[ Ishita Warghat is a law third-year law student at National Law Institute University, Bhopal]
Mergers and Acquisitions (‘M&A’) play an imperative role in the economic domain of the country. They help in business expansion and efficiency while also maintaining a competitive environment. However, such activities are subject to the compliance and supervision of regulatory authorities such as the Competition Commission of India (‘CCI’) to ensure a fair competitive milieu. The introduction of the Competition (Amendment) Act, 2023 (‘Amendment Act’) was an evolutionary measure in this area.
Hailed as a progressive step aimed at improving the competitive landscape of the country, the change has a significant impact in the area of M&A. The Amendment Act is touted to address the loopholes and ease the regulations for business transactions in India. This article intends to analyze the changes made to the Competition Act, 2002 (‘Competition Act’) by the Amendment Act and discuss its possible implications with specific reference to M&A.
Amendments and Analysis
1. Introduction of Deal Value Threshold
One of the primary changes to the Competition act was the amendment to Section 5 via the introduction of concept of deal value threshold (‘DVT’). The introduction of this amendment has helped India join the league of developed jurisdictions such as the U.S. and Germany [SS1] which have a similar provision for their merger and acquisition enforcement mechanisms. The said criterion makes it mandatory for individuals to notify the CCI for transactions above 2000 cr. (approximately USD 250 million). The transactions can be related to the acquisition of voting rights, shares, assets, amalgamation etc. An additional threshold for the applicability of this section is that the company should have ‘substantial business operations in India’ thereby also covering global deals. This amendment is similar to the introduction of offshore indirect taxation in 2012 when indirect taxation was taxable due to the significant value of assets of foreign companies in India. The Amendment Act is also likely to bring ‘killer acquisitions’ under the umbrella of the CCI which are widespread in the digital technology market.
While this is a welcome change, there are certain gaps that need to be addressed. The introduction of the DVT criterion can be a detrimental move for start-ups as it can affect their funding from investors who are looking for a quick exit. This change would bring a lot of regulatory approval processes by the CCI for the investors. Additionally, because companies are increasingly dealing in different forms of transactions such as earn-out payments, payments for non-competition etc., a specific method for the computation of DVT should be notified to prevent any ambiguity. Moreover, the phrase ‘substantial business operations in India’ is of wide import, and therefore specific thresholds that would qualify as significant business operations should be established to delineate the counters of the term. The delineation of such thresholds should be industry specific as what might constitute a substantial business operation for one industry might not be the same for some other industry. For instance, a relevant criterion for establishing substantial business operation for a company involved in retail business would be the number of stores or outlets the company has in India[SS2] [EW,N3] . However, the same criterion cannot be applied to a company that is majorly involved in the digital sector for which the number of daily active users can be a relevant consideration.
2. Change in the definition of ‘control’
The amendment has brought in a change to the explanation provided in Section 5 of the Competition Act, i.e., the definition of ‘control’. The Amendment Act has statutorily incorporated material influence as a degree of control. Judicial precedents help us gain insight into the definition of ‘material influence’.
In the case of Ultra Tech Cement Ltd. v. Competition Commission of India and Ors.[SS4] , the CCI defined material influence to be “the lowest level of control, and implies the presence of factors which give an enterprise an ability to influence affairs and management of another enterprise, including factors such as shareholding, special rights, status and expertise of an enterprise or person, board representation, structural/financial arrangements, etc.” Additionally, in Meru Travel Solutions Private Limited v. ANI Technologies Private Limited and Ors.[SS5] , the CCI noted that minority shareholders who are active investors can be considered to exert material influence over the company. Hence, the Amendment Act has formally recognized the same.
However, one uncertainty that persists is that there are no prescribed guidelines or thresholds that can help one determine what statutorily classifies as ‘material influence’. This may result in companies notifying even their non-controlling minority investments as a precautionary measure which will eventually burden the CCI. Therefore, a comprehensive set of factors or criteria should be laid down to provide a better clarity on this issue.
3. Imposition of Penalties on Global Turnover
The Amendment [SS6] Act seeks to implement penalties on the erring parties on their global turnover instead of their ‘relevant turnover’, i.e., the turnover derived from specific products or services in question. Earlier, there was a long-standing debate with respect to the definition of the term ‘turnover’. The Supreme Court in the case of Excel Crop Care Limited v. Competition Commission of India & Anr. defined ‘relevant turnover’ as “an enterprise's turnover pertaining to products and services that have been affected by any contravention”. It also held that penalties should be imposed on relevant turnover instead of global turnover.
In contrast to the judicial precedent, the Amendment Act has brought in the opposite change. By doing so, big entities involved in global operations with multiple products/services would be dissuaded to enter India thereby affecting the business environment in the country. This measure is not only against the principle of proportionality but is also discriminatory in nature as it affects companies with various engagements thereby leading to unfair outcomes. Computation of the turnover in line with the principle of proportionality as mentioned in the judgment should be reinstated.
4. Settlement Claims
One of the significant changes as proposed by the amendment is the introduction of a settlement mechanism. This measure enables the erring party to settle the dispute by way of monetary compensation or by agreeing to undertake certain commitments before the final decision of the CCI. The amendment also allows the aggrieved party to file for compensation.
This change is hailed as a progressive move that can aid in quick disposal of cases. However, it seems that the alleged erring party that avails this route is indirectly admitting to being guilty by opting for this mechanism as ‘settlement’ is usually understood as the admission of liability for the contravention of rules in foreign jurisdictions such as the European Union.
The 2023 Amendment Act also proposes to impose mandatory fees for an appeal to dissuade applicants from pleading frivolous cases and expand of the scope of cartel-related activities which also includes hub and spoke arrangement, increasing the power of the Director General, inter alia. Provision regarding public consultation is a welcome step to assess the effects of the amendment.The Amendment Act is a step in the right direction to encourage a healthier business environment in the country while also enabling favourable conditions for investment in India. It has also made sure to introduce a robust regulatory mechanism to effectively supervise the actions of the entities involved in the area. The Amendment Act has helped increase the adaptability of the laws to the continuous economic and technological changes in the country and is a step towards the regulation of the digital ecosystem, especially big tech companies. While there are a lot of advantages of the Amendment Act, there are certain loopholes and gaps that need to be addressed to effectively enforce the new changes. As we embrace this positive step, we should also supervise its implementation to better realize the objectives of the Competition Act.