challenges that the current thresholds fail to address which leads to increased scope of anti-competitive practices in different markets; and, third, India’s current stand with respect to the assessment of non-notifiable transactions and the steps that can be taken, following in the footprints of US and EU jurisprudence, to tackle the issue at hand.
By way of elaboration, the thresholds enlisted in Section 5 of the Act for scrutinizing combinations have been subjected to much criticism in the past for several reasons. One of the most important reasons for this criticism is the difference in the quantification of assets and turnover across varying industries. The following sections deal with the conundrum of an anti-competitive combination even which does not cross the notification threshold of the Competition Commission of India (‘CCI’) under Section 6 of the Act. The Zomato Uber Eats deal is a curious case which may become a pioneer in steering the competition regime of India towards a new regulatory mechanism of combination assessment which extends even to non-notifiable transactions. The EU and US jurisprudence already provides for the residuary powers with competition regulators to assess combinations which are below existing thresholds. The Indian regime particularly follows these jurisdictions in framing its laws and therefore, it would only be a welcome step if such a mechanism is introduced in India.
The Indian Regime on Regulation of Combinations
A combination is the entity that is formed after a merger or an acquisition involving more than one corporate entity. However, under Section 6 a combination needs to be notified to the CCI only if it crosses the thresholds of assets or turnover mentioned in the section, in the preceding financial year. The assets or turnover are inter alia calculated by ascertaining the combined value when the entities start operating together. The thresholds for notifying combinations were last revised in 2016. Acquisitions, amalgamations or mergers are required to notify CCI about the deal if the assets of the combination are valued over Rs.2000 crores and/or they have a turnover of Rs.6000 crores. If a combination fulfills either of the conditions, the merger needs to be notified under Section 6 of the Act.
Further, it was realized that there are several transactions where a big entity acquires small startups and these deals are generally not capable of causing appreciable adverse effects on competition. In order to reduce the burden of assessing such transactions on the CCI, the de minimis threshold or target exemption mechanism was notified by the Central Government under Section 54(a) of the Act. Under this exemption, if the target enterprise has less than Rs.350 crores in assets or turnover of less than Rs.1000 crores then even if the combining entity crosses the threshold, the combination need not be notified under Section 6. If all such transactions were to be notified, the escalated bureaucratic burden over the CCI could, causing those combinations which could adversely affect the competition to escape the scrutiny of CCI due to their assessment being delayed.
Backdrop of the Zomato-Uber Conundrum
In the Indian context, the present debate over these thresholds stems from the Zomato-Uber acquisition that culminated in January, 2020 but has since then been entangled in antitrust issues. CCI first inquired about the acquisition through a letter in February, 2020 and Zomato subsequently claimed to have shown all the relevant documents. In December 2020, CCI sent a show cause notice to Zomato seeking an explanation for not notifying the Uber Eats India Asset Acquisition for its review and approval under Section 6(2). CCI has alleged a violation of Section 43A of the Act which deals with mergers that were not filed for review before the CCI even though they crossed the thresholds. Zomato has claimed in its Draft Red Herring Prospectus dated 27th April, 2021 that it filed a response to the show cause notice in February, 2021. Further, it has also requested an oral hearing before CCI to prove that the transaction is non-notifiable under the purview of the Act.
If the Zomato-Uber deal was actually non-notifiable and the same was ascertained by CCI through its letter in February 2020 then the show cause notice of December raises several questions on the powers of CCI to review a combination that does not qualify the requisite threshold. Further, all of this comes into play when the Draft Competition Amendment Bill of 2020 (‘the Draft Bill’) is yet to be approved by the Parliament. This bill has several provisions that directly address the aforementioned issues and this interplay of the Zomato-Uber deal and the Draft Amendment Bill shall also be discussed in detail in the subsequent heads.
Analysis of the Legislative Intent behind Current Thresholds
As discussed earlier, the Indian thresholds are based on the turnover and assets of the combining parties which subsequently determines whether a transaction will be notifiable to CCI. Thresholds were incorporated in order to prevent the merger control regime from becoming unduly onerous. The prior approval for all the mergers would lead to delays and unjustified bureaucratic intervention. The intention behind incorporating thresholds was to scrutinize those combinations only which have the potential to affect the competition in the market. It was believed that companies of lesser asset value post merger focuses more on establishing networks in the initial years rather than revenue generation and thus, these companies are not in a position to cause an appreciable adverse effect on competition in the market.
Regardless of the fact that the bureaucratic burden on CCI increases because of such small valued transactions getting notified, it is important to address the importance of Section 20(1) and its proviso which gives ex-post review powers to CCI for one year from the initiation of the combination. It states that CCI, upon its own knowledge or through information, can inquire or investigate about a combination if it causes or is likely to cause an appreciable adverse effect on the competition. Therefore, it sets a contrast with the assertion that only notifiable transaction should be assessed by the CCI and the question that whether there is a need to assess non-notifiable transactions gains prominence. Further, the legislative intent in the draft bill of 2020 also shows positive steps in diversifying the threshold mechanisms. All of these propositions have been discussed in detail in the next segments.
Assessment of non-notifiable transaction and its implications
The CCI’s probe in the Uber Eats-Zomato deal coupled with the introduction of ‘deal value thresholds’ in the draft bill has broached one of the most pertinent questions which is that whether the competition regulators in India are fairly efficient to avert the acquisitions of “Nascent Competition” & “Killer Acquisitions”. The term nascent competition mainly denotes a particular category of product or technology that is relatively new and has the ability to be a notable competitor in the future whereas killer acquisitions refer to the acquisition of nascent targets in horizontal markets to ‘discontinue’ or ‘kill’ their ongoing projects. Nascent acquisitions such as Freecharge-Snapdeal and Whatsapp-Facebook are amongst the many other acquisitions which escaped antitrust scrutiny in India due to non-fulfillment of thresholds and hence these instances clearly manifest the ineptitude of the current merger control regime to capture “Killer Acquisitions”. In the light of these emerging issues, it becomes pertinent to comprehend the Indian standpoint of merger control.
Changing Contours of Merger Control – Where Does India Stand?
The aggressive acquisitions of novice potential competitors by established players across the globe in the last few years have challenged the competition authorities to enact and amend legislations which can fill this enforcement gap of scrutinizing even the non-notifiable transactions. Antitrust enforcement agencies across jurisdictions have taken the effort to address the nuances of the anticompetitive impact of nascent acquisitions and the scope of improvement in the antitrust policy.
Germany & Austria were among the first countries which enacted transaction based thresholds in 2017 to deal with such loopholes. US merger control regime has also started showing flexibility for ex-post assessment of mergers while dealing with combinations resulting out of nascent acquisitions. This implies that even non-notifiable transaction can be called for an investigation under the US Antitrust laws. The European Commission (EC) also has a mandatory notification system based on thresholds but even if a transaction does not fulfill the threshold requirement, EC can review a transaction if it is notifiable under the national competition law of minimum of three member states. Similar flexibility can also be observed in the UK antitrust regime under which the Competition & Market Authority (CMA) uses share-based tests in addition to turnover based thresholds: as per the share-based tests, authorities can review a transaction if the parties thereto have a share of supply exceeding 25% or the transaction results in an increase in the supply share above 25% in the UK.
When this changing contour of merger control is looked at in India, the Indian competition jurisprudence is found to lack substantive legislation on assessing non-notifiable transactions. However, the challenge of nascent acquisitions, most significantly in the digital economy, has not escaped the CCI’s notice. The report of the Competition Law Review Committee extensively discussed digital markets where enterprises having lower turnovers escape the CCI’s radar. To deal with such loopholes, the report recommended the introduction of Deal Value Thresholds (‘DVT’) and accordingly, the Draft Bill provided power to the central government in consultation with CCI to prescribe other criteria in addition to those mentioned in Section 5 such that fulfillment of such criteria can deem any transaction to be a combination under Section 5.
Admittedly, in its present form, the CCI does not possess any residuary power to access non-notifiable mergers even if the potential competitive harm is evident. The current legislation requires the implementation of DVT apart from providing some residuary power to CCI to assess objectionable non-notifiable combinations.
Conclusion: The Way Forward
It is conspicuous that the current parameters of merger control regime in India are not sufficient to prevent combinations from causing an adverse anti-competitive effect. It is high time that the competition watchdogs take cognizance of the contemporary and dynamic marketing strategies undertaken by dominant players in the market. The introduction of DVT in the Draft Bill is undoubtedly a welcome step but it fails to include some of the remarkable international developments & suggestions such as assessing a merger using an “expected harm” test and “ex post review” of selected combinations that escape scrutiny of the regulators or which are otherwise non-notifiable. The implicit force of law should be replaced by express powers given to CCI so that the regulation mechanism for assessing combinations can be strengthened. The Zomato case can be a trigger point in bringing about revolutionary change in the Indian merger control regime as it comes at a point where the 2020 Draft Bill is on the verge of being enacted. The inclusion of Deal Value Thresholds and their implementation in several industries would require a complete overhaul of the present structure of thresholds; thus, ultimately only competition authorities can change the status quo upon genuine introspection.
The authors are third year students at the National Law Institute University, Bhopal.
Categories: Corporate Law, Legislation and Government Policy