Consumer base, user data likely to determine CCI scrutiny of digital M&As

Mergers of digital businesses may face scrutiny by the Competition Commission of India (CCI) only if they have a critical level of a consumer base and user data, and have signed deals and received payments because such parameters will determine “significant business operations” in India, said CCI chief Ashok Kumar Gupta in an interview.

Significant business operation is a key condition to impose deal-value criteria proposed in the Competition Bill, targeting global digital mergers and acquisitions.

The Bill, tabled in the Lok Sabha during the just concluded monsoon session of Parliament, has been referred to the Standing Committee of Finance, led by BJP leader Jayant Sinha, for review. The panel has been asked to examine the Bill and give its report within three months.

“The local nexus criteria for the purpose of the deal value threshold should be based on factors that affect valuations of an entity in new-age markets. These criteria would largely be based on market-facing factors such as the number of users, the number of contracts, the aggregate amount of payment received, etc. of the target that are not completely reflected in assets and turnover as recorded in the financial statements,” the CCI chief said.

Gupta said such regulations would be finalised after consulting stakeholders and through deliberations.

He said the local nexus criterion was meant to exclude M&A transactions where the target exclusively operated abroad or had limited business operations in India. 
 

The Competition Bill has proposed a minimum threshold “transaction value” of Rs 2,000 crore for any deal as a criterion for notification to the anti-trust regulator if the entity being acquired has substantial operations in India.

The jurisdiction of the CCI is limited to merger and acquisition transactions that meet the asset/turnover threshold specified in the law.

Explaining the regulatory gap which necessitated the introduction of additional notification criteria such as deal value, Gupta said in new-age markets factors such as users, data, growth, and network effect had become the means of gaining significant market position.

“Entities operating a successful business model in new-age business command significant valuation, yet have insignificant assets and no or insignificant turnover recorded in their financial statements,” he pointed out.

He said it was widely recognised across jurisdictions that the traditional asset/turnover criteria may fail to capture potentially anti-competitive transactions in new-age markets. “As a result, M&A, where entities or assets, which (as yet) generate little or no turnover, are purchased at a high price, need examination under competition law,” he noted.

On setting the Rs 2,000 crore threshold, the CCI chief said it was in line with the global jurisdictions like Germany and Austria that have introduced similar criteria into their merger control regime. The US already had it.

In some jurisdictions, such deals which are not captured through traditional asset- and turnover-based criteria are examined through (ex-post) reviews of consummated transactions. “Ex-post review requires sweeping residual powers with competition authorities, with attendant uncertainty amongst businesses,” Gupta said.

The Bill seeks to fine tune the regulatory framework in line with the changes in business models that have emerged over the last two decades. It proposes global best practices like settlement and commitment and overhaul leniency provisions in addition to reducing the maximum time that can be taken for clearing mergers and acquisitions.

The fine print

• The Competition Bill proposes a minimum deal value of Rs 2,000 crore as a criterion for notification to antitrust regulator
• This is subject to target entity having ‘substantial operations’ in India
• Traditional asset/turnover criteria fail to capture potentially anti-competitive transactions in new-age markets
• Several digital deals didn’t trigger CCI approval