[Vaibhav Kesarwani and Naman Kasliwar are students at Gandhinagar National Law University]
I. Evolution of deal value threshold in India
In the realm of corporate transactions, a critical analysis of the deal value threshold in India assumes paramount significance, as it encompasses an earnest endeavour to delineate the contours of the term "substantial business operation." This analytical pursuit holds particular relevance in the context of mergers and acquisitions, where a robust understanding of the parameters that demarcate a transaction's materiality becomes essential. In the Indian legal landscape, determining substantial business operations assumes a multifaceted character, involving meticulous examination of financial indicators, market share, and other relevant factors. India is a rapidly growing economy with a high rate of mergers and acquisitions. In the recent past, these combinations were scrutinized and notified only if the assets or turnover crossed a specific threshold. With the digitalization of the economy and different sectors, the need for heavy investment in assets got reduced, and the companies acquired a dominant and competitive position in the market without heavy investments. Digitalization further resulted in a significant enforcement gap where certain substantial transactions that had a considerable effect on the competition dodged the requirements.
With the introduction of the Competition Amendment Act 2023 ("Competition Act") the legislation tried to fill the gap. It introduced "deal value threshold" under section 5(d) of the Competition Act, which provided that a business transaction, in connection with the acquisition of any control, shares, voting rights, or assets exceeding two thousand crores, would constitute a combination and come under the ambit of competition law in India if the business that was acquired or merged had "substantial business operation in India." However, confusion was further increased in introducing this legislation due to non-clarity on the term "substantial business operation."
This article critically analyses the legal framework i.e. Competition Act, and aims to provide clarity on the manner of determination of substantial business operations under the amended act, thereby fostering a conducive environment for corporate transactions and ensuring regulatory compliance.
II. Defining "substantial business operation": foreign jurisprudence and interpretation
Although the Competition Amendment Bill, 2022 provides that the Competition Commission of India would issue regulations to prescribe the requirements for assessing the term "substantial business operation" of a company/enterprise, the existing foreign jurisprudence on the said term must definitely be studied for a better understanding.
The "deal value threshold" has operated in various jurisdictions such as the USA, Germany, Austria, and South Korea; however, the present Indian framework seems to be based on the Germany and Austria model.
Germany and Austria's jurisprudence prescribe that the target company should have a "significant domestic activity" in order to be scrutinized for crossing the deal value threshold. The term, "significant domestic activity," which corresponds to “substantial business operations in Indian legislation, has been clarified in the Joint Notification Guidance Paper of Germany and Austria, which states that the operation has to be measured in terms of market-related activities of the target company and not in terms of domestic turnover. Furthermore, certain other factors from the Guidance Paper that can help in interpreting the term as mentioned under the Competition Act, can be:
Different Criteria for Different Sectors
The paper provides that the criteria for different industries should be different in order to define "substantial business operations". For instance the criteria of “number of stores of a company” is an important indication for the substantial business operation for a company having retail outlets, however it will not give proper indication of substantial business operation of a company operating in digital sector. These criteria should be such that it cannot be easily manipulated and should be in accordance with the industry standards prevalent in different sectors.
Daily Active Users
In the case of digital operation of the business, the number of daily active users on the website is another criterion that can help determine the expansion of the business by determining the active users and unique visitors.
Assessing Local Nexus
Although this was one of the criteria to determine the term in Austria, the author believes this criterion will not help in the case of the Indian scenario. Due to the high population and different demography in the cities, the use of assets rather than the presence of the consumers should be determined for evaluating the substantiality of the business.
Marketability of Domestic activities
The domestic activities must have a significant market operation, which exists when the target company provides service against payment in an existing market. This criterion can be interpreted by the example of when a free app is supplying advertisement and consuming data of the users.
Although these can be significant criteria for determining "substantial business operation" in India, they could also lead to scrutiny and an increase in the number of transactions that come under the threshold, which would, in turn, result in a high administrative burden, especially for the Indian Administration which is not equipped to deal with such high number of transactions. This problem was also elaborated on in the "Competition Policy for its Digital Era Report, 2019" by the European Union, which criticized the determination of threshold by Germany and Austria.
III. Critical factors in determining substantiality: Financial Indicators, Market Share Analysis, And Sector-Specific Consideration
Although foreign jurisprudence is an excellent source for determining the "substantiality" of operations of an enterprise, the Indian legislation has to consider additional factors that must be taken into account.
Financial Indicators
Indicators such as revenue, assets, profitability, and market capitalization of the enterprise can give quantitative insight into the company's financial strength, which can be easily scrutinized. Thus, it will be a crucial factor in determining the substantiality of a business.
Market Share Analysis
Another vital factor for determining the ‘substantiality’ can be the market-share of a company, which can help in comparative analysis of the position of the company concerning the other enterprise in the same industry and, at the same time, help in determining the influence of the business within its industry. Analysing the market-share helps evaluate the potential anti-competitive effects of a transaction and, in turn, the business operation.
Sector-Specific Considerations
As seen in the legislation of Austria and Germany, India can also have sector-specific considerations when assessing the substantiality. The reason for the same is different thresholds of consideration in different industries, especially in regulated industries like telecommunications, energy, or banking.
IV. Conclusion
Till now, the competition law had been Brick-Mortar-Enterprise-Centric, i.e., the threshold it had used to scrutinize a company, was based on presence of the company in the market in the form of tangible stores/offices or heavy reliance of the company on its physical assets. However, with the introduction and operation of deal value threshold, the legislation has correctly adopted the changes in the local market that has been digitalized with the changing technology.
Although the term "substantial business operation" in the new amendment is yet to be determined, factors such as financial indicators, market share analysis, and sector-specific considerations can provide a more comprehensive understanding of substantiality and significantly impact scrutinizing a business's operation. This nuanced comprehension serves as a crucial framework for evaluating the materiality of transactions, ensuring regulatory compliance, and promoting a fair and competitive business environment.
By upholding the principles of transparency, accuracy, and adherence to legal frameworks, stakeholders can confidently navigate the deal value threshold, enabling successful mergers and acquisitions while safeguarding against anti-competitive practices. As the Indian business landscape continues to evolve, ongoing scrutiny and refinement of the deal value threshold criteria is an essential step towards fostering robust corporate transactions and upholding the principles of legal professionalism in pursuing economic growth.