[Kaif Anwar, a Penultimate Year Law Student at Campus Law Centre, Faculty of Law, University of Delhi]
The Ministry of Corporate Affairs (MCA) has revised the threshold limits and de-minims threshold value pertaining to combination filings required under the Competition Act, 2002 (Act). The Central Government exercises the power to revise asset and turnover threshold limits under Section 5 by virtue of Section 20(3) of the act. The new value of de-minimis threshold shall be operative for two years i.e., till March 2026. The government rationalizes its notification in order to boost the ease of doing business in India.
The threshold values for assets and turnover have been increased by 150% over the original value of 2016 under Section 5. The de-minimis threshold value of target company used for availing exemption from notifying a combination has been increased to Rs. 450 crores for assets and Rs. 1250 crores for turnover.
The author attempts through this article to explain what threshold limits mean and their historical evolution. The author throws light on what was the need to introduce newer threshold limits and what are the concerns associated with them. The author then analyzes the practice of regulating mergers via thresholds under various international anti-trust regimes and finally suggests some measures to improve merger control in India.
Meaning and Historical Perspective of Threshold Limits in Merger Control
The concept of threshold limits entails that any combination that simply means an acquisition, merger, or amalgamation according to the act has to be judged in the context of certain monetary values in order to check the criteria of mandatory notification to the Competition Commission of India (CCI). India has notification jurisdiction in respect of merger control under its anti-trust law. The threshold limits are of three categories namely – (a) Asset and Turnover threshold, (b) De-minimis threshold or de-minimis exemption, and (c) Deal-value threshold (DVT).
The asset and turnover values are provided under Section 5 which are reviewed biennially by the Central Government in consultation with the CCI. The de-minimis threshold is also set by the government. The DVT which was introduced on the recommendations of of the Report of the Competition Law Review Committee, 2019 is provided under Section 5(d) of the act as amended by the Competition (Amendment) Act, 2023 (Amendment). It is awaiting enforcement by the MCA. In simple terms, it means the transaction value or the amount the acquirer is willing to pay to the target entity as consideration. The minimum value is set at Rs. 2000 crore and the acquiree entity should have substantial business operations (SBO) in India. If the transaction exceeds Rs 2000 crore, the trigger notification to CCI is activated.
Rationale for the Introduction of De-minims and Deal-value Threshold
Since the act initially had only asset and turnover thresholds to regulate merger control in India, subsequently the other two metrics were introduced to enhance the competition landscape and align Indian competition law with best international practices. One of the reasons for introducing the de-minimis threshold was to reduce the administrative burden of CCI as exempting certain entities not having significant monetary resources would lead to fewer merger filings. For DVT, the triggering event was the WhatsApp – Facebook merger as WhatsApp had lower than the required asset/turnover value during the relevant time to trigger merger notification. Along with that, this threshold was brought to cover transactions that do not have a business motive but instead are undertaken for other reasons like – market consolidation, elimination of rivals, expansion motives, etc.
Concerns of Usage of Thresholds for Merger Control
It is pertinent to note that despite having such a good amount of monetary safeguards, there are problems associated with them and there are combinations that have escaped scrutiny of CCI. Consider the earlier case of the WhatsApp - Facebook merger. Both were fierce and technologically superior competitors operating in the relevant market of instant messaging apps. This combination created issues of an increased user base harming consumer interests, reduced competitive safeguards, and higher entry barriers in the market.
Killer acquisition is another issue that does not come within the purview of de-minimis exemption. In this, larger firms buy newer and emerging firms that are potential competitors not for business motives and enhancing technological innovations but to eliminate potential rivals. The acquiree firm has lower assets and turnover, thus falling within the de-minimis exemption. One solution for the prevention of this is the DVT metric.
Valuation of combinations subject to uncertainty causes issues regarding calculations of thresholds. Valuation differs due to the usage of various methods and prices of financial securities involved are also volatile. Take the case of earlier mentioned WhatsApp - Facebook deal where final deal value changed.
Startups especially in the technology and AI domain might encounter issues due to DVT as many times emerging companies require huge funding to maintain their competitiveness in the market and to get better technological prowess. This can cause them to get stuck in unnecessary review procedures by CCI even when the deal might have no appreciable adverse effect on competition (AAEC).
The issue with DVT is also that the acquiree entity should have SBO in India. This has to be specified via regulations and the act does not define it. In the absence of precedents, it might be tricky to determine the same, especially for entities of digital sector where userbase is spread across the globe.
Combinations coming within the DVT ambit do not enjoy the de-minimis exemption. This might neutralize the advantage of increased asset and turnover thresholds in some cases.
International Practices
While many countries have similar threshold limitations to govern their merger control under anti-trust laws, there are some additional features present that make merger control more effective and make the respective anti-trust watchdogs better equipped to review combinations to maintain competition and consumer welfare.
In the United States, the size of transaction and the size of party thresholds are used. Along with that, regulators can investigate non-notifiable transactions if there are concerns. The competition regulator can re-assess previously approved combinations. For instance, the historical decision of United States v. E.I. du Pont de Nemours & Co., wherein the US Supreme Court approved the Justice Department’s challenge to Du Pont’s 23% acquisition in General Motors Thirty [30] years later post-acquisition or the Federal Trade Commission (FTC) challenging Meta’s acquisition of WhatsApp and Instagram which was approved in 2012 and 2014 respectively arguing that it has restricted competition in social media sphere post-consummation.
In the United Kingdom, along with thresholds, a share-of-supply test is also used in which parties that acquire or supply at least a certain percentage of certain goods and services within the country face scrutiny.
The European Commission has another mechanism along with threshold limits which allows Member states to request the commission to investigate combinations that do not breach the relevant thresholds but affect trade between member states and harm competition.
In terms of SBO, Germany and Austria use metrics like transaction value, the presence of domestic subsidiary, number of active users, customer location, target location, local nexus, research facilities, etc.
Way Forward and Recommendations for Merger Control
To counter the problem of valuation, guidance can be taken from the recent Securities and Exchange Board of India (SEBI) framework for protecting a company’s true value from rumors affecting price fluctuations. CCI can consider the value of the combination at the time of notifying the CCI as the ultimate value to check threshold limits and provide a fixed valuation method to eliminate various methods available that are used. The draft CCI (Combinations) Regulations, 2023 (Draft Combination Regulations) provide a mechanism to calculate the value of transaction in context of DVT. A similar metric can be introduced for the other threshold limit and de-minimis exemption.
For SBO, the Draft Combination Regulations provide that if 10% of the target enterprise’s global user/subscriber/customer base, gross merchandise value (GMV), or turnover in the past Twelve [12] months/last financial year is in India, it would be deemed to have SBO. This is a welcome step and with further adjudications by the CCI, the conundrum regarding SBO can be solved. Moreover, previously mentioned metrics of Germany and Austria can be utilized by CCI in addition to the regulations.
Aligning the competition law scenario with international practices has been the aim of CCI and the government. The changes are a welcome step in the right direction. It will be appealing to see how this affects the merger control regime in India and whether it overburdens the CCI with an increased number of filings unwantedly resulting in a bureaucratic clog in the M&A landscape of India and thus impacting the ease of doing business. Provisions brought in by the amendment and the new regulations should be applied by CCI to change the anti-trust jurisprudence of India in favor of competitive markets and the efficiency gains must be passed on to the consumer in the form of lower prices and/or improved quality and choices.
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