top of page

DVT: A Panacea or a Pandora's Box? Exploring Alternatives to a Deal Value Threshold.

The author is Alaina Fatima, a fourth year student at Dr Ram Manohar Lohiya National Law University, Lucknow.

Identifying the discrepancies in the Indian Regulatory Notification Model


The year 2014 witnessed a momentous eventin the history of technology; Facebook acquired WhatsApp for an astronomical 19 billion dollars. This high-profile acquisition, significant in multiple ways, sparked many pertinent questions and controversies. Undoubtedly, a transaction this massive must have had an immense impact on competition worldwide.


While WhatsApp had averred that India is one of its biggest markets, surprisingly, this colossal transaction still necessitated no clearance from the antitrust regulator, i.e., the Competition Commission of India (hereinafter, "CCI"). At the time of the acquisition, WhatsApp only had 55 employees and a revenue of 10 million euros, yet it managed to reach millions of consumers. This mammoth acquisition escaped scrutiny because both the tech giants did not have adequate assets or turnover in India to trigger any threshold despite having a substantial market presence here.


Such instances illustrate the discrepancies in the antitrust scrutiny in India that warrant further examination. This regulatory scrutiny follows a notification model through which the CCI assesses whether a combination will likely have an appreciable adverse effect on competition. This article critically analyses the digital incongruence of this model, due to which combinations with potential anticompetitive effects often go unnotified. Furthermore, it assesses the utility of the Deal Value Threshold (hereinafter, "DVT"), which was recently introduced as an additional threshold to encompass such transactions, highlighting concerns regarding DVT's efficacy and its ambiguous criteria. Thereafter, the article proposes alternatives to DVT, i.e., a categorial threshold and a transaction-size threshold, while defining the elusive notion of "substantial" business operations by drawing guidance from foreign jurisdictions.


The Digital Divide: Adaptability of the current statutory regime to the evolving digital markets


There has been a digital boom in every domain in the past few decades, be it education, travel, entertainment, or business. Mergers and acquisitions are no exception to this surge, leading to positive outcomes for companies and customers as well as market competition. However, antitrust regulators around the globe contend that the current statutory stipulations may be inadequate to address anticompetitive concerns, particularly in the tech space, [1] arising out of this upsurge, as evident in the Facebook-WhatsApp case. This is because digital platforms often have a negligible physical presence, such as Ola in India, whose tangible assets are dwarfed by its massive user base of 23.96 million in India alone.


The Competition Law Review Committee (hereinafter, "CLRC") traces reliance to the UK Expert Panel Report, which elucidates that as a part of their business model, the tech companies may not generate any significant revenue for an extended period; their initial objective is to generate a massive user base. Hence, for jurisdictions relying exclusively on turnover thresholds, this poses a significant challenge that must be addressed.


For instance, CLRC averred in its report that in some scenarios, the value of assets/turnover might not be the most precise criterion, and the CCI should instead consider the price an acquirer is willing to pay for the target, which would reflect the actual impact of the transaction on the market. Thus, the CLRC perceived the need to institute an additional threshold to conform to the constantly evolving digital world.


Consequently, the Competition Amendment Bill 2022 (hereinafter, "Bill") introduced a novel, additional threshold to notify transactions in the proposed Section 6(B) of the Bill (now accepted as an amendment to Section 5 of the Competition Act 2002)– the DVT with the primary objective of encompassing those transactions within the purview of CCI's scrutiny, which are often employed as methods to eliminate competition or to proliferate into new domains of businesses to increase the market presence of the entity. To meet DVT's criteria for notifying an acquisition, the deal value must exceed 2000 crores, and the enterprise must have "substantial business operations" in India, indicating a significant level of economic activity in the Indian market.


Reassessing and Unveiling the Concerns with DVT


A. The Uncertain Efficacy of DVT: Lack of Empirical Evidence.


One primary concern regarding the efficacy of DVT is the lack of empirical evidence. The CLRC report appeals to the precedents of countries such as Germany and Austria, which have implemented transaction-value-based thresholds for merger notifications, as a basis for its proposals. Nonetheless, it acknowledges that the empirical evidence for their efficacy is limited. Moreover, this lack of evidence is further reinforced by a 2020 note submitted by Germany to the Organization for Economic Co-operation and Development (hereinafter, "OECD") revealing that the Bundeskartellamt (the German antitrust regulatory authority) has not yet encountered any significant or critical cases notified under the transaction threshold.


B. Contemplating the Utility of DVT

The gaps in the current regulatory framework become evident because CCI lacks specified residual powers to assess non-notifiable acquisitions that fall below the assets and turnover thresholds, unlike its counterparts in the US or the European Union. However, it is pertinent to note that India confers some extensive ex-post powers (even suo-moto) upon its antitrust regulator to examine anticompetitive conduct later, as demonstrated in the case of a complaint filed by Consumer Unity & Trust Society against the proposed PVR-INOX merger. Therefore, no transaction is beyond the scope of the CCI, which impugns the foundation on which DVT was proposed.


C. Examining the elements of DVT: The Ambiguities in Threshold Criteria


In addition to these concerns, the threshold as per Section 6(B) of the Bill, also entails significant gaps in interpreting its elements. First is the vague and arbitrary connotation of "substantial" in "substantial business operations", which needs to be defined expeditiously. Leaving this connotation open-ended would create chaos and confusion within the market and will undoubtedly diminish the ease of business; hence, now that DVT is adopted as a provision, it is necessary to define its components to obviate this lacuna. Second, the deal threshold of 2000 INR is relatively low and may unnecessarily burden the regulator as more transactions will be needlessly notified, apart from adversely impacting the overall ease of business.


Addressing the Limitations of the Deal Value Threshold: Proposed Solutions


Although the existing legislation must evolve to be consistent with the digitally flourishing market, DVT might not be the optimal solution given its discrepancies. The efficacy of DVT appears rather bleak in light of the formidable ex-post investigative capabilities of the CCI, coupled with a lack of empirical evidence indicating any enforcement gap. Therefore, it seems that DVT is attempting to insert itself into an already robust mechanism.


A. Tailored Thresholds: Exploring a Categorical Threshold System


An alternative to DVT could be implementing a novel "Categorical Threshold" system. This proposed system would entail classifying entities based on their business sector or activity, which would dictate the turnover or asset thresholds. The threshold parameters would be established according to industry-specific standards, affording varying limits for sectors such as food, entertainment, and accommodation. This approach recognizes that a one-size-fits-all threshold may not be suitable for all sectors.


B. Transaction Size Threshold: A viable alternative to DVT


Another potential alternative to DVT could involve the adoption of a "size of the transaction" threshold, as currently practised in the United States and Canada. The US adopts this methodology through the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which aims to evaluate the assets, voting securities, and non-corporate interests (such as membership interests) the acquiring party will hold post-acquisition to determine the level of control that the acquirer will have in the acquired entity. Similarly, the transaction size in Canada is determined by the appraisal of the target's Canadian assets and its Canada-specific gross revenues. By incorporating this mechanism in the Indian M&A regime, it is possible to mitigate the potential anticompetitive behaviour while simultaneously maintaining an efficient regulatory system.


C. Assessing the scope of "substantial" business operations


Furthermore, the scope of the word "substantial" in substantial business operations could be defined by drawing helpful guidance from the practices in other jurisdictions with similar thresholds, for instance, the joint guidance paper by Germany and Austria. The paper lays down various methods to define "substantial domestic operations" under the threshold with a focus on the local nexus of the target entity, such as the industry key figures (daily/monthly active users in the digital sector), market shares or physical presence in the domestic market, location of customers and marketability of domestic operations. Adopting a set of similar and well-defined criteria to assess this scope would enable the CCI to monitor the influx of notifications triggered by DVT effectively.


Conclusion


With the Indian antitrust regulatory framework facing unprecedented challenges posed by the constantly evolving digital markets, the DVT attempts to address this incongruence. However, implementing this threshold entails significant concerns, such as the lack of empirical evidence for its efficacy, the utility of the threshold, and the ambiguity in interpreting its elements.


Therefore, exploring alternatives such as categorical or transaction-size-based mechanisms could prove efficient. While the Indian antitrust regime might seem relatively incongruent with the digital surge, there is a scope for evolution in these regulations by implementing a tailored approach to suit the unique needs of different business sectors might help strike a balance in facilitating the concerns of the digital market stakeholders along with ensuring fair competition.

[1] Competition Law Review Committee, Report of the Competition Law Review Committee, 131 (2019).

525 views0 comments

Comentarios


bottom of page