DE MINIMIS EXEMPTION AND CCI’S JURISDICTION: TIME TO REVAMP?
[Pooja V and Bhawna Lakhina are third year students at National Law Institute University, Bhopal]
The de minimis exemption is a form of target exemption under the competition law regime wherein certain transactions falling below a given threshold are exempted from notification to the competition authority. The intent was to mandate notification for only those transactions that cause a significant reduction in market competition and therefore, require closer scrutiny. It was a means to clear the administrative burden of the CCI at the time when the institution was itself at a nascent stage.
The Indian competition regime takes into consideration the asset value and turnover of the target company to exempt a combination from the mandatory notification and competition assessment procedures. Accordingly, any combination which involves the target company having an asset value or turnover below 350 crores or 1000 crores respectively falls within the scope of the de minimis exemption.
In this piece, the authors underscore the problems inherent in the current regime while undertaking a cross-jurisdictional analysis. The authors press for granting residuary power to the CCI to assess below threshold transactions that are likely to cause appreciable adverse effect on competition (“AAEC”).
Problems Inherent in the Present Regime
The exemption, despite seeking to prune the administrative burden of the regulatory authority, raises serious concerns. A pivotal issue posed by the current format of the de minimis exemption is the gateway it provides for killer acquisitions. The term “killer acquisition” refers to an acquisition wherein a firm acquires a nascent competitor only to discontinue the target’s innovation projects, thereby pre-empting the emergence of future competition. The asset and turnover value of such acquired entity (the target company) is generally low, owing to it being a new entrant in the market, thereby exempting them from the CCI’s scrutiny.
However, such combinations pose crucial concerns in the market which have been highlighted in the OECD Report on Start Ups, Killer Acquisitions and Merger Control. This Report points out that such combinations lead to elimination of potential competition which not only affects existing competition in the market but also future prospects. This leads to a detrimental effect on the interests of the consumers who are deprived of newer and potentially better products in the market.
One such example is of the acquisition of Waze by Google. The former was a relatively small company and a nascent competitor to Google. Apparently, Waze had developed a mapping app which could significantly bolster its share in the market. Post its acquisition by Google, the mapping app was launched as “Google Maps”, achieving a dual objective: (a) securing Google’s market position, and (b) eliminating a competitor.
Thus, as of today, considering the new developments in the market, the de minimis exemption is going against the purpose for which it was introduced. This is particularly disturbing in the Indian context because the CCI does not have any residuary power to assess non-notifiable combinations, unlike competition regulators in other jurisdictions. However, in the recent case of Zomato-Uber Eats, the CCI was of the prima facie opinion that the combination would adversely affect the food delivery market and issued a show cause notice to the parties,[i]despite the fact that the combination enjoyed the de minimis exemption.
It is pertinent to note that the power of the CCI to issue a show cause notice is provided under Section 29(1); it requires the CCI to be of the prima facie opinion that the combination is likely to cause AAEC. While the basis for the CCI’s power to enquire in Zomato-UberEats case seems to emerge from this prima facie test, the same raises concerns as to whether such a test could also be extended to non-notifiable combinations.
Amidst this conundrum, there seems to be a provision which enables the CCI to assess even exempt combinations, i.e., Regulation 9(4) of the Combination Regulations. This Regulation relates to composite combinations, which are defined as “inter-related” or “inter-connected” transactions which may not necessarily be “inter-dependant”. Accordingly, if a series of transactions qualifies to be a composite combination, the CCI gets the jurisdiction to assess the same even if it would have otherwise enjoyed the target exemption.
In light of all these, the authors assert that the existing provisions can be utilised to provide residuary powers to the CCI even in case of non-notifiable transactions. This practise would not be peculiar as is it being increasingly adopted in other jurisdictions, as discussed in the subsequent head.
Practise in Other Jurisdictions
The practice in several jurisdictions broadly seems to tilt towards vesting residuary powers to the assessing authorities. For instance, in Australia, the notification procedure is informal and non-mandatory.[ii] However, the authority may use its formal information-gathering powers and/or injunctive relief to investigate mergers that do not meet the notification threshold if they raise competition concerns.[iii] Furthermore, in France, despite the presence of specific thresholds, there is recognition of the necessity of assessing transactions below turnover thresholds in light of the intensified or predatory acquisitions during Covid-19.
Another country, Turkey, recently amended its law on protection of competition, in line with the European Union (“EU”) laws. It was aimed at empowering the Competition Board to initiate an investigation even when the prescribed thresholds are not met. Similarly, Finland has considered amending its turnover thresholds and granting its Competition Authority the power to examine below-threshold mergers that might have negative effects on competition.
Even European Commission recently adopted the Guidance regarding Article 22 of the EU Merger Regulation. This allows Member States to request the Commission to examine concentrations not breaching turnover-thresholds but affecting trade between Member States, and threatening to significantly affect competition within their territory. This empowers the Commission to review a significant number of transactions in a wide array of economic sectors, such as industrial, manufacturing, pharmaceutical and digital.
In addition, competition legislations in the US provide flexible mechanisms wherein the regulators are empowered to conduct assessment of non-notifiable combinations if there are concerns regarding antitrust violations.[iv] There are also instances where combinations have been subjected to ex-post assessment which implies that the competition regulator can re-assess combinations which had been previously approved, in case of subsequent anti-competitive implications.
The Way Forward
As highlighted in the preceding sections, concerns pertaining to the de minimis exemption are being increasingly recognised worldwide, and it would be misleading to say that India has turned a blind eye towards the issue. The legislature even introduced a Draft Amendment Bill in 2020 which, if enforced, would enable the CCI to prescribe any criteria different from the currently prescribed asset and turnover thresholds. The authors are of the opinion that this would help in bringing an otherwise non-notifiable combination within the scope of the CCI’s jurisdiction to conduct competition assessment.
However, caution should be exercised in making such notification thresholds specific enough to assess the predatory acquisitions. To that extent, the CCI can take inputs from the discussion in the 133rd OECD Competition Committee meeting. While the authors primarily insist on vesting the CCI with residuary powers to assess below threshold transactions having the potential of causing anti-competitive effects, there are other measures that can be introduced to address these issues.
One such measure is the introduction of “deal value thresholds” in the Indian competition regime, which has also been recommended in the Report of the Competition Law Review Committee. Accordingly, the criteria used to assess combinations would be the “value of the transaction” rather than the currently used asset and turnover values of the target entity. This, the authors reckon, would enable the CCI to scrutinize even those combinations which can cause AAEC, but still escape scrutiny.
At the same time, India should consider adopting the post facto review mechanism followed in the US, wherein the competition regulator can re-assess a combination which had earlier been approved if it subsequently causes any anti-competitive effect detrimental to consumer interest. It is also pertinent to note that Section 20(1) provides such powers to the CCI, wherein it can assess combinations after they have been effectuated. The authors, thus, propose widening the ambit of this provision to the effect of it being inclusive to non-notifiable and/or exempt combinations as well.
Furthermore, there are high chances of the turnover of companies being distorted owing to the pandemic. To deal with the same, the authors suggest resorting to the French model to assess the turnover limits, which takes into account another year of reference when a company’s turnover for a certain year does not accurately reflect its strengths in the market.
All these measures would help in eradicating problems posed by the de minimis target exemption, in addition to achieving the objectives of the Indian competition law. At the backdrop of composite transactions, where the CCI has the power to analyse below threshold transactions, it is evident that the aims and purposes of the Act should take precedence over mere procedural requirements. In light of the same, the CCI should extend this power to other transactions as well. The sooner, the better.
--------------------------------------- [i] Zomato Ltd. Red Herring Prospectus (6 July 2021) page 327, available at https://www.bseindia.com/downloads/ipo/Zomato_RHP_070720212008.pdf. [ii] Merger Guidelines, Australian Competition and Consumer Commission (November 2008), available at https://www.accc.gov.au/system/files/Merger%20guidelines%20-%20Final.PDF. [iii]Ibid, Guidelines 2.6, 2.8. [iv] Clayton Act, 1914, Section 7; Federal Trade Commission Act, 1914, Section 5; Sherman Act, 1890, Sections 1 and 2.