By Rahul Rai and Shruti Aji Murali
On September 15, the US antitrust agency, the Federal Trade Commission (FTC) issued the report on its study of mergers and acquisitions (M&A) by five of the top platform companies in the US that had escaped antitrust scrutiny. While releasing the report, the new chairwoman of the FTC, Lina Khan emphasised her focus on making the FTC more interventionist.
Ms. Khan remarked, “While the Commission’s enforcement actions have already focused on how digital platforms can buy their way out of competing, this study highlights the systemic nature of their acquisition strategies. It captures the extent to which these firms have devoted tremendous resources to acquiring start-ups, patent portfolios, and entire teams of technologists—and how they were able to do so largely outside of our purview.”
Ms. Khan’s colleague, Commissioner Rebecca Kelly Slaughter echoed similar concerns. In her press statement following the release of FTC’s report, she remarked, “My concern has always been that when we simply review acquisitions serially, we may miss bigger picture patterns of anticompetitive roll-up strategies. I think of serial acquisitions as a PacMan strategy: Each individual merger, viewed independently, may not seem to have a significant impact, but the collective impact of hundreds of smaller acquisitions can lead to a monopolistic behemoth.”
Ms. Khan enjoys President Biden’s support for steering the FTC away from the laissez-faire approach that has defined the US’ approach to regulation of markets. She’s determined to take them back to the seventies when the world of economic policymaking was besotted with the idea that policymakers could define the ideal size and shape of markets. She’s not alone. Germany and Austria have already beaten the US in the race to expand their competition regulators’ ability to examine M&As in the technology sector. Other members of the European Union are at different stages of tweaking their competition rules to expand their regulators’ ability to examine M&As that apparently have been flying under the radar.
Fear of missing out appears to have affected the Indian competition policymakers as well. In July 2019, the Competition Law Review Committee (CLRC) recommended that an enabling provision empowering the Government to introduce necessary thresholds including a deal-value threshold for merger notification may be introduced in the CA02. This recommendation found its way in the Competition (Amendment) Bill, 2020 (Amendment Bill). Fortunately, the Indian Parliament hasn’t yet considered the Amendment Bill. If the Amendment Bill is not revived, it may well prove to be a strategic masterstroke for India.
The world’s leading economies, including the USA, Germany, UK, and (closer to home) China are making it difficult for big technology companies to operate with the freedom they have enjoyed in the last two decades. The fear of big technology companies’ overarching presence in our lives has motivated policymakers to turn their back on the laissez-faire approach to regulation which perhaps enabled the creation of these omnipresent corporations.
India is yet to completely shun the socialist legacy of government control and regulation. We have just begun flirting with laissez faire. We enacted a modern competition law in 2002 and started implementing it only in 2009. Our economic problems won’t be solved by aping the world. Their retreat from the laissez-faire to the command-and-control approach to regulating markets presents India with a rare opportunity. We need to seize the moment.
The question is how do we do it? The answer is simple – resist the urge for adventure. Stay the course we embarked on by enacting the [Indian] Competition Act, 2002 (CA02). The CA02 is a beautifully crafted legislation. It reflects a calibrated balance between ex-ante rules and ex-post disciplines. The CA02 empowers the CCI to screen a select set of M&As before they take effect. Equally, it arms the CCI with the tools to impose sanctions, both monetary and remedial, if it finds that any enterprise is restricting competition by abusing its dominant position or by entering into anti-competitive agreements.
Currently, the CCI’s jurisdiction to review mergers and acquisitions under the CA02 is triggered when the parties to a transaction together cross certain financial thresholds linked to the value of their combined assets or turnover. Resultantly, the acquisition of targets that may command multi-million-dollar valuations, especially in the tech sector goes unscreened, simply because the target’s book value of assets or turnover are minuscule. The Indian Parliament’s approval of this scheme reflects their desire to contain the Government’s intervention to a select set of transactions only.
This decision was correct when the Government allowed the implementation of merger control rules in 2011. Back then, it responded to the unique economic challenges faced by India. It signaled the Government’s resolve to attract foreign capital and increase the ease of doing business in India. These two imperatives haven’t changed. The revisionist movement gripping the world of competition law presents India with an opportunity to wean both entrepreneurs and capitalists away from Silicon Valley and Shenzhen to India.
While the need for attracting a greater share of global capital has increased, the fear that has prompted the leading global antitrust regulators to tweak their merger control rules shouldn’t be imported into India hastily.
The CLRC report notes that “digital markets in India have witnessed a number of transactions, which have been used as a strategy to consolidate market positions, eliminate potential threats or to expand into new lines of businesses. Examples include, acquisition of Myntra by Flipkart, TaxiforSure by Ola, WhatsApp by Facebook, and Freecharge by Snapdeal.” It concludes that, “there is an enforcement gap regarding the ability of the CCI to review transactions in digital markets to test their anti-competitiveness under the present merger control regime.”
While recommending the introduction of an enabling provision empowering the Central Government to introduce a deal-value threshold, the CLRC appears to have completely missed asking three key questions:
- What incentives drive entrepreneurial risk-taking and early-stage investors in the digital ecosystem?
- Are promising Indian start-ups selling out to incumbents, and if so, why?
- What impact would a closer ex-ante review of transactions have on the still-nascent start-up ecosystem in India?
Incentives – Tapping a market need for greater returns
Startup founders are confident risk-takers with a firm belief in their ability to reap rich rewards – monetary or otherwise. Investors bet their capital on risk-taking founders in tapping a promising business opportunity. PE and VC funds aggregate capital from private sources with the promise of greater returns (than traditional asset classes) within a definite time frame. Naturally therefore PE and VC funds focus as much on their exit strategy as on finding a promising business for allocating their capital. Typical modes of exit include share buyback, secondary sales, open market sales, or M&A.
The incentives whetting founders’ and funders’ risk-taking appetites are the rewards for their creativity and investment. Cap the rewards and their risk appetite shrinks. Create roadblocks in the path for investment or exit, and funders develop cold feet or even change course to find other avenues for investment.
No Entry if the path to exit is uncertain
Open market exits have been a mainstay for PE/VC exits in India over the past decade. Indian PE and VC Association estimate that as much as 43% of all exits in the previous decade have been open market deals. SIDBI’s report on private investment in India reflects a similar trend. In 2017, the open market accounted for about approximately 40 percent of total PE exits in India whereas M&A accounted for only 20 percent.
SIDBI’s research on private investments in India has identified longer exit timelines, leading to lower returns on investments as one of the key reasons affecting investor confidence. Exit timelines are determined as much by the ability of a start-up to navigate the complex regulatory environment while maintaining a sharp focus on business growth, as by the regulations disciplining exit options.
Deal Value Thresholds aren’t needed
The CLRC’s fear that strategic buyouts by incumbents, including the big tech firms, are gobbling up promising Indian start-ups appears misplaced. Do we then really need to introduce deal-value thresholds for a problem that we cannot conclusively prove to exist? Introducing deal value thresholds will likely expose investor buyouts and exits to CCI’s scrutiny and further delay the transaction timelines, making India a less attractive investment destination.
This would likely prompt investors to hedge their bets or find investment opportunities in countries that offer a quicker and more predictable ecosystem for exits. Does this mean that the competition regulator ought to retreat altogether? Clearly, no.
Existing rules are sufficient
Widening the net by introducing deal value thresholds will open doors for more intrusive inquiries in search of killer acquisitions or unravel what FTC Commissioner Slaughter terms “PacMan strategy”. The carefully crafted merger control rules, along with the well-designed jurisdictional thresholds give the CCI the ability to examine transactions that are most likely to raise competition concerns.
Section 4 of the CA02 expressly prohibits dominant enterprises from limiting or restricting technical or scientific development in relation to goods or services to the prejudice of consumers as abusive conduct. This provision can help the CCI penalise a dominant incumbent that acquires a promising start-up only to eventually discontinue the innovative product, service, or process being developed by the start-up.
The CCI’s enforcement tools are certainly not trifling – a penalty for abusive conduct can go up to 10% of the aggregate turnover for three financial years of the errant enterprise. The CCI can levy a similar penalty on the individual office bearers responsible for the abusive conduct. Additionally, the CA02 also contains a nuclear option for disciplining the conduct of dominant enterprises: it can direct the break-up of a dominant enterprise to prevent it from abusing its position of dominance.
Need for a Virtuous Cycle of Creative Destruction
As the IT sector in the 1990s, the nascent Indian digital economy presents an opportunity to boost India’s GDP. It needs all the support and capital we can attract. Attracting global private capital to motor the growth of the Indian digital economy trumps the CLRC’s fears around “killer acquisitions”. Capital won’t sail to Indian shores or be channeled to riskier, more innovative sectors and enterprises if we continue to create roadblocks to exit. Strategic buyouts will become even rarer, further narrowing investors’ options.
We need to embrace competing sources of capital, whether private capital or cash reserves of incumbents to bet on Indian start-ups. Only then can we kickstart the virtuous cycle of creative destruction in the digital economy, allowing innovative start-ups at the “edge” so to speak to move closer to the centre and challenge incumbents. Essentially, we need to sweeten the deal to attract capital from all sources.
In the meantime, should the CCI stand by and watch incumbents get so entrenched that they start abusing their position? Absolutely not. The CA02 contains strong tools to discipline enterprises that abuse their dominant position. The CCI must continue to sharpen its skills and when the occasion arises wield the tools with the confidence to withstand rigorous scrutiny by courts and commentators.
Rahul Rai and Shruti Aji Murali are practicing advocates with a special focus on technology and antitrust/competition law. The views expressed in this article are strictly personal.
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