By Akash Gulati, 3rd Year, B.A.LL.B. (Hons.), Dr. RMLNLU, Lucknow.
On the 5th of August, 2022, the draft amendment bill to the CCI Act was introduced in Lok Sabha. The bill included some significant additions to the CCI Act such as that of the “deal value threshold.” It did so to expand the scope of scrutinization of mergers and acquisitions and to accommodate the CCI for the evolving market. Recently, the WhatsApp/Facebook merger made evident the changing nature of the market and solicited a new criterion for notification of mergers, as the existing standards couldn’t include a significant merger.
In this piece, we look at the proposed amendment and try to fill in the grey areas that currently exist by perusing the norms of other major jurisdictions, specifically with respect to Germany & Austria. Moreover, we shall try to understand what the amendment entails with it for the CCI in the coming times.
CURRENT REPORTABLE TRANSACTIONS
The current norms of the Antitrust laws solicit notification of mergers and acquisitions only if they cross a set threshold of either the turnovers or the assets. The CCI terms it as the combinations. Such combinations can only proceed further if the CCI approves the same.
As per the 2016 notification, the thresholds for the notification on combinations to the CCI stand at the following values:
Companies in India:
Individual Enterprise: >2,000 INR crore worth of assets OR >6,000 crores INR worth of turnover.
Group Level: >8,000 INR crore worth of assets OR >24,000 crores INR worth of turnover.
Worldwide with Indian subsidiary:
Individual Enterprise: assets worth >$1 bn with at least >1000 INR crore in India OR turnover worth >USD 3 bn with at least >3000 INR Crore in India.
Group Level: Assets worth USD 4 bn with at least 1000 INR Crore in India OR turnover worth >USD 12 bn with at least 3000 INR crore in India.
DEAL VALUE THRESHOLD AS PROPOSED
The insertion of sub-section (d) in Section 5 of the CCI act proposes that if the value of a transaction, concerning any acquisition of control, voting rights, or assets of an enterprise, merger, or amalgamation exceeding INR 2,000 crore, provided that the enterprise that is a party to the transaction has “substantial business operations in India”, such a transaction would require notification to the CCI to avail its approval. The scope of such “substantial business in India” has been left to the regulator to specify through regulations in due course of time.
A. WHAT “SUBSTANTIVE BUSINESS IN INDIA” COULD MEAN?
While the specifics of what “substantive business in India” would exactly mean remains to be notified by the regulator, we can look into similar policies in other jurisdictions with an emphasis on the principles and not so much on the quantitative aspects of the same since the economies differ from each other in various ways, however, the underlying principles remain almost common to all. While there are not many jurisdictions have introduced a deal value threshold for antitrust approvals, a provision for the same exists in the German & Austrian Jurisdictions.
The German & Austrian parliament introduced a similar provision of including deal value threshold as a criterion for notification to the respective antitrust authority, wherein “substantial domestic operations” was the mandatory caveat to the deals surpassing its threshold set out. To further substantiate what “substantial domestic operations” means, the Bundeskartellamt & Bundeswettbewerbsbehörde (German & Austrian Antitrust Authorities, respectively) released a guidance note regarding the newly introduced provisions.
Clarifications culled from the guidance note enumerating the factors that may determine if a said company has substantial domestic business: -
A criteria measurement specific to the sector to be utilized (where turnover is not relevant) that could not be manipulated easily. For example, monthly active users or unique visitors in the digital sector can be the relevant possible indicators.
Location and utilization of assets are also relevant, wherein, if the acquired party in question has assets in the respective jurisdiction along with the utilization of the same for business activities within the jurisdiction, such will point towards a higher quantum of business activities locally.
A considerable customer base within the local jurisdiction.
Marketability of domestic activities would also point towards substantial domestic operations where such marketability may be through:
Traditional service against payment model.
Service is remunerated by means other than monetary payment, for example, data of a free mobile application user used to provide targeted advertisements, this model is popularly utilized by Facebook and other platforms of its like.
Service is provided free till substantial proliferation, and upon such proliferation, monetized either traditionally or by advertisement revenue models. This model is utilized by YouTube, where a premium version is sold for disabling advertisements, which is a non-monetary consideration for the free users.
Activities consisting of research and development of (future) products and services, provided that such research must have considerable potential marketability.
Significance of the domestic activities: In this context, the activities undertaken by an enterprise should have a high degree of economic and competitive potential.
B. WHAT COULD BE INCLUDED IN THE “DEAL VALUE”
As per the current definition in the amendment bill, the value of a transaction includes “every valuable consideration, whether direct or indirect or deferred for any acquisition, merger or amalgamation”, this definition being too expansive and inexhaustive, solicits further clarification from the regulator in case the bill gets passed intact. To deal with this ambiguity, we take a summary look at the joint guidance note of the Austrian and German Antitrust Authorities.
Firstly, the assets and other monetary benefits that the seller receives from the buyer in any merger or acquisition determine the transaction value. Assets here are interpreted broadly to include voting rights, securities, tangible assets, and intangible assets.
Secondly, contingent considerations are also to be included, such as those included in earn-out clauses, additional payments based on future turnovers, or even payments for non-competition.
Lastly, liabilities assumed by the buyer are also currently included in the German & Austrian Jurisdiction.
The guidance note also clarifies that the actual value of the company is not the transaction value often, as the consideration for the acquisition surpasses the current value of the company, as the acquirers usually buy the acquirees for potential integration and expansion.
The above-mentioned text provides us with a summary of what we can expect from the regulator in the prospective upcoming guidelines. Moreover, since such inclusion of a deal value threshold is a relatively new addition, more exhaustive and encompassing criteria would take due time to evolve as cases, and disputes arise.
CONCLUSION: CONSEQUENCES OF THE NEW PROVISION & THE UPSCALED ROLE OF CCI
The mergers and acquisitions activity in India is currently witnessing an all-time high, even defying the global downward trend of slumping merger activities. This gets coupled with the prospective enlarged scope of even the smaller deals to be notified to the CCI, which is set to put the commission on its toes for evaluating and approving more agreements than ever before. This task becomes even more cumbersome given the prospectively updated timeline of conducting assessments within 150 days in contrast to the previous 210 days period.
Although the amendment is set to bring within its scope a lot more significant mergers within scrutiny, especially the ones involving internet-driven tech companies with minimal assets and turnovers but immense market potential. This would allow fair play between emerging companies and the existing tech giants, provided that the regulator equips itself with the resources required to implement the amendment efficiently without causing undue delays and piling pending assessments. Lastly, the CCI must come up with a guidance paper of an exhaustive nature to the extent possible to minimize the possibility of unnecessary filings of notifications and provide a clearer yardstick to the involved players working in tandem with the regulator.
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