$4.7-bn BillDesk deal: Prosus-backed PayU gets show-cause notice from CCI

Changes to deal structure possible, say experts

India’s antitrust regulator has shot off a show-cause notice to Prosus-backed PayU India on its proposed $4.7-billion acquisition of Indian payment gateway, BillDesk, deepening its scrutiny of the deal and raising the possibility of modifications to ensure the combined entity does not undermine competition.

The 30-page notice from the Competition Commission of India (CCI), sent at the end of July, seeks a detailed explanation from PayU on why a ‘Phase-II’ investigation into the proposed deal should not be launched, said two persons privy to the development.

A Phase-II investigation is a thorough exercise that can lead to remedies involving modifications in the deal structure to ensure the combined entity does not adversely affect competition in the market. As the nomenclature suggests, this is the stage after the Phase-I investigation, which leads to the CCI’s approval if it concludes that the transaction is not likely to cause an “appreciable adverse effect on competition”.

PayU, which had time until Sunday to respond to the CCI, declined to comment on detailed queries from Business Standard. The CCI did not respond, either. This newspaper could not independently ascertain whether the firm had responded to the notice.

This is one of the very few deal proposals where the regulator has served a show-cause notice. In about 900 approved cases, only 22 were placed under a detailed investigation and passed with some remedies, and less than 15 received show-cause notices.

Industry experts say the CCI notice could delay the clearance by another three months. Pointing to the implications of the phase-II investigation, they say remedies may not necessarily be taken well by the acquirer since they could modify the deal terms significantly.

Prosus, the Dutch-listed arm of the South African internet group, Naspers, announced in August last year that it would, along with its fintech subsidiary, PayU, acquire Mumbai-based BillDesk for $4.7 billion. BillDesk, operated by parent IndiaIdeas, provides online payment gateway services to help businesses with auto-settlements, etc.

The show-cause notice was issued after the CCI expressed its reservations with PayU’s revised filing in April. The regulator had marked PayU’s first filing last year invalid because it reportedly found the information furnished inadequate. According to the officials cited above, the CCI was not convinced even with the revised filing as PayU did not address the queries relating to how the "relevant market" would be determined in this case.

Although earlier a combination (merger) of both online and offline markets was considered as the “relevant market”, the CCI, in the recent past, has restricted the definition to only include the online market while examining the market share of an entity in that space. Subsequently, the regulator sought comments from third-party stakeholders, including competitors, suppliers, and customers, on issues related to the deal.

“The CCI gives a lot of weight to stakeholders’ comments, especially when it involves the merger of two of the country’s largest payments gateway businesses. So, clearance requires a cautious approach,” said a regulatory official.

As many as 40 stakeholders responded, with most flagging a potential dominance and monopoly that could cause disruption. They urged the regulator to deny approval to the merger.

“The Commission takes longer in exceptional cases. The proposed deal is among the five per cent cases where the commission is taking time to clear it. Only two per cent matters were passed with remedies,” the official cited above said.

The deal is slated to become the second largest acquisition in the Indian digital space, after Walmart’s $16 billion buyout of ecommerce behemoth Flipkart in 2018.

While announcing the acquisition, PayU said the combined entity would emerge as one of the top online payment services providers -- both globally as well as in India -- with an annual payment volume of $147 billion.

Regulatory hurdles

• In August 2021, PayU announces BillDesk merger; later files merger notification with CCI for approval
• CCI marks the filing as “notice not valid” and directs PayU to file revised merger notification
• PayU submits revised merger notification in April this year
• But CCI says queries on “relevant market” not addressed
• It seeks stakeholders’ response; stakeholders flag potential monopoly
• So far, 13-14 firms have received CCI show-cause on merger
• Of 900-plus approved mergers, only 2% cleared with remedies