Merger Control Regime and Transaction Threshold in the Digital Economy

Shubham Jain, National Law University, Jodhpur

A market study conducted by the Competition Commission of India (“CCI”) in relation to e-commerce (such as digital economy, online entertainment services, food technology industry, etc.) is booming and is expected to contribute about USD 120 billion to the Indian economy.[i] The digital industry is standing tall on the foundation of big data, innovation and entrepreneurship. Often, the novel innovative industries are bought up by the people with deep pockets thereby posing a threat to competition, and often this threat can be analyzed only after a long periods of time.

Amazon, one of the market leaders in the digital economy across the globe, is known to have used its accumulated data to establish its private labels,[ii] and have greater control over the supply chain of the products.[iii] Often times, it ends up acquiring the upcoming brands and builds its portfolio based on this data to expand its business.[iv] Further, recently Facebook has invested in Reliance Jio to further their plans of starting an online payment system using Facebook’s WhatsApp and their existing user base of 400 million,[v] and bundling up their messaging services with a payment system along with JioMart.[vi] These raises a lot of issues related to the adverse affects of such data driven mergers and investments on competition within the relevant market.

This article seeks to discuss the competition law regime in India related to merger control, and prescribed threshold as the notification trigger. It will also discuss if it is fit to address the issues which are foreseeable in the new age of digital economy.

The Competition Law Regime in India in relation to Merger Control

Section 5 and 6 of the Competition Act, 2002 (“Act”) along with the Competition Commission of India (Procedure in regard to the transaction of Business relating to Combinations) Regulations, 2011 (“Regulation”) grant the CCI authority to address concerns related to appreciable adverse effect on competition (“AAEC”) arising out of the mergers and acquisitions (“combination” – as defined under the Act) taking place in India or abroad if the transaction qualifies the threshold provided under the Act.[vii] The parities have to notify CCI regarding the merger or acquisition if it crosses the threshold based on the value of assets or turnover – unless exempted, if the CCI finds that the combination could lead to AAEC, it has the authority to make necessary changes to the merger.[viii] In an acquisition, the acquirer has the obligation to notify CCI about the combination, and in a merger the transacting parties have the obligation to notify.[ix] The threshold set by the CCI is as follows:

1. Within India: [A] Enterprise Level: The assets with minimum value of INR 2,000 crore; or a turnover of more than INR 6,000 crore; [B] Group Level: The assets with minimum value of INR 8,000 crore; or a turnover of more than INR 24,000 crore.[x]
2. Worldwide presence with Indian leg: [A] Enterprise Level: The assets with minimum value of USD 1 billion, with minimum Indian component of INR 1,000 crore, or a turnover of more than USD 3 billion, with minimum Indian component of INR 3,000 crore; [B] Group Level: The assets with minimum value of USD 4 billion, with minimum Indian component of INR 4,000 crore, or a turnover of more than USD 12 billion, with minimum Indian component of INR 3,000 crore.[xi]

The Competition Law Review Committee (“CLRC”) noted that the ‘asset and turnover threshold test’ in the present form cannot account for the AAEC resulting out of combinations in the digital economy.[xii] It was noted that in the digital markets, the business do not turn a profit in the early years of their existence, thereby such transactions escape the scrutiny of the CCI.[xiii] Further, it was also noticed that the bigger businesses often engage in combination transactions to “consolidate market position, eliminate potential threat, and expand into new lines of business.”[xiv] They cited examples of Myntra’s acquisition by Flipkart, Freecharge by Snapdeal, etc. to substantiate the aforementioned point.[xv]

Further, as per the recommendations of CLRC,[xvi] a Green Channel route for merger approval by the CCI has been adopted.[xvii] The introduction of Green Channel route makes the requirement of self analysis even more important.[xviii] Therefore, the need of objective guidelines and regulatory thresholds becomes critical to the success of Green Channel route.

Alternative measures

The Competition and Markets Authority (“CMA”), the governing body of competition law in the United Kingdom, formulated the ‘share of supply test’ to counter the issues posed by digital markets and transactions like the ones mentioned above.[xix] The test gives CMA the authority to review transactions which result into an increment on a share of supply of 25% or more in any plausible frame of reference; the said frame of reference doesn’t necessarily mean economic market.[xx] The test also facilitated CMA to assert their jurisdiction over the merger of Roche and Spark, over a drug under development stage.[xxi]

CLRC recommended adoption of a threshold based on deal value, with objectively quantifiable thresholds along with local nexus criteria.[xxii] However, the report also notes that there are several difficulties in formulating an objective threshold such as: fluctuations in the value of shares; performance based deferred payment; variation due to date of calculation of value; and introduction of local nexus.[xxiii]

Suggestions

 As stated above, the corporations will start adopting increasingly complex transaction structures to ensure that the CCI approval would not be required, especially when the concerned parties are aware that the transaction may lead to AAEC. Therefore, the share of supply test adopted by the CMA in United Kingdom is a relatively objective. It is also important to note that the share of supply test remains objective even amidst the turbulent international markets, thereby facilitating self assessment within grant of approval via the Green Channel route.

Further, AAEC caused by Amazon’s strategy of acquisition based on the data to build a private brand and oust small businesses as its competition by undercutting businesses and gain greater profits cannot be addressed by the deal value threshold.

Alternatively, it is suggested that in the digital markets, a user based threshold may also be adopted; as the digital businesses during the initial years of their business focus on building user base, and although the user base and data obtained by the digital business get translated into a higher valuation, the same may not hold true in case of complex combination transactions, especially in a turbulent economy.

Conclusion

The digital markets pose a meticulously complex problem where it is easier for the business to indulge in combination transactions which may lead to AAEC, and it is becoming increasingly difficult for the regulating authorities to address these issues. It is evident that the existing regulatory framework is not sufficient to address the impending the problems. Therefore, CCI will have to become innovative and experiment with different ideas which may prove useful in catering to the issues posed by the digital markets.

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Shubham Jain is a student at National Law University, Jodhpur. 

 

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Photo credit : JOHN THYS/AFP

Notes:

[i] Competition Commission of India, “Market Study on E-Commerce in India – Key findings and Observations”, January 08, 2020, Available at: https://www.cci.gov.in/sites/default/files/whats_newdocument/Market-study-on-e-Commerce-in-India.pdf

[ii] Lauren Feiner, “Amazon admits to Congress that it uses ‘aggregated’ data from third-party sellers to come up with its own products”, November 19, 2019, Available at: https://www.cnbc.com/2019/11/19/amazon-uses-aggregated-data-from-sellers-to-build-its-own-products.html

[iii] Supraja Srinivasan, “Amazon builds portfolio of private labels across categories”, September 29, 2016, available at: https://tech.economictimes.indiatimes.com/news/internet/amazon-builds-portfolio-of-private-labels-across-categories/54575394

[iv]Eugene Kim, “Amazon is buying companies at an unprecedented rate in its quest to expand”, June 28, 2018, available at:  https://www.cnbc.com/2018/06/28/amazon-is-buying-companies-at-an-unprecedented-rate-and-why-matters.html

[v] News18, “WhatsApp Faces Investigation in India for Bundling Payments with Messaging”, May 16, 2020, Available at: http://www.news18.com/news/tech/whatsapp-faces-investigation-in-india-for-bundling-payments-with-messaging-2622521.html

[vi] Samanvi Narang, Prateek Gupta, “Analysing the Competition Law issues in the ambitious Jio-Facebook deal”, May 07, 2020, Available at: https://www.scconline.com/blog/post/2020/05/07/analysing-the-competition-law-issues-in-the-ambitious-jio-facebook-deal/

[vii] G.R. Bhatia, Kanika Chaudhary Nayar, “India: Merger Control 2020”, Available at: https://iclg.com/practice-areas/merger-control-laws-and-regulations/india

[viii] Section 5, Competition Act, 2002.

[ix] Avantika Kakkar and Anshuman Sakle, “India: Merger Control”, March 27, 2020, Available at: https://globalcompetitionreview.com/insight/asia-pacific-antitrust-review-2020/1222412/india-merger-control

[x] CCI Notification No S.O. 675(E) dated March 4, 2016.

[xi] CCI Notification No S.O. 675(E) dated March 4, 2016.

[xii] Minitry of Corporate Affairs, Government of India, “Competition Law Review Committee Report, July 2019” Available at: http://www.mca.gov.in/Ministry/pdf/ReportCLRC_14082019.pdf

[xiii] Minitry of Corporate Affairs, Government of India, “Competition Law Review Committee Report, July 2019”, at 132, Available at: http://www.mca.gov.in/Ministry/pdf/ReportCLRC_14082019.pdf

[xiv] Id.

[xv] Id.

[xvi] Minitry of Corporate Affairs, Government of India, “Competition Law Review Committee Report, July 2019”, at 127, Available at: http://www.mca.gov.in/Ministry/pdf/ReportCLRC_14082019.pdf

[xvii] CCI Press Release, “Competition Commission of India (CCI) introduces Green Channel clearance for Merger & Acquisitions”, August 19, 2019, Available at: https://www.cci.gov.in/sites/default/files/press_release/PR82019-20.pdf

[xviii] Ashima Obhan, Nishtha Jaisingh, “A Look At The CCI ‘Green Channel’ route”, November 21, 2019, Available at: https://www.mondaq.com/india/antitrust-eu-competition-/866490/a-look-at-the-cci-green-channel39route#:~:text=In%20a%20bid%20to%20facilitate,to%20save%20you%20precious%20hours.

[xix] Competition Commission, and Office of Fair Trading, “Merger Assessment Guidelines (Revised)”,  At 17, Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment _data/file/284449/OFT1254.pdf

[xx] Verity Egerton – Doyle, “Casting the net wider: three themes from the CMA’s jurisdictional skirmishes in 2019” Janurary 10, 2020, Available at: https://www.linklaters.com/en/insights/blogs/linkingcompetition/2020/january/casting-the-net-wider-three-themes-from-the-cmas-jurisdictional-skirmishes-in-2019#:~:text=The%20%E2%80%9Cshare%20of%20supply%E2%80%9D%20threshold,an%20economic%20%E2%80%9Cmarket%E2%80%9D).

[xxi] Id.

[xxii] Minitry of Corporate Affairs, Government of India, “Competition Law Review Committee Report, July 2019”, at 133, Available at: http://www.mca.gov.in/Ministry/pdf/ReportCLRC_14082019.pdf

[xxiii] Id.