Centre for Internet and Society

Combinations and Competition: Why the draft DCB must account for digital mergers and acquisitions

Abhineet Nayyar and Isha Suri — 2024-08-08T07:47:01Z

Authored by Abhineet Nayyar and Isha Suri, reviewed by Nishant

“It is better to buy than to compete”

Mark Zuckerberg (Meta CEO, 2008)[1]

Mergers and Acquisitions (collectively, M&As or Combinations) have been a common practice in industry consolidation for many years now. In fact, as Zuckerberg’s infamous quote suggests, it might be one of the central pillars of today’s internet economy. The recently announced $1.5 billion merger between Reliance Industries and Disney, which, among other things, aims to combine their streaming services – Jio Platforms and Hotstar, respectively – is just another instance of this growing trend.[2] Data on market activity suggests that far from being an outlier, M&As are becoming commonplace in the Indian technology ecosystem as well - a trend likely to continue and increase unless market regulators intervene.

Built on direct and indirect network effects, digital markets are susceptible to concentration in the hands of a few dominant platforms. In addition to potentially anti-competitive practices that these platforms are likely to engage in such as deep discounting, they often use ‘strategic investments and partnerships’ with their competitors or other firms in their supply chains to further consolidate their position in the market. Examples include but are not limited to Facebook’s 2012 acquisition of Instagram for $1 billion, its 2014 acquisition of WhatsApp for $19 billion, or even its 2020 investment of $5.7 billion in Reliance Industries’ Jio – a partnership that positions itself at “bringing together JioMart, Jio’s small-business initiative, with WhatsApp”.[3][4][5][6] Through similar transactions, dominant players are in a position to foreclose competition and further entrench their position as market leaders.

In 2022, the Parliamentary Standing Committee on “Anti-Competitive Practices by BigTech Companies” also highlighted ‘killer acquisitions’ in India’s digital markets as one of the many concerning anti-competitive practices.[7] As per the Standing Committee, in the choice between ‘Build versus Buy’, “large platforms tend to pick the latter, thereby disallowing smaller firms to grow beyond a certain limit.” [8] However, the Committee on Digital Competition Law (CDCL), specifically formed to look into competition-related concerns in digital markets, chose to exclude this particular anti-competitive practice from the ambit of its proposed Digital Competition Bill (Draft DCB). Moreover, the CDCL explains this choice by pointing to the Competition [Amendment] Act, 2023, which theoretically allows the Competition Commission of India (CCI) to review more M&As.

But this justification is only partial.[9] While the 2023 Amendment tries to answer the question “Are the right digital M&As being regulated by CCI?”, it ignores the more pertinent “Are the right principles being deployed to review digital M&As?”.

In this context, the first section of this article provides an overview of conventional M&A regulation in India and underlines prominent trends in the process. This is followed by an inquiry into the evolution of digital combinations in India, and their treatment by CCI. We conclude the piece by recommending CCI incorporate more accurate and relevant theories of harm for digital mergers – a practice that competition authorities have incorporated in other jurisdictions such as the EU’s Digital Markets Act, the UK’s Digital Markets, Competition and Consumers Bill and the 2022 guidelines released by Singapore’s Competition and Consumer Commission.[10]

Reviewing Combinations for Anti-competitiveness

M&As, including digital mergers, are governed through Sections 5 and 6 of the Competition Act, 2002 [Act] and the Combination Regulations, 2011. The Act lays out many key elements in this respect, including defining ‘Combinations’ - referred to a sub-group of M&As that qualify certain threshold values and are required to notify CCI about their existence.[11] In addition, the Act also empowers the CCI to evaluate and adjudicate on these combinations.[12]

Typically, a qualified combination – including a merger, an acquisition, or an investment that meets the threshold criteria – must notify the CCI of the relevant transaction.[13] Following this notification, as per the rules, the Commission conducts a thorough review of the anti-competitive effects of the proposed combinations. Once complete, the CCI is empowered to either approve or reject the transaction. Overall, the CCI primarily assesses the combination based on its effect on the competition structure of the relevant market. In cases where the CCI is satisfied that such adverse effects can be eliminated by suitable modification, it may approve the combination with modifications. Conversely, the Commission might also pursue an investigation against a combination that has failed to notify it of the relevant transaction.

It is important to note that not every M&A requires notification and approval from the Commission and depends on whether that particular transaction qualifies the threshold values set under Section 5 of the Act.[14] With massive digitisation underway across all sectors of the Indian economy, concerns about how these threshold values affect scrutiny of digital mergers – which usually didn’t qualify – have drawn focus in recent years.[15] Deals such as Facebook’s 2014 acquisition of WhatsApp, which evaded the regulator’s scrutiny since it failed to meet the qualifying thresholds, have also uncovered the need for newer ‘theories of harm’ that can be used to govern such combinations adequately [more on this later].[16]

Digital M&As and Limitations of the Status Quo

According to data released by CCI in its annual reports, the Commission reviewed 99 combination notices in 2022-23, an increase from 90 during the previous year.[17] Out of these 99, the Commission approved 92 such combinations in 2022-23, up from 89 in 2021-22.[18] However, it is pertinent to note that none of these combination notices were rejected by the Commission. In fact, CCI has not rejected any of the 400+ combination notices filed with it in the last five years.[19]

Furthermore, research undertaken by Deloitte suggests that there were more than 160 mergers or acquisitions in India in 2022-23.[20] This disparity between CCI’s figures and market estimates can largely be attributed to the threshold requirements under the 2002 Act. Taking into account that over 36% of these 160+ M&A deals are estimated to be in the ‘Technology, Media and Telecommunications’ industry, it is reasonable to assume that ‘asset-light’ digital combinations continue to escape the Commission’s scrutiny.[21] This is a risk because despite failing to meet the threshold values set under the 2002 Act, many deals are still significant in their scale. For example, Reliance Industries group, which also owns the telecom giant Jio, single-handedly accounted for eight (8) digital acquisitions in 2019.[22]

The Commission’s high approval rate, coupled with its inability to appropriately scrutinise such digital M&As, led to the government seeking modifications to India’s competition law.[23] In 2023, following the recommendations of the 2019 Competition Law Review Committee, the Competition (Amendment) Act, 2023 [or ‘the 2023 Amendment’] was passed.[24] Among other changes, the 2023 Amendment included “value of transaction” as one of the threshold measures for triggering the notifying clause.[25] This meant that even if a merger did not satisfy the ‘asset’ or ‘turnover’ threshold values, it could still be deemed a combination if the value of the transaction exceeded ₹2000 cr.[26] However, the impact of the 2023 Amendment on CCI’s future rulings is yet to be seen.

Thereafter in 2023, the Government of India constituted the CDCL “to examine the need for a separate law on competition in digital markets”, including a framework similar to the EU’s Digital Markets Act.[27][28] However, unlike the US, the EU, the UK, or Singapore – jurisdictions that the CDCL referred to during its deliberations – it explicitly excluded ‘mergers and acquisitions’ from the draft bill’s scope, instead relying solely on the 2023 Amendment.[29] But the intended objectives of the 2023 Amendment and the proposed DCB are entirely different. While deal value thresholds aim to address the ‘threshold value’ problem to include more deals under merger review, they provide no guidance that can help adapt the merger review process to the context of digital markets.

Adopting Accurate and Relevant Theories of Harm

Established theories of harm lie at the core of any merger review process, with the competition regulator relying on them to assess potential damage to competition. Traditionally, if merging parties are neither competitors (horizontal) nor trading relationships (vertical), their combinations are usually not subject to strict enforcement under the conventional merger review regime.[30][31] As a result, traditional theories of harm focus on the risk that the post-merger firm will ‘bundle’ or ‘tie’ the pre-merger firms’ products together. In contrast, many inherent characteristics of digital markets – such as network effects and low marginal costs – have been found to exacerbate the gaps in these outdated theories of harm.[32][33] While network effects allow first movers to access a positive feedback loop and become dominant in digital markets, they also incentivise mergers between competitors because an increase in the network of users is likely to generate further returns.[34]

Take the case of ‘platform envelopment’, for example, where a platform dominant in one market i.e., ‘the origin market’, enters another platform market i.e., ‘the target market’ – through a merger or an acquisition – and bundles its original functionality with that of its newly acquired platform in the target market.[35] As a prominent example of this theory, Google entered mobile operating systems by bundling Android with Google Search – two separate markets – to leverage the data generated by users of both. Such data was effectively monetized through Google’s online advertising platforms, thereby enabling the firm to fund its entry in a way that could not be replicated by other competitors and contributed to its eventual dominance of the mobile operating system market.[36] However, recognising envelopment and using other such theories of harm requires an understanding of platform characteristics, the impact of direct and indirect network effects, and the role of data in enabling platform monopolisation – all of which the draft DCB seeks to do.[37]

As highlighted earlier, many other jurisdictions have also updated or are in the process of updating their merger guidelines to incorporate these newer theories of harm. For instance, the Japan Fair Trade Commission (JFTC) amended its merger guidelines in 2019 to address the competitive concerns of conglomerate mergers, especially in digital markets. This allows the JFTC to consider factors such as network effects, the value of data, and the importance of marginal costs while reviewing digital combinations.[38]

With M&A activity in India’s digital sector also bound to witness an upward trend, we reiterate that merger review for digital markets should account for many of these characteristics that are likely to amplify the shortcomings of traditional theories of harm. This requires the CDCL to modify the draft DCB accordingly or, at the very least, for the CCI to publish detailed guidelines on reviewing digital M&As, accounting for more evolved theories of harm.

[1]FTC v. Facebook, Inc, FTC Amended Complaint, 2021, p. 1, available here

[2]Reliance and Disney team up to crush Netflix and Prime Video in India, Rest of World, March 2024, available here

[3]The Inside Story of How Facebook Acquired Instagram, OneZero, August 2020, available here

[4]India seeks to tighten rules on M&A antitrust scrutiny, Reuters, 2022, available here

[5]CCI approves acquisition of approximately 9.99% of Jio Platforms by Facebook, AZB and Partners, 2020, available here

[6]Facebook Invests $5.7 Billion in Indian Internet Giant Jio, The New York Times, April 2020, available here

[7]Parliamentary Standing Committee on Anti-Competitive Practices by BigTech Companies, Ministry of Corporate Affairs, p. 8, available here

[8]Parliamentary Standing Committee on Anti-Competitive Practices by BigTech Companies, Ministry of Corporate Affairs, p. 8, available here

[9]Comments to the Draft Digital Competition Bill, 2024, Nayyar, A., Suri, I., and Bedi, P., Centre for Internet and Society, May 2024, p. 20-22, available here

[10]Singapore: Competition law fact sheet, Norton Rose Fulbright, April 2024, available here

[11]The Competition Act, 2002, Government of India, p. 8, available here

[12]The Competition Act, 2002, Government of India, p. 12, available here

[13]Combination FAQs, Competition Commission of India, available here

[14]The Competition Act, 2002, Government of India, p. 8, available here

[15]Big Data Mergers: Bridging the Gap for an Effective Merger Control Framework, Tyagi, K., May 2021, p. 34, available here

[16]India seeks to tighten rules on M&A antitrust scrutiny, Reuters, 2022, available here

[17]Annual Reports, Competition Commission of India, available here

[18]Annual Reports, Competition Commission of India, available here

[19]Annual Reports, Competition Commission of India, available here

[20]India’s M&A Trends 2023, Deloitte, 2023, available here

[21]India’s M&A Trends 2023, Deloitte, 2023, available here

[22]2019 In Review: Top 10 High-Profile Startup Acquisitions In India, Inc42, 2019, available here

[23]India seeks to tighten rules on M&A antitrust scrutiny, Reuters, 2022, available here

[24]The Competition (Amendment) Act, 2023, Government of India, available here

[25]The Competition (Amendment) Act, 2023, Government of India, available here

[26]The Competition (Amendment) Act, 2023, Government of India, available here

[27]Unstarred question No. 81, Government of India, Lok Sabha, December 2023, available here

[28]The Digital Markets Act Proposal of the European Commission: Ex-ante Regulation, Infused with Competition Principles, European Papers, 2021, available here

[29]Report of the Committee on Digital Competition Law, Government of India, 2024, p. 151 onwards, available here

[30]A note on conglomerate mergers: The Google/Fitbit case, Nakagawa, K. and Matsushima, N., Japan and the World Economy, Volume 67, 2023, 101203, ISSN 0922-1425, available here

[31]Executive Summary of the Roundtable on Conglomerate effects of mergers, OECD, June 2020, available here

[32]Executive Summary of the Roundtable on Conglomerate effects of mergers, OECD, June 2020, available here

[33]Tying and bundling in the digital era, Holzweber, S., European Competition Journal, October 2018, available here

[34]Horizontal mergers, cost savings, and network effects, Cosnita-Langlias, A. and Rasch, A., Bulletin of Economic Research, April 2018, available here

[35]Harnessing Platform Envelopment in the Digital World, Condorelli, Daniele; Padilla, Jorge, Journal of Competition Law & Economics, 00(00), 1-45, 2020, available here

[36] Harnessing Platform Envelopment in the Digital World, Condorelli, Daniele; Padilla, Jorge, Journal of Competition Law & Economics, 00(00), 1-45, 2020, available here

[37]Summary of Discussion of the roundtable on Conglomerate Effects of Mergers, OECD, Feb 2021, available here

[38]Conglomerate effects of mergers – Note by Japan, OECD, May 2020, available here

For more details visit https://cis-india.org/raw/combinations-and-competion

Digital Markets and India: Demystifying the Draft DCB

Abhineet Nayyar and Isha Suri (in alphabetical order) — 2024-04-15T06:15:21Z

This document summarises the proceedings of the Roundtable on the draft Digital Competition Bill (DCB) [hereinafter referred to as ‘the Roundtable’]. The Roundtable was conducted online on April 1, 2024, and included representation from academia, law, civil society, and policy organisations. The primary objective of the Roundtable was to discuss the recent report published by the Committee on Digital Competition Law (CDCL) in March 2024 along with the draft of the DCB.

The event was organized by Abhineet Nayyar and Isha Suri.

The Roundtable began with a brief presentation by Abhineet Nayyar (Centre for Internet and Society - CIS) providing an overview of the various important themes identified by CIS during the course of their research. This introduction was followed by Roundtable discussions moderated by Isha Suri (CIS), focusing on important areas identified by CIS for the course of this discussion.

This summary seeks to crystallise the learnings that emanated from this Roundtable to inform the discourse and contribute to the ongoing public consultation for the draft DCB, due by April 15, 2024.

I. Ex-ante or ex-post

The initial parts of the discussion focused on the shift from a largely ex-post model to an ex-ante model to competition regulation in India. It was briefly summarised during the discussion that while the extant Competition Act of 2002 relied on ex-post methods to recognise anti-competitive practices, the proposed DCB adopts an ex-ante approach similar to what has been adopted or is being deliberated in other jurisdictions. Few participants highlighted the benefits and costs of switching from the former to the latter and highlighted specific learnings for digital markets in India, while some were sceptical of this shift towards an ex-ante model, given its potentially detrimental impact on MSMEs and lack of enforcement capacity in India.

The discussion began with the participants highlighting the gaps in the extant ex-post regulatory framework, including delayed enforcement and disposal of appeals, and its under-reliance on private enforcement techniques that increase the ecosystem’s dependence on CCI as a central node. Simultaneously, however, several participants also warned against potential issues in the ex-ante approach proposed under the draft DCB. While some of these concerns related to the general ineffectiveness of ex-ante regulations – as highlighted, for example, in data protection and broadcasting – many participants deliberated on specific sections of the draft DCB. It was also pointed out that telecom regulation does have ex-ante provisions to address competition concerns within the sector. One participant, for instance, highlighted the proposed bill’s wide scope and the risk it poses for an under-resourced regulatory regime.

Overall, the group emphasised the need to carefully consider the particulars of the ex-ante approach proposed under the draft DCB. While there was a broader consensus that this approach may address some issues with digital markets particularly, the discussion brought to the fore many concerns with how this approach is currently being articulated. In addition to the bill’s wide scope, the Roundtable also discussed the necessity for an impact assessment study to understand its effects better. Other concerns regarding the proposed threshold values and the draft DCB’s focus on ‘contestable’ markets were also tabled during the discussion.

II. Building Regulatory Capacity

The participants discussed existing regulatory capacity in light of the proposed ex-ante approach under the draft DCB. Several participants highlighted factors that currently inhibit CCI’s capacity, the foremost of them being the Commission’s reliance on enforcement by bureaucrats with time-bound deputations affecting continuity and sustained capacity. In the absence of professional capacity, particularly in digital markets, the wide scope proposed by the draft DCB is only likely to further test CCI’s ability to deliver on its mandate. Moreover, in discussing how to build CCI’s professional capacity, a participant also highlighted the risk of regulatory capture by the private sector if one were to follow a ‘revolving door’ approach.

Participants then delved into potential solutions for CCI’s constrained capacity. In addition to staffing the Commission with subject matter experts, a participant also stated that given the political economy, it may be prudent to design the regulatory ecosystem to work around the problem of legacy issues of lack of professional capacity and independence. The participants also briefly discussed the role of impact assessment in resolving this problem, specifically by including the effect of the draft DCB on CCI’s already strained capacity.

III. Proposed Threshold Values

Deliberations began with the rationale for the Threshold Values (TVs) proposed by the draft DCB. Several participants shared their reservations about the bill’s reliance on international standards, especially for metrics such as market capitalisation and global turnover. Some also identified certain areas where the proposed bill seeks to identify TVs that are more relevant to the Indian market. For example, a participant highlighted that the draft DCB, in Section 3(4) chooses to identify and calculate business users and end users for each of the core digital services separately.

In addition to discussing the rationale behind TVs, many participants also suggested avenues for potential improvement. For instance, one of the participants recommended the identification of threshold values for each of the core digital services, as opposed to the current service-agnostic thresholds. It was posited that the expedited timeline of three months may have constrained the committee from recommending nuanced thresholds suited for Indian contexts since that would require market studies or commissioned (independent) research for evidence gathering and analysis.

Some participants were optimistic that the currently open consultation process may leave room for further negotiation on the prescribed TVs. This includes, among other things, identifying more representative calculation methods for arriving at appropriate values and incorporating global best practices.

IV. Remedies and Penalties

The participants sought to ascertain the effectiveness of penalties in the form of fines as a tool for deterring abusive conduct by dominant entities in general, and digital behemoths, more specifically. On one hand, some participants highlighted the lack of evidence to support the assumption that currently imposed fines deter such abuse in the market. For instance, one of the participants referred to a recent incident where the Dutch competition regulator imposed a €5 million fine for every week Apple failed to comply with an antitrust decision by the regulator. In the end, Apple had accumulated fines worth €50 million, instead of allowing dating app providers to use alternative modes of payment, ostensibly indicating how companies perceive penalties as yet another operating cost.^{^[1]}

On the other hand, a few participants also underlined the need to look at ‘penalties’ as a part of a larger toolkit and not as a standalone deterrent. In this context, the draft DCB’s focus on settlements and commitments, and criminal penalisation were also highlighted by some attendees; while others pointed out the need for an institutional redesign – for example, by reviewing the current appellate process, or by potentially reintroducing the Competition Appellate Tribunal (COMPAT).

Additionally, the question of penalties led to a discussion on the calculation of the quantum of fines and the process followed therein. Stressing the need for more elaborate penalisation guidelines, one participant questioned CDCL’s choice of capping penalties at 10% of the enterprise’s global turnover, especially for industries that have comparatively higher profit margins. It was also pointed out that there is no empirical evidence suggesting the efficacy of the 10% cap, as a sufficient amount.

The discussion also briefly delved into the issue of structural remedies as a tool for correcting harms in digital markets, given the presence of strong network effects and winner-take-all outcomes. Even though there was not a deep dive into the issue of structural remedies, per se, a participant indicated that certain obligations under the DCB, such as the one on tying and bundling comprise a form of structural reform.

V. Digital Mergers and Acquisitions

Unlike the Competition Act 2002, the draft DCB explicitly excludes combination review from its scope, instead relying on the 2023 amendment to the Act. It was pointed out during the discussion that recent amendments in the merger review process such as the inclusion of deal value thresholds should check anticompetitive mergers. However, as highlighted by a few participants during the Roundtable – even though the amendment would potentially enable CCI to investigate digital M&As, the Commission would still have to rely on theories of harm established under the extant Act, which largely examines price-based effects of mergers. For instance, one participant highlighted the role of price-based assessments informing CCI’s working in many merger review cases and pointed out the limitations of these assessments in examining combinations in the digital market.

On the other hand, many obligations identified and elaborated under the proposed DCB are, in fact, better suited to support CCI’s regulation of such digital M&As. Another participant pointed out that while sections 3 and 4 of the extant Act can still, theoretically, allow CCI to borrow from the draft bill, the proposed regulatory landscape does not ensure this synergy between the two pieces of legislation.

VI. Gaps in the Consultation Process

Finally, the discussion highlighted the consultation process adopted by the CDCL during the drafting of this bill. While there was a general agreement that the process was not very representative, different participants brought up diverse perspectives. One participant, for instance, underlined the importance of including MSMEs in the drafting process, given their deep reliance on digital tools and technologies. Other attendees also echoed this viewpoint, highlighting that although the CDCL incorporated inputs from BigTech companies and industry associations, the perspectives of consumers, technology experts, and platform workers were missing from the list of stakeholders consulted during the process.

There was cautious optimism in the room that subsequent drafts of the Bill might address some of these concerns by including a diverse set of stakeholders and incorporating a bottom-up consultative process.

^{^[1]} https://www.reuters.com/technology/dutch-regulator-rejects-apples-objections-against-fines-2023-10-02/

To download the PDF, click here and the Presentation here

This report has been authored by (Abhineet Nayyar and Isha Suri)

For more details visit https://cis-india.org/raw/digital-markets-and-india-demystifying-the-draft-dcb