Deals In The Digital Market Must Be Scrutinised For Competition Effects, Says Expert Committee

To enable the competition regulator to review transactions in the digital market, a 10-member committee has suggested that a deal-value threshold be introduced. The committee, headed by Ministry of Corporate Affairs Secretary Injeti Srinivas, was set up in October 2018 to review the competition law.

The committee has recognised that there exists an enforcement gap when it comes to assessing the competition effects of deals in the digital space. For instance, deals like Facebook-WhatsApp, Flipkart-Myntra, Ola-TaxiforSure, Snapdeal-Freecharge didn’t meet the turnover or asset thresholds and so, didn’t require any approval of the Competition Commission of India. Presently, only those mergers require CCI approval where the parties to the deal have combined assets in India of over Rs 2,000 crore or total Indian turnover of more than Rs 6,000 crore.

Companies in the digital market often do not generate revenue for a number of years since their focus is growth and may not have a huge asset base. In such cases, the turnover and asset threshold are poor indicators of a deal’s significance for competition, the committee has noted.

It has pointed to jurisdictions like Brazil and Ireland where competition authorities have used their residual powers to scrutinise transactions in the digital space. The U.S. has a size-of-transaction test. Similarly, Germany and Austria have a deal- threshold and substantial-operation test that bring within the regulator’s purview transactions that don’t meet the traditional turnover or asset thresholds.

And so, the committee has proposed a deal- threshold for mergers or acquisitions in the digital market. In laying down this threshold, the committee has said, the CCI would need to account for:

Variation in deal based on date of calculation
A local nexus test to avoid catching cases that may not actually impact competition in India.
Fluctuations in the of shares if they’re part of the transaction etc.

The other potential issue in digital markets, the committee has noted, could be agreements that don’t strictly follow the vertical or horizontal categorisation under the Competition Act. Vertical agreements are those that take place between entities involved at different stages of a production chain, while horizontal agreements are between entities at the same level.

“Business relations that are emerging due to the evolution of digital markets, give rise to unanticipated forms of linkages and agreements. There may be instances in new age markets which may not squarely fit into the traditional definition of horizontal or vertical relationship.”

And so, the competition law must be broadened to say all agreements that are likely to cause appreciable adverse effect on competition in India can be examined by the regulator, the committee has suggested.

Besides specific recommendations for deals in the digital space, the committee has proposed several other changes to CCI’s merger control regime, namely:

Clarity On ‘Control’

Introduce a ‘material influence’ threshold for determination of control, the committee has said. Acquisition of ‘control’, once the asset or turnover threshold is met, is one of the factors that triggers CCI approval for deals. But what rights will amount to control hasn’t been spelt out in the law.

To address this, the committee has suggested the ‘material influence’ threshold, which will bring within its fold acquisition of joint or negative control, informational rights etc. Through regulations, the CCI should specify what’ll constitute as material influence and also provide a list of certain minority rights whose acquisition won’t breach this threshold, the committee has said.

Acquisition Or Change In Control

Presently, acquisition of control triggers CCI’s approval even if the acquisition is purely financial, non-strategic in nature. The committee has pointed out that acquisition of control is a catch-all test that also brings in its net transactions that are unlikely to have an adverse impact on competition. This unnecessarily stretches timelines, increases costs etc.

And so, it has suggested a change-in-control test, with an additional criteria to capture investments in competitors. The additional safeguard is required since acquisition of control—and not change in control-in competitors can itself impact competition adversely.

Market Testing The Remedies

Under the Competition Act, there is no requirement for the CCI to market test the remedies it has directed as part of granting approval to a transaction. This means it isn’t mandatory for the regulator to obtain views, comments of third-party customers, suppliers, or competitors on whether the remedies directed by it will address the competition concerns.

For instance, in approving Schneider Electric’s acquisition of L&T’s electrical and automation business, the CCI had directed certain remedies like changes to distributorship and commercial agreements to remove exclusivity clauses relating to termination, discontinuation of loyalty rebates, maintaining existing number of distributors, product range and R&D expenditure, export commitments etc. But none of these remedies were tested in the market to assess whether or not they’ll address the competition concerns identified by the CCI.

So, to ensure that the remedies decided by the regulator adequately address the competition concerns, the CCI must market test the remedies, the committee has proposed. In doing this, the committee has said, the regulator must be mindful of confidentiality concerns of the merging parties and be aware of third-party biases.