Big-Data Mergers in India: Changing Landscape and The Way Forward
POSTED IN Competition Law,
Recently, the Competition (Amendment) Act, 2023 received Presidential assent on 11th April 2023 after being passed by both the houses of the Indian Parliament. This is considered to be a major overhaul for the Indian competition regime as it brings out the changes that were recommended by the Competition Law Review Committee (‘CLRC’) and Parliamentary Standing Committee on Finance (‘Standing Committee’) after extensive deliberations with various stakeholders. One of the major changes brought about by the amendment is the introduction of the ‘deal value threshold’ which allows the Competition Commission of India (‘CCI’) to get hold of big data merger transactions where their present ‘asset and turnover’ threshold has not been very effective.
Big Data is often defined as “the pool of high volume of data collected by firms in the data generation, segregation, and/or processing scenarios with high velocity, variety and veracity for value creation”. The primary antitrust concern with such mergers stems from the fact that this accumulation of data is not organic, instead, most of it is acquired inorganically via acquisitions. . The monopolisation of data into the hands of few companies leads to entry barriers where the new competitors may not be able to buy/acquire the equivalent volume and type of data that may help them assess consumer demands, needs, and preferences. Thereby, leading to foreclosure of competition, entry barriers, and power concentration. Therefore, merger analysis is the useful ex-ante method to assess emerging competition concerns originating from Big Data mergers.
I. THE SHIFT TOWARDS DEAL VALUE THRESHOLD
Unlike other jurisdictions, India requires parties to a transaction to notify the CCI if the transaction’s asset value or turnover thresholds are met. However, the CCI vide Section 6 can only look into mergers and acquisitions which qualify as ‘combinations’ under Section 5 of the Act. For merger notification, either turnover of the parties to the acquisition should be more than three thousand crores rupees (in India) or fifteen hundred million US dollars (in or outside India or in the aggregate). Further, the asset value should be more than one thousand crore rupees or five hundred million US dollars. However, a transaction is exempted from notification to the CCI if the target company’s asset value or turnover value does not exceed three hundred fifty crore rupees and one thousand crore rupees in India respectively (De minimis Exemption). While the framework can be beneficial for the traditional market, the test fails to keep a check in the fast-moving digital economy.
Digital markets are light on assets and do not generate significant revenue for the initial years and rather focus on the growth of the users to exploit network effects of such markets. The present threshold fails to note that turnover is not the only reason for acquiring a company and the customer base or data sets becomes more relevant in the digital economy. While the ‘turnover threshold’ objectively measures the relevant turnover and thereby triggers the duty to notify the merger/acquisitions, such acquisitions in the digital market often bypass the scrutiny because of the size of the target company.
On the other hand, the ‘deal value’ threshold is subjective and gives an estimate of the firm’s market rate which may fluctuate from one acquirer to another. Furthermore, the acquirer’s price invariably considers the target company’s market potential along with assets that are not essentially conveyed in the company’s turnover. To clarify, the subjectivity underlying the ‘deal value’ threshold is considered to be a more apposite tool for screening market power as higher the value of the target company in the market, the higher probability of its impact on competition in near future.
Therefore, owing to the traditional threshold, often mergers in the digital market escaped the CCI’s scrutiny due to low asset value and turnover.. The CLRC recommended that a ‘size of transaction’ or ‘deal value’ criterion be adopted, similar to those used in Germany, Austria, and the United States. Although the amendment with respect to the threshold in India is yet to be clarified by the CCI, the CLRC and the Standing Committee recommended that the threshold should be kept at INR twenty billion and the target enterprise should have “substantial business operations in India.” Further, the de-minimis threshold will not apply to transactions where the deal value threshold applies.
The new amendment to the Act redefines the term ‘turnover’ from its original inclusion of “value of sale of goods or services” to exclude intra-group sales, indirect taxes, trade discounts and all amounts generated through assets or business from customers outside India. Further, the term ‘value of transaction’ has been added to the Act and it means valuable consideration, whether direct or indirect, or deferred for any acquisition, merger or amalgamation. This means that the CCI can now look into all kinds of valuable considerations including those transactions where excessive price may have been paid for transfer of voting right, securities etc. The amendment has also reduced the maximum limit for the scrutiny of such mergers from 210 days to 150 days thereby expediting the entire process.
II. THE WAY FORWARD
Based on the analysis of several big data mergers in the European Union such as Goolge/Fitbit, Microsoft/Skype , it can be concluded that a similar pattern exists in such transactions that even escaped the antitrust scrutiny in Europe. It can be seen that all such cases included a big industry player with considerable turnover as the acquirer and an innovative target company with a high valuable asset and the price paid was way above the market standards. In such a case, the ‘deal value threshold’ as recommended by the CLRC would be a practical idea to implement and check cases where the acquirer has paid much more than the market price to acquire data sets of the target company.
However, the threshold also comes with a few shortcomings. It would be burdensome to decide the threshold for such transactions as the same may vary from one method to another. The German and Austrian Authorities have set the same at four hundred million euros and two hundred million euros respectively, provided that certain thresholds are met and the target has ‘significant’ activities in the individual countries. However, owing to the dearth of jurisprudence on the subject, the CCI might struggle to establish whether such digital entities have ‘substantial operations in India’. Therefore, the upcoming years are very crucial for the competition regime and it is upon the CCI to ensure that the effectiveness of the threshold is not diluted. The CCI must also consider whether, as in the US, the deal value test should take precedence over the turnover thresholds, or whether, as in Germany and Austria, it should be used as a safety net to get hold of transactions that escape the turnover thresholds.
This amendment brings about a progressive change in the regulation of mergers in India to further improve India’s position in the Ease of doing business Index. The merging entities might need to satisfy both the asset/turnover threshold and the deal value threshold and further clarification is sought from the Indian competition watchdog in this regard. For clients considering such transactions, it is pertinent to understand the implications of such provisions and the scrutiny it entails.
-Akshat Pande (Corporate Practice Head & Partner), Mahima Cholera (Senior Associate), Dipak Verma (Associate)