The decision to exempt mergers below certain thresholds from the CCI’s gaze has starkly divided opinions among competition lawyers, writes Freny Patel

A lot is riding on the government extending the de minimis exemption benefit by another five years. It was expected, and proves necessary for ease of doing business in India, especially in a post-covid world.

On 16 March 2022, the Ministry of Corporate Affairs extended the de minimis exemption benefit for a further five years, until 28 March 2027. The exemption under competition law absolves certain M&A transactions from having to notify the Competition Commission of India (CCI) if the target’s turnover or assets falls below prescribed merger thresholds.

De minimis cures a visible gap in the legislation,” says Anisha Chand, a Mumbai-based partner at Khaitan & Co. “It is fundamental to establish a local nexus for deals, and the extension weaves in well with India’s ‘business friendly destination’ story.”Eyes wide shut

The idea, introduced in 2011, was intended to reduce the regulatory burden on the competition authority, exempting M&A deals involving small targets that are unlikely to raise concerns under the Competition Act, 2002, especially when the institution was at a nascent stage.

The exemption was proposed when Vinod Dhall was the founding member and acting chairman of the antitrust authority. “It was never the intention of the law that every transaction be notified to the CCI,” says Dhall, who is now a senior adviser at Touchstone Partners in New Delhi. He says this would have unnecessarily increased the burden on the competition watchdog, if it had to scrutinise every M&A deal.

The original de minimis exemption of 2011 exempted transactions if the target assets did not exceed INR3.5 billion (USD45.2 million), or if their turnover was not more than INR10 billion.

On 29 March 2017, to improve India’s “ease of doing business”, the Ministry of Corporate Affairs made significant changes by expanding the scope of the exemption to cover all types of transactions including mergers, acquisitions or amalgamations of a portion, or a business division, of an enterprise.

Previously, the value of assets, or turnover of the entity selling the assets, was considered under the de minimis exemption. The CCI was flooded with merger notifications because large corporations selling assets of insignificant value were subjected to seek merger clearance from the antitrust authority, as they could not make use of the de minimis exemption benefit.

THE NUMBERS GAME

Today, merging parties must notify the CCI if the combined domestic assets exceed INR20 billion, or if the combined domestic turnover exceeds INR60 billion, or if the combined worldwide assets exceed USD1 billion, including domestic assets of at least INR10 billion.

The de minimis exemption benefits both companies and the CCI, says Deeksha Manchanda, a New Delhi-based partner at Chandhiok & Mahajan. “It is linked to the ease of doing business and prioritising regulatory resources,” she explains, adding that in transactions where the target size is small, it is reasonable to assume that no anti-competitive effects can be caused.

The benefit of the de minimis exemption can best be captured by the number of M&A deals witnessed in India last year.

Against an all-time high of USD90.4 billion in M&A transactions in the first nine months of 2021, based on financial market tracker Refinitiv, 95 transactions were notified to the CCI. Six of these were filed under Form II, the long form of notification, and 29 were notified under the green channel, the automatic approval system for deals that have no horizontal or vertical overlaps.

Since India introduced the merger control regime on 1 June 2011, the CCI has looked at 913 M&A transactions, without blocking any. Eight transactions, constituting less than 1%, have gone to phase II merger review.

RISK OF ‘KILLER ACQUISITIONS’

But there are always two sides to a coin, as the de minimis exemption threshold has given rise to the risk of “killer acquisitions”, where an incumbent acquires a nascent competitor with the sole intention of discontinuing the target’s innovation projects and thereby killing future competition.

Measures to eradicate problems posed by the de minimis target exemption are necessary, says a New Delhi-based antitrust lawyer, citing a host of past deals that escaped CCI scrutiny. These include: Zomato’s USD350 million acquisition of Uber Eats in January 2020; Ola Cabs’ USD200 million acquisition of TaxiForSure in the taxi aggregator space in March 2015; and Flipkart’s USD70 million acquisition of the Indian fashion e-commerce portal, Jabong.com through its subsidiary, Myntra, in 2016.

In the past, killer acquisitions involved new entrants or startups, and rarely well-established corporate entities, the lawyer points out. However, the economic impact of covid-19 has given rise to the blockbuster merger of India’s two largest multiplex chains – PVR and Inox Leisure – just days after the government extended the de minimis exemption provision.

The mega deal, announced in late March 2022, will create the country’s largest multiplex chain, with about 50% market share, without triggering an antitrust review. PVR-Inox managed to escape CCI scrutiny thanks to the pandemic and the government-imposed lockdowns shrinking the turnovers of the companies well below the notification threshold. Inox Leisure ended the financial year on 31 March 2021 with a turnover of INR1.48 billion, while PVR closed the year with a turnover of INR6.98 billion.

The PVR-Inox deal sidestepping antitrust scrutiny despite the merger creating a virtual monopolist in the market of multiplexes “is a classic example of why the CCI is seeking additional parameters, as revenue is not always an indicative metric,” says Nisha Kaur Uberoi, a Mumbai-based partner heading the competition law practice at Trilegal.EYES WIDE SHUT

Anshuman Sakle, a Mumbai-based partner at Khaitan & Co, observes: “The government could have considered revising the structure of the exemption, whereby it could have insisted that exemption would be granted only if both asset and turnover thresholds are not breached, instead of the current practice of either/or.”

The exemption is “definitely required”, says Sakle, lest the CCI be flooded with merger applications given the numerous M&As that are taking place. “It is not worth the CCI’s time to go through all deals,” he adds.

Without the de minimis exemption, deal closure timelines would be impacted, affecting deal certainty, says Sakle. “There is a need to strike a balance.”EYES WIDE SHUT

TAKE EUROPE’S LEAD

Several legal experts suggest that India should take a leaf from the European Commission’s book and empower the Indian competition watchdog to scrutinise transactions even if they fall below the merger thresholds but have the potential to impact or stifle competition.

The CCI’s former acting chair, Dhall, disagrees with this suggestion, saying India should not consider it at this stage. It is “unnecessary and unwise to introduce such a provision” just because transactions escape scrutiny, he tells India Business Law Journal, explaining that it could give rise to “too much interference in business deals”.

A majority of antitrust authorities are in a dilemma on whether current merger thresholds or enforcement tools need to be modified to capture “killer acquisitions” in the tech space. As data is the new oil, digital and technology companies are perceived as the most valued businesses globally.

But the lacuna in competition law, as merger thresholds were based on the conventional assets and turnover test, has resulted in many deals escaping antitrust scrutiny and authorities around the world contemplating introducing new merger thresholds targeting the digital economy. Six major jurisdictions including the US, Canada, Germany, Austria, Sweden and South Korea have adopted the transaction size test when evaluating mergers.

The CCI’s joint director, Vipul Puri, said at a recent conference that several M&A transactions in the digital space tended to slip past regulatory scrutiny because target companies in the sector often did not have many physical assets or meet the requisite turnover test.

In February 2020, the Competition Amendment Bill was released, which, if approved, would provide the government, in consultation with the CCI, to prescribe any criteria whereby acquisitions will be deemed notifiable under the law.

The Competition Law Review Committee proposed in August 2019 additional merger thresholds, such as transaction value or deal value thresholds, targeting digital markets where deals tend to escape regulatory scrutiny.

Puri said that though the bill had proposed deal value thresholds, lawmakers would need to decide whether to allow the de minimis exemption to co-exist alongside the new merger thresholds. He warned that allowing the de minimis exemption to co-exist with proposed new thresholds could enable deals to go through unchallenged.

If the de minimis exemption continues to co-exist, the CCI would not be empowered to look at transactions that fall under the exemption, even if the transaction results in an appreciable adverse effect on competition, Puri told a webinar on the impact of changing merger control thresholds on the startup ecosystem, which was organised by the Centre for The Digital Future & India Development Foundation in March this year.

The proposed amendment contains an enabling provision to introduce suitable thresholds – not necessarily deal-value thresholds – which could be supplementary to the de minimis exemption, or a mutually exclusive threshold that needs to be evaluated separately for digital mergers, says Chand, of Khaitan & Co.

“There are some concerns with deal value threshold, especially, if it lacks a local nexus requirement,” adds Manchanda, of Chandhiok & Mahajan. This would be relevant where the target’s business is global. As the deal value would represent the value of the global business and not just the India leg, it would be important to ensure that the India link/nexus is significant to require notification to the CCI. She hopes that the amendment bill appropriately accounts for a local nexus requirement.

Kanika Chaudhary Nayar, a New Delhi-based partner at L&L Partners, agrees that it will be a fine balance. “The government has to draw a balance between the transactions that get scrutinised by the CCI as well as retaining the ease of doing business,” she says.

Currently the de minimis exemption is granted when the target’s assets are less than INR3.5 billion, or its turnover is less than INR10 billion. Modifying it from the current “either/or” to “and” could ensure that killer acquisitions are caught within the CCI’s purview, says Nayar.

Some degree of analysis would be required to understand how many such deals use such an exemption and need to be scrutinised, as opposed to those that are exempt and should remain so. “If the percentage is minuscule, the CCI would be burdened with those several other deals that would get caught because of the ‘and’, and the otherwise faster and smooth deal approval process would slow down again,” she says.

As the introduction of deal value thresholds could create an administrative burden for the economy and the regulator, Trilegal’s Uberoi hopes that the metrics are significantly high so that CCI’s limited bandwidth is not consumed by looking at deals that have no problems.

“The digital market economy is dynamic and fragmented,” she says. “Something prescribed today may not hold good six months down the line, and hence it is better for the government, together in consultation with the CCI, to undertake an annual review of these thresholds as the market evolves.”

ASIA SCRUTINISES DEALS IN DIGITAL SPACE

REGULATORS HAVE HAD TO ADAPT EXISTING MERGER REVIEW GUIDELINES


Many mega-mergers and killer acquisitions worth billions of dollars escape antitrust scrutiny due to regulatory loopholes, as M&A targets in the digital economy fall below specified merger thresholds. This universal phenomenon is prevalent in many jurisdictions around the world. Tech giants the likes of Google, Facebook, Amazon, and Alibaba continue their aggressive M&A strategies uninhibited, as data is king.

Several antitrust authorities in Europe and the US have come out with amendments to competition law in an effort to curb killer acquisitions. A handful of Asian regulators have also followed in the footsteps of the West, and several others, including India, are contemplating similar legislative amendments.

In October 2019, Japan revised its merger notification policy and guidelines, taking into account deals in the digital space. The Japan Fair Trade Commission (JFTC) recommended notifying transactions where the total deal value exceeds JPY40 billion (USD314.5 million) or when the merger could affect Japanese consumers. The authority will look into network effects, as this could pose difficulties for users when it comes to switching to another competitor, and constrain data transfer.

The JFTC rarely used its power to investigate mergers that fell below the prescribed thresholds. Following its policy revision, the Japanese authority has increasingly scrutinised deals that had earlier escaped its attention, such as Google/Fitbit and M3/Nihon Ultmarc.

South Korea has also amended its merger review guidelines in December 2021, partly aimed at reining in the clout of the ever-expanding digital giants. Prior to an amendment to the Guidelines on Merger Filing, it was not possible for the Korea Fair Trade Commission (KFTC) to look at mergers involving startups with high growth potential in terms of the number of users but low assets or turnover base, below its prescribed merger thresholds.

Today, a merger filing can be triggered if the transaction value is at least KRW600 billion (USD475.2 million) and a local nexus exists enabling the KFTC to scrutinise deals involving high growth potential startups.

The Australian Competition and Consumer Commission is deliberating on a new tailor-made merger test when it comes to big tech companies, replacing the existing voluntary notification regime with a mandatory notification system. Other proposals include the ability of the Australian antitrust watchdog to evaluate any M&A deal that results in market power and substantially lessens competition.

The proposals, if adopted, would apply not only to the digital economy but across all sectors. It would benefit the country as a whole given the existence of significant market concentration across many sectors in Australia.