Soaring high-value M&A deals in the digital space that skip antitrust merger review have spurred a global debate on how fitting merger control thresholds really are
Anisha Chand and Anmol Awasthi
Today, nearly everything we do has a digital touch to it. Our lives are so entwined with the internet that it would be quite apt to describe ourselves as netizens of a digital era!
The rapid digital transformations have challenged several existing legislations which were originally designed to address conventional business models. More particularly, across jurisdictions, the increasing number of global M&A deals in digital and hi-tech markets has challenged the traditional setting of merger control rules.
This all started in 2014 when social media giant Facebook acquired WhatsApp. While the deal was worth $19 billion, it did not require an antitrust approval in many jurisdictions since it did not trip the merger thresholds. This sparked an international debate on whether the traditional turnover-based thresholds required a rethink.
Let us dive deeper into the workings of the Indian merger control rules to understand the alleged “enforcement gap” and whether deal-size thresholds can effectively plug this gap.
Current thresholds in India
The Indian merger control thresholds are based on the asset and turnover size of the transacting parties. If breached and no exemptions apply, the deal requires a pre-clearance from the Competition Commission of India (CCI). Similar thresholds are also employed by anti-trust regulators worldwide.
However, in new-age markets where disruptive innovation is the norm, most companies typically employ business models where the initial focus is on building a strong consumer base. Consequently, the company hardly generates a profitable revenue in its initial years and may even be offering its products or services free of cost.
What attracts big technology incumbents to these start-ups is the degree of innovation or market potential and the synergies expected from combining the businesses. Since the target is not asset or turnover heavy, these buyouts (or “killer acquisitions”) fall through the cracks and escape the CCI scrutiny. Thus, even if competitive harm is apparent, the deal’s non-reportability prevents its review by the CCI. The issue is accentuated by the fact that the Competition Act, 2002 (Act) does not allow the CCI to call in and review non-notifiable transactions.
Today, many of these killer acquisitions have empowered technology giants to distort market conditions in their favour.
Proposal for deal-size thresholds
To plug the alleged “enforcement gap” in the extant regime, the Competition Law Review Committee noted that an additional threshold test based on “transaction value” could be introduced to bring high value M&A deals under CCI’s review fold. Subsequently, the Competition Act (Amendment) Bill, 2020, has recently proposed to introduce an enabling provision in the Act which will empower the central government to introduce supplementary notification thresholds under the Act as it deems fit.
The way forward
Internationally, there is little empirical evidence backing the success of deal size thresholds. Therefore, any amendment to the extant regime should be carefully thought through such that all issues are ironed out before these are introduced.
For instance, similar to the present thresholds, deal size thresholds should be objective and simple yet clear in application. Issues such as accurate computation of transaction value for deals where the value is not fixed at execution or based on variable components and establishing the local nexus of a global transaction with Indian markets will need to be addressed in advance. Further, these thresholds should not burden the business with additional compliance requirements to an extent that it delivers a blow to the start-up space and ease of doing business in India.
Ultimately, if the government hastens to introduce deal size thresholds, it may just be an unequal attempt to capture a handful of deals -- with genuine competition risks -- by using a sweeping framework of metrics. With the proposed thresholds guaranteeing a surge in reportable transactions in the digital ecosystem, it is advisable for tech companies to keep close tabs on developments to avoid being caught unawares.
Anisha Chand is a Partner and Anmol Awasthi is an Associate at Khaitan & Co. Views are personal.