Introduction
Competition plays a vital role in promoting economic efficiency, innovation, and consumer welfare. To ensure fair competition and prevent anti-competitive practices, many countries have established competition laws and regulatory authorities.
In line with this global trend, the Indian Competition Act, 2002, has been a cornerstone of India’s competition regulatory framework. In April, 2023, one of the important amendments has been introduced, incorporating the concept of deal value threshold (DVT) into the Act for the purpose of notifying mergers and acquisition to the CCI.
This amendment aims to enhance the Competition Commission of India’s (CCI) ability to scrutinize and regulate mergers and acquisitions, thereby fostering a competitive market environment. The introduction of DVT is a proactive step to capture transactions that might not be adequately assessed by merely considering the traditional financial metrics based on assets or turnover thresholds.
Understanding Deal Value
“Deal value”, as per the amendment in the Competition Act of India, refers to the value of any transaction in connection with the acquisition of any control, shares, voting rights, or assets of an enterprise, merger or amalgamation. In simple language, the “deal value threshold” is a specific value that, if a business deal surpasses it, triggers a requirement for the parties involved to notify or inform the regulatory authorities. In the context of competition laws, this notification is often necessary to ensure that the deal doesn’t negatively impact fair competition in the market.
For example, if a country has a deal value threshold of $100 million, any business deal or merger worth more than $100 million would need to be officially reported to and approved by the regulatory body overseeing competition in that country.
This amendment broadens the scope of transactions that fall under the purview of the CCI. Now, in addition to transactions meeting certain asset and turnover thresholds, those exceeding a specified deal value are also subject to mandatory notification and regulatory approval from CCI.
By way of amendment, the threshold for deal value transactions has been set at Rs. 2000 crores or above, provided that the enterprise which is being acquired, taken control of, merged or amalgamated has such substantial business operations in India.
As per the draft Combination Regulations [The Competition Commission of India (Combinations) Regulations, 2023], the substantial business operations in India of an enterprise refers to if either of the conditions satisfies viz.: (a) the number of its users, subscribers, customers, or visitors, at any point in time during a period of twelve months preceding the relevant date is 10% or more of its total global number of users, subscribers, or visitors, respectively; or (b) its gross merchandise value for the period of twelve months preceding the relevant date is 10% or more of its total global gross merchandise value; or (c) its turnover during the preceding financial year, in India, is 10% or more of its total global turnover derived from all the products and services.
This means that mergers and acquisitions meeting this criterion must be notified to the Competition Commission of India (CCI) for regulatory approval. This change acknowledges the evolving nature of business transactions, where the significance of some deals may not be accurately reflected by traditional financial parameters alone.
The introduction of the DVT is in line with the idea of capturing transactions that might have a significant impact on competition, innovation, and market dynamics, even if their financial metrics (like turnover or assets) might not be exceptionally high. This could include sectors such as intellectual property, technology and innovation, e-commerce and retail, the financial sector, and other non-financial assets that play a pivotal role in determining the competitive landscape.
Some of the sectors where the deal value threshold (DVT) can play a pivotal role are being discussed below:
Technology and Innovation: In sectors driven by intellectual property, innovation, and intangible assets, the value of a transaction might not be adequately captured by turnover or asset-based thresholds.
E-Commerce and Retail: The growth of e-commerce and digital platforms has led to unique business models and intangible assets that contribute to deal value. Acquisitions in this sector might involve customer data, online platforms, and technology assets.
Pharmaceuticals and Healthcare: Transactions involving pharmaceutical patents, research and development investments, and healthcare services might have a substantial deal value even if the traditional financial metrics are not as high.
Energy and Natural Resources: Mergers and acquisitions in the energy sector could involve assets like mining rights, exploration licenses, and renewable energy infrastructure, which may contribute significantly to deal value, and if not assessed ex-ante by the competition authorities, there may be a threat of potential dominance and its abuse at a later stage.
Some other sectors where role of DVT can be pivotal in assessing the mergers and acquisitions by CCI are Startups & Venture Capital and Financial Services, etc.
However, there may still be major competition concerns in such deals. Deal value could help assess the competitive impact of mergers and acquisitions involving such transactions where traditional thresholds model can disguise the competition authorities.
De-minimis exemptions
Whether De-minimis exemptions would be applicable on the DVTs?
“De-minimis” is a Latin term that means “about minimal things” or “too trivial to be considered.” In legal contexts, it refers to something so small or inconsequential that it’s not worth bothering about.
The de-minimis exemption in the Indian Competition Act is a provision that says that those mergers or acquisitions, that wouldn’t really affect competition much, can be exempted from mandatory notification to the CCI for seeking approval of such mergers or acquisitions.
As per the amendment, de-minimis exemptions are not applicable to transactions based on DVT. It implies that even transactions falling below the traditional turnover or asset-based
thresholds but meeting the specified deal value threshold would not be exempt from the notification requirement to the Competition Commission of India (CCI).
Benefits of the DVT
By considering both traditional financial metrics and deal value, the CCI can now better assess the potential impact of a transaction on competition in the markets.
The inclusion of DVT prevents companies from structuring transactions in a way that avoids the notification based solely on assets or turnover thresholds. With the introduction of the DVT, it will be very difficult for the parties to such transactions to escape from the radar of CCI, and CCI can assess and take corrective measures if it finds any current or potential threat to fair competition practices in markets in India.
Other jurisdictions where DVT exist
In addition to a turnover based threshold, Germany introduced a deal value threshold for merger controls in 2017. As per the new DVT, a merger is notifiable if the value of the proposed transaction exceeds €400 million, irrespective of the turnover thresholds. Similarly, in Austria, the DVT is applicable for all the mergers where the transaction value exceeds €200 million.
Conclusion
The introduction of DVT in the Indian Competition Act marks a progressive step towards enhancing the CCI’s ability to scrutinize and regulate mergers and acquisitions effectively in changing scenarios.
By considering the full spectrum of transactional considerations, including purchase price, equity stake, and other non-financial factors, the CCI aims to ensure that even transactions of significant competitive impact are subject to regulatory oversight.
The writer is Joint Director, Competition Commission of India. Views expressed are personal