By Bandana Saikia and Deyashini Mondal, 4th year B.A. LL.B. (Hons.), Symbiosis Law School, Pune
Introduction
The Digital age has brought about significant shifts in the manner in which consumers get information and make decisions on the items and services they purchase. . In India, the industry of food delivery has evolved into a very competitive one. According to a market analysis compiled by Business Wire, the market for food delivery in India is presently projected to produce roughly 710 million USD between the years 2022 and 2026, demonstrating a CAGR of 28.13%. Restaurants are scrambling to establish internet meal delivery platforms as a result of the significant expansion of the online platform that is available to consumers. The concept of aggregators is now one of the most popular market trends, and the food technology industry is an example of an industry that falls within this category Zomato is one such example that has pioneered the meal delivery platform across India. Therefore, this blog is proposed to be done with the aim of understanding Zomato’s acquisition strategy to eliminate competition in the Market while analyzing its effect on consumer consumption behavior and the need for an ex-post assessment in order to deal with killer acquisitions post the merger’s consummation.
Zomato’s Acquisition Strategy To Eliminate Competition In The Market
Horizontal mergers have the potential to directly diminish market competition due to the reduced number of enterprises involved and the newly formed organization's increased ability to impose effective market dominance. According to Section 6 of the Act, illegality of any arrangement is likely to have an AAEC on competition inside India.
By assessing the effects on the key players in the market, a combination's market impact must be ascertained. The challenged merger will have a significant impact on suppliers of food, customers, and rival businesses. Now that UberEats has been removed from the list of dominant corporations, its customers will switch to one of the two major businesses in the meal delivery sector. As a result, Swiggy and Zomato would gain even greater market share and establish a duopoly.
According to Section 6(2), anyone intending to join into a "combination" must notify the CCI of their plan. The use of the word "proposes" in the section makes it clear that the notification must be delivered before the combination has been implemented, not after. The Supreme Court ruled that an ex post facto notice would violate Section 6(2) because it would be a fait accompli in the case of SCM Soilfert Ltd v. CCI, where a penalty of 2 crores was imposed on SCM Solifert India Limited and Deepak Fertilizers and Petrochemicals Limited for failing to notify the CCI about the acquisition of shares in Mangalore Chemicals and Fertilizers.
The requirement to inform the CCI about a combination has some limitations. The only exception intended for asset acquisitions is concerning purchases made by the company in the normal course of business or as an investment, which this deal will obviously not qualify for. Schedule I, which lists many exclusions, is mentioned in Regulation 4 of the Combination Rules.
The Competition Act of 2002 does not define "ordinary course of business" or "what counts as an investment for the party," but in the case of Anuj Jain v. Axis Bank under the Insolvency and Bankruptcy Code of 2016, it was established that these terms refer to the normal course of business. The activity would be regarded as being a part of the regular course of business if it cannot be distinguished from the other transactions of the business. Given that Zomato's regular business involves aggregating restaurants and food delivery, the combination will undoubtedly be regarded as extraordinary.
Zomato's position in the market is only marginally strengthened by the acquisition of Uber Eats, but the company gains a significant edge over its competitor in terms of user data. In addition, Zomato will have more leverage in negotiations with restaurants after the departure of a competitor, which might result in lower operating expenses and less losses in the future.
Zomato wished to enter the Amazon Pantry, Big Basket, Swiggy Instsmart, and other players-dominated e-commerce grocery market. The company, which is already a large international food delivery and restaurant aggregator, made numerous attempts but failed to enter the rapid commerce grocery and basics delivery market.
Acquisitions "where enterprises whose control, shares, voting rights, or assets are being acquired have assets of not more than INR 350 crore in India or a turnover of not more than INR 1,000 crore in India" are exempt for five years from the CCI's merger and acquisition rules, according to CCI order S.O.988(E) & 989(E).
Zomato and Blinkit were not obligated to inform the CCI of the current merger because it is "de minimis" in scope. The government has extended this exemption for a further five years, through March 2027, in order to make business operations easier.
Need For An Ex-Post Assessment In Order To Deal With Killer Acquisitions After The Mergers’ Consummation
If an arrangement, such as a cartel, results in price fixing, bid rigging, or collusive bidding, or if it restricts production, supply, technological advancement, or the provision of services in a particular geographic area, then it is considered to have anticompetitive effect under the Act. The CCI will examine the purchase of Uber Eats by Zomato to see whether or not it is anti-competitive since it is a "horizontal agreement," or a contract between two firms in the same industry. Due to the potential for the acquired company's larger customer base to allow it to operate independently of market forces and adversely affect rivals, such a transaction requires careful consideration.
A liberal and careful ex-post evaluation in order to highlight the uncertainty involved with killer acquisitions is required. Ex-post evaluations basically look at acquisitions after they've been completed. Given that the impacts of killer acquisitions only become apparent after a given amount of time. Ex-post evaluation of killer acquisitions raises a fundamental issue about the need to expand the CCI's current ex-post review authorities in situations where there has been an abuse of dominance and a significant reduction in competition (AAEC).
Section 20(1) of the Competition Act, 2002 allows the CCI to review "combinations" within a year of their implementation. Section 5, which specifies combinations, exempts agreements when the target entity's assets/turnovers are below a certain threshold. As they fall inside the threshold, killer acquisitions make CCI powerless. To solve this problem, section 20(1) is recommended to be broadened to cover non-notifiable and exempt combinations by adding a proviso to the exemption provision under section 5 indicating it is inapplicable if the CCI reasonably thinks a killer acquisition has occurred.
Consumer Harm as a consequence of such Killer Acquisition
The benchmark for consumer welfare is most simply understood in terms of monetary values and quantity requirements. However, competition authorities may and do routinely take into account other characteristics that affect consumer welfare, such as product quality, product variety, service quality, and innovation. Digital market concentration may be advantageous but can also result in significant expenses. Both the target firm's inability to innovate and the incumbent firm's ability to maintain its dominating position on the market have a negative impact on consumer welfare.
may result in worse quality, fewer options, or higher effective pricing for customers. The biggest worry is that it could stifle innovation because new entrants will find it more difficult to bring their products to market and larger companies will have less to fear from them. This could lead to a trade-off where the potential dynamic costs of concentration outweigh any static benefits. Such "Killer" acquisitions may actually hurt consumer preferences by lowering the degree of product heterogeneity and so distorting market competition. Market share distortion is more elastic in markets with low levels of market concentration. These circumstances are probably going to limit these businesses' capacity to make longer-term investments in innovative concepts and their own expansion. As a consequence, customers will be denied access to cutting-edge new goods and services. Zomato's client base has grown thanks to its purchase of Uber Eats, giving it an advantage over Swiggy. This suggests that Zomato has a great deal of sway over its business users and future competitors and that consumers are in serious danger from the platform's commercial operations. Due to the platform's ability to aggregate a big share of consumer demand on one side of the market, the platform has considerable leverage on the lagging company customers who rely on the platform as a means of accessing online food delivery services.
Recommendation and Conclusion
Given the present trend of digital giants in various markets seeking mergers and acquisitions to develop a significant consumer base and grab a huge market, CCI's role to investigate and scrutinize such transactions grows. This is owing to the threat posed by such companies and firms capturing a huge market, becoming dominant, and perhaps abusing this position to gain an advantage. With the emergence of new technology and changing market norms, managing such high-value mergers and acquisitions becomes critical in order to encourage and preserve market competitiveness. Such transactions must be regulated in order to respect the Preamble and objectives of the Competition Act of 2002. It is therefore recommended that-
The CCI should emphasize digital market merger monitoring and thoroughly analyze damage to innovation and possible competition in case selection and evaluation.
The CCI should use its investigatory powers to study the digital advertising market throughout the value chain to assess competition and consumer damages.
The CCI should fight mergers that potentially reduce innovation and competition and harm consumer welfare more often and forcefully, backed by legislative measures.
Comments