Towards a Framework for Scrutinizing Combinations in the Digital Market –A Roadmap for Reform
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 [mergers/acquisitions].
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. 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. This report is a step in that direction.
Problems in existing Indian regulatory landscape governing combinations
Under the Competition Act, 2002, the obligation to notify a combination is dependent on the combined turnover and assets of the acquirer and target company. Combinations involving parties that meet the prescribed thresholds must obtain the Competition Commission of India’s [CCI’s] prior approval. The CCI, therefore, does not have the power to scrutinize transactions that do not meet these quantitative criteria as to assets or turnover even if they entail clear competitive harm to Indian markets. Even if the prescribed quantitative criteria are met, combinations in which the target company does not have a meaningful presence in India, as measured based on its assets or turnover, are not subjected to CCI scrutiny.
In digital markets, acquisitions often derive value from some business innovation or acquiring data of target companies which often do not have a large asset base. Further, the business model of tech companies is typically focused on creating a large user base and not on revenue maximization. Therefore, asset and turnover based thresholds may not fully capture the significance of a combination in the digital sector for competition.
Owing to this regulatory gap, a number of combinations have thus far escaped CCI scrutiny. These include the acquisition of:
• Myntra by Flipkart;
• TaxiforSure by Ola;
• Whatsapp by Facebook; and
• Freecharge by Snapdeal.
In this report, through a cross-jurisdictional survey of the manner in which different countries have sought to plug this regulatory gap, we seek to offer an informed perspective on the regulatory pathway that India can adopt. This report will hopefully serve as the foundation for an informed discussion on this subject and serve as the catalyst for the modulation of Indian competition law to account for emerging digital realities.
International regulatory response to digital combinations:
The table below summarizes the approaches being explored by multiple jurisdictions to capture combinations in the digital market that currently escape scrutiny.
|European Union||Germany||United Kingdom||Brazil||United States|
|The EU has a referral system under which member states can refer a transaction to the European Commission [EC] that meets the two prescribed parameters. In June 2021, the EC issued guidance with the potential of more transactions being referred to the EU. Further, the EU is exploring the adoption of a proposal called the Digital Markets Act. Under this framework, certain entities will be designated as Gatekeepers. Intended concentrations involving such entities with a service provider offering services in the digital sector or what are called ‘Core Platform Services’ must be notified to the EC.||Since 2017, Germany has deployed a deal value threshold [DVT] framework, aimed at capturing combinations that hitherto escaped scrutiny. Germany has also released detailed guidance to address the issues connected with operationalizing this framework. Further, in January 2021, Germany added a provision to its competition law which empowers the country’s competition regulator, the Bundeskartellamt, to require concentrations involving any entities in all or specified sectors to be notified to the Bundeskartellamt that meet any of the prescribed thresholds.||The United Kingdom is exploring the adoption of the Strategic Market Status [SMS] proposal. Under this framework, certain entities, based on an economic evidence-based assessment, will be labelled as SMS entities. Such entities must report acquisition of de jure or de facto control.||In June 2020, the Administrative Council for Economic Defence [“CADE] – Brazil’s Competition Regulator – General Superintendence initiated an investigation to collect information on acquisitions made during the past 10 years by certain international technology companies as well as Brazilian retailers.||In June 2021, the US’ House Judiciary Committee approved a package of six bills that deal with the regulation of market power online. One of the bills, H.R. 3826, the Platform Competition and Opportunity Act of 2021, prohibits, subject to prescribed exceptions, acquisitions, total or partial, by Covered Platforms of the stocks or assets of any person engaged in or implicating commerce.|
Key findings of the report:
The report assesses the merits and viability of the regulatory approaches available to India in the following terms:
- As to a digital gatekeeper framework, the adoption of such a framework will require sustained thinking and consultation on: [a] whether the framework is empirically likely to capture transactions currently escaping scrutiny; [b] ensuring that the framework is flexible enough to accommodate shifts in market conditions.
- To determine if it would be wise to vest the CCI with discretionary power to scrutinize combinations that do not meet existing thresholds, the CCI could consider conducting a market study to determine specific sectors in which this approach could be deployed in India.
- As to the DVT framework, given that there exists some experience of implementing this framework globally, it seems like the best option for India at this stage.
- When implementing the DVT framework, the CCI should release guidance that addresses the issues connected with the practical operationalization of this framework, as has been done in Germany.