Centre had on August 5 introduced the Competition (Amendment) Bill, 2022 in Lok Sabha to amend the Competition Act, 2002. Competition Commission of India (CCI) Chairperson Ashok Kumar Gupta spoke to BusinessLine on wide range of issues around the Bill providing regulatory perspective on the proposed amendments and their underlying rationale.
Excerpts:
What is the thrust of the Bill and what are its key proposals?
Overall, the thrust of the Bill is to facilitate ease of doing business by providing regulatory certainty, framework for faster market correction and a trust based business environment.
To highlight some key proposals, let me mention that the Bill moots broadening the scope of anti-competitive agreements; proposes to include facilitators of certain anti-competitive agreements within the framework of law; reduces time limit for approval of mergers and acquisitions; introduces deal value threshold as an additional criteria for notifying M&As; provides limitation period for filing cases relating to anti-competitive agreements and abuse of dominant position; introduces settlement and commitment framework; broadens and deepens scope of inter-regulatory consultations; besides incentivising parties in an ongoing cartel investigations in terms of lesser penalty to disclose information regarding other cartels (leniency plus).
One very significant proposal in the Bill is for reduction of time-limit for approval of M&As from 210 days to 150 days. How do you view this?
The proposed changes are in sync with the regulatory practice and philosophy of CCI in facilitating inorganic growth of businesses. We are confident that CCI will gear up to the new timelines proposed in the Bill. CCI has focused on quick approval of M&As that do not cause appreciable adverse effect on competition. The Competition Act presently provides 210 days to CCI to assess the likely adverse effect on competition of such combinations. Further, India has a mandatory regime. All transactions above certain financial thresholds are mandatorily required to be notified to CCI. The average number of days to approve M&As has already come down to 17 working days only. The underlying assumption for a trust-based regime to succeed is that the parties will reciprocate by providing complete and full disclosures. Analogously, making of false statement or omission to furnish material information will attract aggravated penalties as proposed in the Bill, apart from other consequences.
The Bill proposes to introduce deal value threshold as an additional criterion for notifying M&As to CCI for approval. What was the gap under the extant regime which this Bill seeks to fill?
Let me clarify the provision is agnostic in nature and not specifically directed at acquisitions taking place in digital ecosystem. However it will primarily be used on new age markets.
In new-age markets, factors such as users, data, growth and network effect have become means of gaining significant market position. Entities operating a successful business model in new-age business command significant valuation, yet have insignificant assets and none or insignificant turnover recorded in their financial statements. It is important to note that under Sections 5 and 6 of the Act, jurisdiction of the CCI to review combinations is limited to M&A transactions that meet the asset/turnover threshold specified in the Act. Thus, a regulatory gap was observed in the regime which necessitated introduction of an additional notification criteria.
It is now 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.
The Competition Law Review Committee Report (CLRC) also touched upon this issue. The Committee discussed the (in)adequacy of the existing asset and turnover-based thresholds for the notification of combinations provided in Section 5 of the Act. It recommended an enabling provision empowering the Government to introduce necessary thresholds including a deal-value threshold for merger notification be introduced in the Act.
You talked about deals having sufficient local nexus to come under the scanner— can you elaborate?
M&A transactions that are likely to have an effect on competition in India will only be relevant for examination under the provisions of the Act. Thus, local nexus will also be a relevant factor for deal size test. This criterion is meant to exclude M&A transactions where the target exclusively operates abroad or has limited business operations in India.
The premise of deal value threshold is that, in new-age markets, assets and turnover, as recorded in the financial statements of the target, donot reflect complete market strength of the target. However, the possession of intangibles such as data, network effect, users, source of supply, etc., that contribute to the market position of the target operating in a new-age market is reflected in the valuation of the entity. Thus, local nexus criteria for the purpose of the deal value threshold should also be based on factors that affect valuation of an entity in new-age markets. These criteria will largely be based on market-facing factors such as number of users, number of contracts, aggregate amount of payment received, etc., of the target that are not completely reflected in assets and turnover as recorded in the financial statements.
It is pertinent to note that local nexus criteria is not prescribed through the Act; rather, this is to be prescribed through regulations to provide flexibility and to dynamically respond to changing market conditions. Let me hasten to add that these are some tentative thoughts and a final view will emerge after intensive internal deliberations and public consultations.
Can you elaborate on the Bill’s proposed settlement and commitment mechanism?
The Bill seeks to introduce a ‘settlement and commitment’ framework to reduce litigation. The settlement mechanism would apply to alleged contraventions related to certain anti-competitive agreements and abuse of dominance. An application for settlement may be filed only after receipt of investigation report but prior to such time as may be prescribed by regulations, before the passing of final order by the CCI, which may impose certain conditions that may include settlement amount. The Bill also empowers CCI to accept commitments from to address anti-competitive concerns raised. As envisaged in the bill, an application for commitment may only be submitted after an inquiry has been initiated by CCI, but within such time (as may be prescribed by regulations), prior to the receipt of investigation report by the party concerned.
The existing statutory framework already provides for lesser penalty for cartels on self-reporting. Thus, the commitment and settlement mechanism for certain anti-competitive agreements—that is, anti-competitive agreements other than cartels and abuse of dominance—would make the law holistic in providing for trust-based solutions.