[Vidhispeaks] Making India’s combinations regime fit for digital age

Modern advances have put pressure on traditional understandings of how businesses operate. One area where this trend has been noticeable is the regulation of combinations.
Vidhispeaks
Vidhispeaks

By Rahul Bajaj

Problem statement: The impact of technology on the way we live and transact can hardly be overstated. Competition law has not been immune to this trend. Modern advances have put pressure on traditional understandings of how businesses operate. One area where this trend has been noticeable is the regulation of combinations.

Specifically, unlike their brick and mortar counterparts, the emphasis of entities operating in the digital market is more on expanding their user footprint and making cutting-edge innovation as opposed to earning more revenue.

In its report in July 2019, the Competition Law Review Committee (CLRC/Committee) noted that many transactions in the digital market do not meet the existing asset and turnover-based thresholds for them to qualify as notifiable combinations under the Competition Act, 2002 (the Competition Act).

Echoing this sentiment, the Furman Report in the UK [commissioned to suggest reforms to modulate UK competition law to unlock the potential of the digital economy] notes:

The business model of digital companies often means that they fail to generate any significant revenue for a number of years, focusing initially on user growth. For countries relying solely on turnover thresholds to apply jurisdiction, this is a significant issue that must be addressed."

Against this backdrop, the CLRC suggested the adoption of new criteria for transactions to qualify as notifiable combinations that can account for the way the tech industry functions. It noted that devising an alternative approach to enable competition regulators to scrutinize such transactions would not be premature.

This is because “merger control, in terms of its intent and form, is an anticipatory regulation.” Even so, it cited 4 examples of such transactions:

The acquisition of

• Myntra by Flipkart;

• TaxiforSure by Ola;

• Whatsapp by Facebook; and

• Freecharge by Snapdeal

It suggested that the Competition Act be amended to contain an enabling provision that empowers the government to introduce necessary thresholds including a Deal-Value Threshold (DVT) for merger notifications.

A DVT would mean that transactions crossing the threshold would be subjected to merger scrutiny. Consistent with this recommendation, as per the first proviso to Section 5[c] of the Draft Competition Amendment Bill of 2020 put up for public comments, the Central government is proposed to be empowered to lay down ‘other criteria’ for an acquisition to be deemed to be a combination.

As a result, in order to determine what combinations involving actors in the digital market should trigger antitrust scrutiny, it is necessary to attune the screening mechanism for detecting such transactions to the mode of operation of digital markets.

Approaches in other jurisdictions

Recognising this need, different competition regulators have begun exploring possible avenues to gauge transactions currently escaping scrutiny. Four such examples are considered below.

First, in December 2020, the EU floated a new proposal, called the Digital Markets Act (“DMA”), as a targeted intervention to deal with anti-competitive behaviour by entities labelled by the proposal as digital gatekeepers.

This framework applies to the Core Platforms run by Digital Gatekeepers providing services to business users established in the EU or end users located/established in the EU. A digital gatekeeper is defined as a provider of core platform services designated pursuant to Article 3 of the DMA. In order for a core platform service provider to qualify as a gatekeeper, the following three conditions must be met:

• Having a significant impact on the internal market;

• Operating a Core Platform Service which serves as an important gateway for business users to reach end users; and

• It enjoys, or will foreseeably enjoy, an entrenched and durable position in its operations.

Pertinently, Article 12 clarifies that a Digital Gatekeeper has to inform the European Commission of any intended concentration involving another provider of core platform services or of any other services provided in the digital sector irrespective of whether it is notifiable to a Union competition authority under the EU Merger Regulation or to a competent national competition authority under national merger rules.

Such a notification must set out the specified details, such as the target company’s annual turnover in the European Economic Area and some indicators of the acquirer’s level of activity.

Second, in the United States, the House Judiciary Committee’s Subcommittee on Antitrust launched an investigation to “examine the rise and use of market power online and assess the adequacy of existing antitrust laws and current enforcement levels in digital markets.

After cataloguing the practices that digital gatekeepers engage in to consolidate their power, the Subcommittee outlined some potential solutions to remedy the status quo. Pertinently, it suggested flagging up any acquisition by a dominant undertaking as being ‘presumably anti-competitive’ so as to subject it to merger scrutiny.

To operationalise the Subcommittee’s recommendations, in June 2021, the House Judiciary Committee approved six bills. One of the bills, H.R. 3826, the Platform Competition and Opportunity Act of 2021, prohibits acquisitions, total or partial, by Covered Platforms of the stocks or assets of any person engaged in or implicating commerce. The Bill outlines criteria for designating a digital platform as a ‘Covered Platform’.

Third, in the United Kingdom, the Strategic Market Status (“SMS”) proposal singles out some entities for special treatment. It has to be determined, based on an economic evidence-based assessment, whether the entity has “substantial and entrenched market power” in relation to a specific digital activity and, second, whether that power provides the entity with a strategic position.

The determination of such power is to be based on a multifactorial assessment. Relevant factors include: availability of alternatives, scope for entry and expansion of new players, degree of innovation in the market and the ease of switching for consumers. The assessment of SMS is to be made with reference to specific activities undertaken by comparable entities that have a similar function or which, in combination, fulfil a specific function.

Whether an entity has strategic position depends on such factors as the entity’s size and scale, its bargaining power in a specific market segment, its gatekeeping function, its ability to define the rules of the game within its own ecosystem and also in practice for a wider range of market participants and the extent to which the entity can leverage its market position from one market segment to another through the development of an ecosystem of services. As per the proposed regime, SMS entities are required to report acquisition of de jure or de facto control.

However, the most promising solution for India, at present, appears to be the adoption of a DVT which has been implemented in Germany and Austria. As per Section 35(1a) of the German Competition Act, subject to the prescribed turnover-based requirements, if an acquisition is valued more than EUR 400 million and the target undertaking has "substantial operations" in Germany, such transaction is subject to the merger control review of the German competition regulator. Germany has also issued a Guidance Note which clarifies a series of operational issues connected with implementing this framework.

Takeaways for India

As for the implementation of a digital gatekeeper framework or something similar to it, it is submitted that designing such a framework will require sustained thinking and consultation on the subject. Since that has not yet begun in India, this framework will at best be implementable in the medium to long term.

Given that there exists some global experience of implementing the DVT framework, coupled with the fact that such a framework can be implemented pursuant to the proposed proviso to Section 5[c], it seems like the best option for India at this stage.

The CCI, like its counterpart in Germany and Austria, can consider issuing a guidance note. The note can be peppered with suitable illustrations and responses to them, so as to ensure that it is both comprehensive and offers a realistic assessment of how different fact situations can be dealt with.

Further, the CCI should open up an informal channel of communication with relevant entities so as to ensure that any teething issues not covered by the guidance note can be suitably addressed.

Introducing this framework will be a positive step in the direction of making India’s competition law fit for the digital age.

A detailed report on the above subject can be found here.

Rahul Bajaj is a Senior Resident Fellow at the Vidhi Centre for Legal Policy, New Delhi, India.

Vidhispeaks is a fortnightly column on law and policy curated by Vidhi. The views expressed are of the fellow and do not reflect the views of Vidhi or Bar & Bench.

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