The proposed acquisition of 77% of Flipkart’s shares by Walmart has generated some very intense media scrutiny. One of the reasons for this is the strong opposition that Flipkart-Walmart deal is facing from the traders’ lobby. As reported in various newspapers, complaints have been filed before both the Competition Commission of India (CCI) and department of industrial promotion and policy. Various organizations have also requested the government to intervene and prevent the proposed transaction.

It is important to point out here that the proposed transaction requires only the approval of the CCI. Hence, in the midst of this fierce debate, it is important to understand the role of the CCI and the way it analyses transactions.

The CCI is a statutory body created by its parent statute, the Competition Act, 2002. One of its roles is to assess and approve or disapprove combinations such as acquisitions, mergers or amalgamations that cross certain assets/turnover thresholds. The proposed acquisition crosses the relevant thresholds and, hence, Walmart has filed a notice with the CCI seeking its approval. As a statutory body, CCI is bound by the provisions of its parent statute and cannot go beyond the parameters prescribed therein. In terms of the Act, a combination is assessed on the basis of whether or not it causes “appreciable adverse effect on competition" in the relevant market in India. Hence, CCI can only assess the effect of the proposed Flikart-Walmart deal on competition in India. It cannot go beyond this and comment or even consider other issues such as the alleged violation of foreign direct investment norms.

As far as assessing the effect on competition in the relevant market goes, the CCI will consider, among other statutory factors, the market shares of the parties and the level of competition likely to sustain post the transaction. Hence, broadly speaking, the larger the size of the relevant market, the smaller would be the effect, positive or negative, of the proposed transaction. This issue becomes quite important in the present case. Undeniably, Flipkart is a significant player in the online e-commerce market, but in the larger retail market combining online and offline retailers, Flipkart’s market share is insignificant. Hence, whether or not the CCI treats the online market as the relevant market, as distinguished from the larger retail market, becomes a point of contention.

Till date, no competition authority in the world has distinguished between online and offline markets. The CCI itself, in its previous orders, has treated online and offline as different channels of distribution, but part of the same relevant market. As recently as in 2017, while analysing the MakeMyTrip-Ibibo transaction, the CCI refused to distinguish between online and offline markets. While the CCI is free to have another look at the relevant market definition, the parties challenging the proposed Flipkart-Walmart deal will have to present some very strong arguments based on a lot of empirical data to convince the CCI to ignore its own precedents.

Further, while analysing a transaction, the CCI (and other competition authorities) categorizes it as either horizontal (between competitors), vertical (between enterprises at different levels of the production chain) or conglomerate (enterprises in unrelated markets).

Horizontal transactions tend to raise the most competition concerns because of the integration between two competitors. Vertical transactions raise comparatively fewer competition concerns because the integrating parties are not competitors and the primary concern is the availability of either the raw material suppliers or the distribution network. Conglomerate transactions raise the least competition concerns as the integrating parties are entirely unrelated.

The proposed acquisition can, at best, be treated as a potentially vertical transaction because Walmart may be able to sell its goods in India through Flipkart’s online platform. Hence, the potential competition concerns, in theory, are limited because of the nature of relations between Walmart and Flipkart.

Even in cases where the CCI has concerns regarding the effect of a combination on competition, it does not merely reject the combination. It has the option of directing the parties to carry out remedies to address the concerns. Such remedies can either be structural—that is, sale of certain assets/business divisions/ subsidiaries—to limit the combined market power of the parties or behavioural. The latter would involve commitments from the parties regarding their conduct in the market after the transaction.

In the aforesaid context, it must be recalled that the CCI, till date, has never disapproved a combination. At best, in certain cases, it has given conditional approval by directing the parties to carry out structural remedies to eliminate competition concerns. Not surprisingly, it has given conditional approval only in cases involving horizontal transactions. Hence, any challenge to the proposed Flipkart-Walmart deal before CCI—like the one mounted by the traders association—will, in order to succeed, have has to go beyond, showing that the proposed acquisition is going to have an appreciable adverse effect on competition. It will also have to show that such appreciable adverse effects cannot be resolved by either structural or behavioural remedy. That is a heavy burden to discharge.

Gautam Shahi is an independent advocate.

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