[Aarya Parihar is a B.A.LL.B student at Dr. RML National Law University, Lucknow]
The Competition Amendment Act 2023 (‘Amendment Act’) has triggered a discussion around the Deal Value Threshold (‘DVT’) once again. The recent change to the Competition Regime is unprecedented because, to date, the relevant criterion for notification to the Competition Commission of India (‘CCI’) was the combined value of the Assets & Turnover of the combining parties. The newly introduced DVT significantly supplements the method of assessing the Appreciable Adverse Effect on Competition ( ‘AAEC’) as an addition to the extant turnover or value of assets threshold.
This will be the first time that CCI will be scrutinizing a transaction on the basis of its total deal value apart from the parties’ aggregate turnover or value of assets. The rationale behind the introduction of DVT was highlighted in the Competition Law Review Committee Report of 2019 (‘Report’) that due to the sole reliance on the total value of assets or turnover of the transacting parties, various acquisitions which ought to have been reviewed by CCI go unnoticed.
This article presents a journey traversed by India to inculcate DVT in its legal framework and will then delve into understanding the challenges and changes that it will bring about with special reference to the Pharmaceutical, healthcare and biotech Industry of India and the Mergers & Acquisitions (M&A) taking thereof in that sector.
The Consistent Journey Towards Deal Value Threshold
The Competition Amendment Act 2023 brought in a flurry of reforms to the existing Competition Law framework in India. It introduced, inter alia, the calculation of the Deal Value Threshold for assessing whether a notification must be sent to the CCI by the Combining parties. The recommendation to insert DVT into the Indian landscape dates back to the recommendation given by a government-appointed Committee in its report.
The said Committee, after deliberating upon the limitation of the present combined asset and turnover threshold with respect to the transactions in Tech and Pharma industry, suggested inserting the provision for Deal Value Threshold. The said recommendation of the Committee was reflected in the draft Competition Bill released in 2020 to invite public comments.
This draft became the Competition Bill of 2022, introduced in the Lok Sabha, which was shortly referred to the Standing Committee on Finance for review. The Bill was returned with some recommendations and was reintroduced in the Lok Sabha in February 2023. Subsequently, both the houses passed this bill in its Budget Session making it the Competition (Amendment) Act 2023.
The Deal Value Threshold and its Implications
As outlined earlier also, the extant Competition regime of India depends on the aggregate value of assets and turnover of the transacting parties to qualify it as a Combination or not. As per the Section 6(2) of the Competition Act, 2002 (‘Act’), every combination has to be notified by the transacting parties to the CCI.
Section 5 of the Act lays down the contours of what would be termed as a ‘combination’. The Amendment Act has inserted clause (d) to Section 5, which provides a standalone threshold by calculating the total value of the deal. In case the total value of the deal crosses Rs 2,000 crore (roughly $ 245 million), then it would be termed as a Combination and the relevant notice as per Section 6 must be sent to the CCI. An important caveat is also added that either of the party must have ‘substantial business operations’ in India. However, the phrase ‘substantial business operation’ is not defined anywhere in the Amendment Act or through any other clarification/FAQ by the authorities.
The Limitation of Total Value of Assets or Turnover Threshold
The calculation of the total value of assets or turnover of the transacting parties is limited to its application. It largely leaves a lot of transactions outside the scanner of CCI, which should have been reviewed by it. It is important to understand that in cases where the targeted company is a start-up, then its turnover would be anyhow much less than the bigwigs in the field. Due to this reason, some acquisitions fall out of the regulatory net of the CCI.
The addition of DVT seeks to bring most of these acquisitions within the ambit of scrutiny by CCI. The Committee, in its report, cited examples of big tech deals, like Flipkart/Myntra and Facebook/WhatsApp going unnoticed due to the relatively low worth of the target company.
Killer acquisitions by the bigwigs will now come under the scanner of CCI with the new threshold. It is crucial to mention the acquisitions of Uber Eats and Blinkit by Zomato, which totalled 350 million and 570 million, respectively, but the same was not termed as a Combination for the purposes of sending a notice to CCI due to the absence of DVT. The newly introduced DVT would mandate a pre-perusal of these acquisitions that, without its existence, were seeing the light of the day without CCI’s scrutiny.
However, there are several concerns raised as to the newly introduced amendment. The complication regarding the computation of the deal value is highlighted. Also, the subjectiveness in defining substantial business operation sans any definition by the Legislature would be a challenge before the CCI. Lastly, it is argued that the newly introduced changes would increase the compliance and administrative burden on Companies and CCI respectively.
The Mighty Pharmaceutical Sector and Unnoticed Acquisitions
The Pharmaceutical, healthcare and biotech sector has been booming since the last few years, with the net deal value from various transactions combined doubling in 2022 as compared to the preceding year. Importantly, in a paper by OECD Pharmaceutical sector was underscored for having a considerably large number of killer acquisitions. Pharma giants are more likely to invest in start-ups that are at their very nascent stage, which in turn, allows them to avoid the attention of the Competition Regulatory Authorities concentrating on the turnover of the parties for pulling out their crosshairs. Also, a Joint Paper by the German and Austrian authorities emphasised on the likelihood of acquisitions in the Pharmaceutical sector going unnoticed.
More so, there have been several deals in the Pharma sector which were humongous in terms of the deal value but the considerably less aggregate turnover or value of assets of the parties allowed it to go unscrutinised. For instance, the acquisition of Curatio Healthcare by Torrent Pharma for around Rs 2,000 crores would have been examined by the CCI under the new Deal Value threshold. Also, the acquisition of Piramal Healthcare by Abbott Labs for $3.7 Billion and the buying/acquisition of the domestic business of Unichem Laboratories by Torrent Pharma for around Rs 3,600 crores also qualify as a Combination under the newly introduced threshold but were outside the regulatory net before the introduction of DVT.
These transactions ought to have filed a notice to CCI for review of their Combination but did not due to either the de minimis or the aggregate turnover of the parties falling below the required threshold as laid down in Section 5. These transactions, due to their deal value are considerable for the market and require a review by CCI on whether they are likely to cause AAE. This shortfall/inadequacy of the extant regime is fulfilled by the addition of DVT.
The above-quoted doctrinal and empirical data concerning the pharmaceutical industry highlights that the newly introduced Deal Value Threshold would bring various transactions, which would have otherwise not been under the examination of CCI. It is important to understand that the DVT was introduced while keeping in mind the killer acquisitions in the Pharmaceutical, healthcare and biotech sector. The acquisition of newer startups, which may become their potential competitor in the future, is strictly anti-competitive behavior. As stated earlier, it generally falls outside the scrutiny of CCI because the target entity is a smaller company with a much lower turnover and value of assets. The DVT would require Combinations where the value of the deal exceeds Rs 2,000 Crore to be notified with the CCI. The Pharma industry is bound to grow exponentially in the future, given its constant uptick in the previous years. Importantly, this growth would also involve various acquisitions in the said sector, which might come under the scrutiny of CCI.
As stated earlier, there are certain challenges that the CCI has to grapple with to make a smooth transition from the earlier Turnover Threshold to the present Deal Value Threshold. Nonetheless, it is important to understand that there are always uneven corners in every novel policy that needs to be ironed out with time, and we are hoping to see a similar exercise by the relevant players and the CCI by working in tandem. For the time being, the DVT in its present form would address various challenges that were previously going unaddressed, or the CCI turned a blind eye due to the lack of any legislative framework in place. DVT is an ambitious leap in the Competition Law regime of India, but the relevant players have to be cognizant of the gaps that exist, and efforts should be made to fill in those cavities.