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The Fallacy Within the ‘SBO’ Framework: Re-Assessing the Deal Value Threshold

[Tanya Sara George is a third year law student at the Maharashtra National Law University, Mumbai.]


Introduction


On 9th September 2024, the Ministry of Corporate Affairs (“MCA”) introduced amendments to the merger control regime of India. One notable change was the update of Section 5 of the act and the Deal Value Threshold (“DVT”) to better account for killer acquisitions in the country. A killer acquisition occurs when a firm is bought by its competitor with the sole view of stifling or eliminating the business completely. In the past framework presented by the Competition Act, various killer acquisitions such as Zomato’s acquisition of Uber Eats or Facebook’s acquisition of WhatsApp were left unregulated from regulatory scrutiny, leaving way for a major lacuna for the Indian market.


As per the present framework set forth by the Competition Act, along with the Combination Regulations (“Regulations”), the DVT holds for two main thresholds, i.e., if a transaction fulfils any of these thresholds, it would require prior approval from the Competition Commission of India (“CCI”). These are: First, a quantitative threshold set at INR 2,000 crores, and second, a target that has substantial business operations (“SBO”) in India.


This article concerns itself with the latter criterion. The author expands into the SBO framework in the DVT and elaborates on the fallacies within domestic SBO assessment. This is done in regard to, firstly, the SBA’s regulatory gap for foreign entities, secondly, the flawed assessment of the objective quota and thirdly, the lack of consideration for data-driven acquisitions. The author argues that this flawed assessment posits regulatory issues that can circumvent scrutiny from the framework, antithetical to its intent.


The SBO Framework


As per Regulation 4 of the Regulations, a digital entity would be stated to have SBO in India if 10% of its -


i. users,

ii. turnover,

iii. gross merchandise value (“GMV”)


is derived from Indian markets.


The SBO Threshold and Foreign Companies


Earlier cases involving companies with foreign parent companies, such as Facebook’s acquisition of WhatsApp, easily circumvented the DVT. Deals involving companies with foreign parents often showed turnovers below the threshold, allowing for the De Minimis exception despite the parent company satisfying quantitative thresholds. The present framework’s focus on only the target entity does not account for this regulatory drawback and, moreover, adds to the regulatory burden by disproportionately affecting smaller domestic entities.


Now, foreign companies that fall below the quantitative threshold would evade scrutiny as these companies may not have substantial business operations in India yet. However, killer acquisitions, are utilized as an ex-ante modus operandi, which effectively allows entities with excessive resources to stifle domestic markets and prevent competition before setting up their entities in the market unopposed. Due to the necessity of the target having a direct nexus with the Indian market, companies that have substantial business operations in other countries are looking to set their mark in the Indian market despite having a significantly appreciable adverse effect on competition (“AAEC”) domestically, would be left unregulated.


Additionally, the requirement for a “direct nexus” with the Indian market fails to account for indirect or potential market influence. A global tech company offering backend services or hosting Indian user data on international servers could significantly impact domestic competition, even if it does not meet the SBO thresholds. For example, Amazon’s cloud services provide infrastructure for numerous Indian startups but may not fall under the framework’s ambit as they do not directly cater to Indian end-users. This ambiguity creates loopholes that allow large foreign entities to operate under the radar.


Moreover, rather than foreign entities that should come under scrutiny, domestic startups, especially in the tech industry that requires large sums of money, would face significant regulatory hurdles and get stuck in scrutiny proceedings, which often have no AAEC.


The Objective Quota in the SBO Threshold


As per Regulation 4, the criterion for an SBO is met if the entity has 10% of its users, turnover, or GMV. While this seems to be all-encompassing, it holds for a major fallacy. Namely, by placing the quantitative threshold as a percentage rather than an objective empirical, the threshold does not adequately distinguish between a large company having a major presence in domestic markets and a small company having a slight presence in the domestic market.


Take, for example, a major company that has substantial business operations in various countries, including India. Ostensibly, the percentage of users in India would be relatively less as it is viewed in comparison to the users in various countries. However, a smaller entity that has not yet pervaded into international markets may have a stronger proportion of its users in India despite the actual number of users being significantly lesser in comparison to the larger entity.


This fallacy in assessment places smaller entities that have a much lower proximity to dominate or cause AAEC under unnecessary regulatory scrutiny by the CCI in their transactions, whereas larger entities with substantial international presence and resources, capable of causing AAEC are wilfully left out of the regulatory ambit. Further, domestic startups seeking foreign investment or partnerships face additional compliance burdens, which could deter innovation and growth.


No Consideration for Data-Driven Acquisitions


Further, the SBO framework neglects the growing importance of data as a strategic asset in the digital economy. Companies often acquire startups not for their turnover or user numbers but for their access to valuable consumer data. For instance, the acquisition of WhatsApp by Facebook was driven largely by its vast user data, which significantly enhanced Facebook’s market position. Despite WhatsApp’s substantial reach among Indian users, its operations did not generate significant revenue at the time, allowing it to bypass regulatory scrutiny.


Similarly, Google’s acquisition of Fitbit, Microsoft’s acquisition of Linkedin, and Amazon’s acquisition of Ring shows the increasing trend of digital enterprises to prioritise data rather than revenue, circumventing DVT thresholds but holding for severe AAEC in the domestic markets. Similar acquisitions in India could lead to monopolistic control over data ecosystems without triggering the SBO thresholds, highlighting a critical gap in the domestic combination regime.


Way forward


I. Wider ambit


Jurisdictions, such as Germany and Austria, have adopted DVT thresholds since 2017. Along with other quantitative metrics, they utilize factors such as the active number of users, customer location and target location. In India, due to the availability of technology and the growing options in digital entities, there may be various ‘registered users’ that do not fall under the ambit of ‘active users’, but create regulatory burdens for domestic startups. Distinguishing between passive and active users, as done by Germany and Australia, while substantiating with other quantitative metrics, can help the SBO framework be more comprehensive and reduce unintended regulatory complications for small entities.


Additionally, rather than placing the 10% cap on the ‘users’, this could be placed in proportion to the overall market share of the entity, which would adequately ascertain its future dominance or AAEC. For example, earlier, a large entity ‘ABC’ having a market of 600 million users but 50 million users in India, would evade the SBO threshold, while a small entity ‘XYZ’ having a market of 50 million users and only 5 million users in India would fall under CCI scrutiny. However, when taking the quota in proportion to the overall market share, i.e., the real propensity of the entity to disrupt the market would be calculated, ensuring that smaller firms are left out of the regulatory bind.


II.  Forward-looking Assessments and Inclusion of Data Consideration


The European Union’s Merger Regulation emphasizes assessing a merger's potential to significantly impede competition, even if immediate market share thresholds are not met. Similarly, the UK’s Competition and Markets Authority uses a forward-looking approach, allowing them to look past objective criteria. For example, in Meta’s acquisition of Giphy, they ruled that the deal could reduce competition in social media platforms and advertising markets. Such assessments allow regulatory bodies to act preventively, even for startups or nascent technologies.


Further, acknowledging data as a key strategic asset, India must integrate data acquisition into merger reviews. For example, the Australian Competition and Consumer Commission ("ACCC”) focuses on data dominance in its competition assessments. The ACCC scrutinized Google’s acquisition of Fitbit, emphasizing the potential for data consolidation to harm competition in digital health markets. A similar emphasis by the CCI on the competitive value of data assets could prevent acquisitions that enable monopolistic control over data ecosystems.


Conclusion


The current SBO framework under India’s DVT regime presents significant gaps that undermine its ability to address anti-competitive practices. By narrowly focusing on rigid metrics like user percentage and turnover, the framework inadvertently burdens domestic startups while allowing large foreign entities with significant market influence and perhaps data-driven motives to evade scrutiny. International precedents from jurisdictions like Germany, Austria, the EU, and the UK illustrate the importance of forward-looking assessments and recognizing data as a critical asset. Strengthening the SBO framework with comprehensive and adaptive criteria will ensure a fair, competitive environment that fosters innovation and protects Indian markets from monopolistic control.

 



 

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©2020 by The Competition and Commercial Law Review.

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