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Shrija Shanvi is a 4th year student of Symbiosis Law School, Pune.
Introduction
The way to keep the economy afloat and the market flooded with a diverse range of products is nothing but innovation. Innovation in an existing market blooms competition. More often than not, the incumbents view this innovation as a threat to their dominant position in the relevant market. This has led to the growing trend of “Killer Acquisition” wherein the incumbent acquires an innovative nascent firm but does not develop the acquired product or stops its manufacturing to prevent potential competition that it may pose to the acquirer’s established product-line. Alternatively, it may acquire the product but not kill it, thus eliminating the competitive pricing angle. The end result of such an acquisition is larger market share of the incumbent accompanied by weak competition in the market thus reinforcing and solidifying its dominant position in the market.
Fallacies in the Global Turnover-Value Based Approach to Merger Review
Most jurisdictions have a compulsory notification system prior to the merger. Such notifications are largely based on Turnover value thresholds. The Competitive Authorities assess mergers and acquisitions based on the turnover value of the merging parties. Under this system, the Competitive Authorities do not possess jurisdiction to look into the merger unless the deal falls under the specified turnover value thresholds. The merging parties are not bound to notify the Authorities of their merger plan until the threshold is triggered. This logic flows from the fact that since the turnover value is less, it is unlikely to cause considerable harm to the competition in the market.
In the recent times there has been an increase in mergers involving larger firms acquiring innovation-driven start-ups with high valuation and potential for competition. However, these start-ups have low turnover rates since in the initial years of development, the focus is more on creating a user base and constant R&D initiatives coupled with lower prices, paving the way to turn in huge profits later. Due to this, the acquisition of such start-ups lack the required Turnover threshold and do not fall under the radar of Competitive Authorities. Resultingly, these acquisitions go undetected under the Turnover-value based Notification System despite having potential for anti-competitive effects in the market.
Competition Regime In India And CCI’s Approach Towards Anti-Competitive Combinations
Competition Regulation in India is enforced by the Competition Commission of India (“CCI”) working under the framework of The Competition Act, 2002 (“Act”). Sections 5 and 6 of the Act deals with mergers and acquisitions of enterprises that may cause an appreciable adverse effect on competition in India in the relevant market. As per the Act, the merging parties who fall under the Turnover threshold specified under S.5 must send a notification under S. 6 to the CCI of the proposed merger. However, due to the fallacies in Turnover-value threshold system as discussed above, combinations with turnover value falling below the threshold escape CCI’s scrutiny and continue to have anti-competitive effects in the market.
In 2022, Zomato Limited acquired Blink Commerce Pvt. Ltd. (Blinkit). The acquisition concluded with Zomato acquiring 91.04% of Blinkit’s shareholding which amounted to about 3485 crores. The transaction was effected as a share swap. Zomato issued 600 million fully paid-up equity shares for INR 55.45 as a consideration paid towards acquiring Blinkit. Interestingly, this was not the first time that Zomato had camouflaged an acquisition to evade CCI’s scrutiny. In 2020, Zomato acquired Uber Eats under the façade of an all-stock deal wherein the existing shareholders of Uber Eats were given a 9.99% stake in Zomato. The value of the deal was about INR 2485 crores. Both Uber Eats and Zomato operated in the quick food delivery sector. This killer acquisition of Uber Eats by Zomato consolidated its dominant position in the relevant market leaving Swiggy as its sole competitor creating an anti-competitive environment that stifles innovation.
These transactions were not required to be notified to the CCI as they were able to avail the ‘De Minimis Exemption’ under S.6 (2) of the Act which exempts notification obligation for transactions falling below the required notification threshold.
To better tackle such mergers that are successful in evading the notification system under the Turnover-value framework, the Competition Law Review Committee published a report in 2019 wherein it noted that CCI did not possess any residuary powers to investigate transactions that are not required to be notified. It further noted that many transactions having a large deal value were able to take benefit of the De Minimis Exemption and were effective in evading scrutiny by CCI. The Committee referred to the Deal Value Test System being incorporated in the Competition Legislations of countries like Germany and Austria.
Emergence of Deal Value Threshold in the Competition Framework
In September 2024, the Competition Commission of India notified the Competition Commission of India (Combinations) Regulations, 2024. These regulations are in pursuance of the Competition (Amendment) Act, 2023 which amended S.5 of the Act and introduced the criteria of Deal-value threshold (“DVT”). DVT is a notification criterion based on the ‘value of the transaction’. It is in addition to the existing turnover value threshold prescribed under S.5 (a), (b) and (c) of the Act.
The notification requirement to CCI under DVT would be triggered in the following circumstances:
- The ‘value of the transaction’ of the proposed merger, acquisition or amalgamation must exceed INR 2000 crores.
- The enterprise being acquired, merged or amalgamated must have “substantial business operations” in India.
The ‘value of the transaction’ intends to include all forms of direct and indirect considerations. It may be a cash based or non-cash deal or an immediate or deferred payment. It has a wider ambit that intends to capture all kinds of valuable considerations such as a share swap or all-stock transaction or any other purchase price adjustment mechanism which otherwise would not have been ascertainable under the turnover-value threshold framework.
Lacunae in the Deal Value Threshold Approach
The DVT framework is a crucial addition to the Competition Legislation framework in India. However, it would be an overstatement to claim that it would suffice being an iron wall against preventing killer acquisitions. There remains a high possibility that DVT would not be entirely effective. In killer acquisitions, nascent firms are acquired at very early stages of development when their valuation is still low. Thus, the odds of the deal value of such acquisitions triggering the DVT are very low. Additionally, many a times the anti-competitive consequences of such acquisitions are evident years after they take effect. A classic example is the infamous Killer Acquisition of Instagram by Facebook.
How to effectively prevent Killer Acquisitions?
To effectively target and prevent Killer Acquisitions, the following additional framework is proposed to complement the existing regulatory framework.
Shifting Burden of Proof
One way to address this issue is by reversing the burden of proof, creating a rebuttable presumption of anti-competitive effects. Under this approach, Competition Authorities would assume that the acquisition or combination is anti-competitive by default. The burden would then shift to the merging parties to produce evidence that the proposed merger does not adversely impact the relevant market. A similar approach was noted in the 2021 report of the Competition and Economics Law Workshop of the Australian Competition and Consumer Commission.
Mandatory Notification for Serial Acquirers
Under this framework, if a firm makes multiple acquisitions within a set period,—say, five years—in the same or related markets, it must inform regulatory authorities, even if each individual transaction is below the usual reporting threshold. This is particularly instrumental in scenarios where a dominant entity systematically acquires nascent firms to kill potential competition.
For instance, inspiration can be drawn from similar frameworks implemented in the U.S and Australia. The U.S. Federal Trade Commission (FTC) has recognized the necessity of scrutinizing patterns of multiple small acquisitions that, collectively, may substantially lessen competition or tend to create a monopoly.
Australia’s January 2024 amendments to its Competition Legislation require the Australian Competition and Consumer Commission (ACCC) to assess the cumulative effect of acquisitions undertaken by an entity over the preceding three years in related markets.
Implementing such a framework in India would ensure that the CCI can effectively monitor and address these systematic anti-competitive Killer Acquisitions.
Conclusion and Way forward
It is imperative to scrutinize and curb Killer Acquisitions to ensure equitable competition in the marketplace. With the incorporation of the Deal-Value Threshold (DVT) framework, the Indian Competition Regime is now better equipped to manage anti-competitive mergers. Nevertheless, the DVT framework contains certain lacunae, as identified in this piece.
Thus, it is essential to integrate complementary regulatory mechanisms such as shifting the burden of proof and imposing mandatory notification for serial acquirers. These measures would enhance the Competition Commission of India’s ability to detect and prevent anti-competitive Killer Acquisitions and promote a dynamic market environment, encouraging continuous innovation and fair competition while safeguarding consumer interests.
