We do need tighter scrutiny of pricey deals by competition authorities

Earlier, such deals could benefit from the ‘small target’ exemption, which required the target to hit a minimum level of turnover and assets in India for scrutiny. That is why deals like Zomato’s acquisition of Blinkit, valued at around ₹4,500 crore, could escape the CCI lens. 

India is a hotbed of startups and has produced many unicorns despite their low turnovers. For example, Purplle and Cult.fit have commanded valuations of over ₹10,000 crore with turnovers of under ₹1,000 crore. Going forward, investors in such startups must be mindful of the impact of the CCI filing on deal costs and timelines.

Also read: Will new competition rules open the door for more hostile takeovers?

The concept of deal value has been kept expansive and is not limited to the value recorded in transaction documents. Deal value would also include the considerations paid for any previous deals between the same target and the acquirer group in the preceding two years. 

If the transaction documents do not record the true and complete deal value, it would be based on the value noted by the board. Interestingly, if the deal value cannot be established with certainty, it may be considered to have breached the deal value threshold (DVT).

Foreign deals may not get caught despite meeting the DVT as long as the target entity does not have “substantial business operations in India" (SBOI). To assess a target’s SBOI, the standard rule is that it must have at least a 10% business nexus with India. For digital services, this 10% rule applies to the global number of users, gross merchandise value (GMV) or turnover. 

In all other cases, it applies only to global GMV or turnover with an additional requirement of a minimum Indian GMV or turnover of ₹500 crore. This is aligned with the global best practice of having a minimum turnover threshold in the country of review to preclude deals with no local impact.

The CCI has reinforced its intention of not letting many deals in the digital sector escape its scrutiny by: (i) not applying a minimum absolute turnover/GMV threshold to digital services, and (ii) broadly defining digital services to include any service provided over the internet. 

Further, the absence of any guidance on how to attribute ‘number of users’ and ‘turnover’ to the Indian market could let the CCI catch borderline cases. This is not surprising, as the genesis of the DVT regime lies in the need to review ‘killer acquisitions,’ which continue to afflict digital markets.

There has been an increase in deals involving a ‘make or buy’ decision, i.e., whether to develop a new technology or product in-house or buy it from a maverick or startup (Meta’s acquisition of a virtual reality startup, Within Unlimited Inc, for example).

Also read: Local customer base of global digital firms central to CCI’s new merger control norms

Competition law issues around such deals are two-fold. On one hand, competition authorities are concerned about lack of innovation by incumbents as they can buy innovative products from startups to strengthen their market presence. On the other hand, startups often show a tendency to focus their innovation on or around an incumbent’s business. 

One such deal that attracted competition law scrutiny in the EU and UK was Adobe’s proposed acquisition of Figma (a product design platform which competed aggressively with Adobe’s XD application). The deal was called off amid concerns raised by authorities that it would stifle Figma’s innovation initiatives.

Competition authorities around the world are inclined to scrutinize and challenge mergers that may adversely impact competition in new-age markets. There is now a willingness to even assess below-threshold deals and develop novel ‘theories of harm.’ 

An example is the famous Illumina/ Grail case, where the European Commission (EC) attempted to review a deal which did not meet review thresholds. After the recent judgement by the European Court of Justice holding the EC’s attempt as unlawful, France has announced a review of its merger rules to avoid such a situation. 

Other EU states may follow suit. Australia has also proposed the inclusion of a DVT in its merger control regime. With its Digital Markets, Competition and Consumers Act, 2024, even the UK will be better equipped to assess conglomerate mergers and killer acquisitions of emerging products by incumbents. 

As the CCI has been a front-runner in adopting new tools to address digital markets, it will probably not shy away from taking radical steps to ensure fair antitrust scrutiny of deals that may raise potential competition law issues.

Given delays in other initiatives to address competition concerns in digital markets, such as India’s Digital Competition Bill, the enforcement of DVT would allow the CCI to assess certain high-value deals in the digital sector which could otherwise escape scrutiny. 

Industry would have welcomed transitional protection for deals that were already signed but not fully closed before 10 September 2024. However, such deals must now be reassessed under the new regime and notified to the CCI, if required. 

Also read: Global deals worth more than ₹2,000 crore under CCI lens from Tuesday

In light of the global trend of increased competition law scrutiny, it is prudent to assess competition law risks early on and craft deal documents carefully for any impact on the deal timetable and closing conditions.

These are the author’s personal views. Divyansh Prasad and Rohan Zaveri contributed to this article.