The funding winter for Indian tech firms coincides with a penalty on MakeMyTrip-Go-Ibibo (MMT-Go) by the Competition Commission of India (CCI)
Amendments to the Competition Act codify the CCI's approach, potentially impacting tech firms like Zomato and Swiggy, and raising concerns about disproportionate penalties for platform operators
There’s a need though for introducing clear guidance for the industry on when and how the CCI will exercise its statutory powers
The onset of the funding winter for young Indian technology firms in the second half of 2022 coincided with the levy of an INR 223.48 Cr penalty on MakeMyTrip-Go-Ibibo (MMT-Go) by the Competition Commission of India (CCI). The penalty is 5% of MMT-Go’s average total turnover from 2017 to 2020. During this period, MMT-Go’s average annual loss was INR 2294.52 Cr. It is yet to turn an annual profit.
Like most online platforms, MMT-Go has chased growth over profits since its inception in 2000. In platform markets, profits follow a sustained period of growth. To sustain growth till a platform reaches market-leading size and scale, firms need to focus more on customer acquisition than profits. Every penny they earn or raise through funding must be invested back to acquire customers. During this phase, any misstep under the competition rules could cost them dearly, as MMT-Go has learnt the hard way.
Other Indian technology firms under CCI scrutiny may soon find themselves in MMT-Go’s position. The first in line will likely be Zomato and Swiggy, both under scrutiny for imposing anti-competitive price parity conditions, among other things.
How Does The CCI Compute Penalties?
The Competition Act empowers the CCI to levy penalties of up to 10% of the average turnover for the preceding three financial years on guilty enterprises. In the early years of competition law enforcement, the CCI interpreted the term “turnover” to mean “total” turnover derived from the sale of all products and services, across all geographies. Naturally, this approach led to the levy of jaw-dropping penalties.
For example, in a case involving an allegation of bid rigging in the supply of aluminium phosphide tablets, the CCI imposed a penalty of INR 63.90 Cr on Excel Crop Care Limited, a multi-product company. The corresponding penalty on United Phosphorus Ltd., another party to the case was INR 252.44 Cr.
The CCI’s decision found its way to the Supreme Court, which disagreed with its approach. In Excel Crop Care vs. CCI, the Supreme Court clarified that for multi-product companies the penalties must be tied to the turnover from the business affected by the anti-competitive conduct. In other words, the penalty should be a factor of the ‘relevant’ turnover and not the ‘total’ turnover.
CCI Departs From Supreme Court’s Guidance
While computing the penalty amount for MMT-Go, the CCI deviated from Supreme Court’s guidance in Excel Crop Care vs. CCI. It considered MMT-Go’s revenue across all its business verticals (ticket bookings for flights, buses, etc.), even though the infringement concerned its practices with respect to hotel listing alone.
The CCI observed that “restricting revenue to just one segment would not appropriately capture the interdependent and integrated nature of the ecosystem wherein one product/ service reinforces multiple other products/ services.”
This observation is telling. It indicates that the CCI appears to think that limiting penalty to a factor of the relevant turnover alone reduces the deterrent effect it seeks to instil through penalties. The CCI has found an ally in the Government.
In April this year, the Government introduced several changes to the Competition Act, some substantive and others procedural. The substantive changes include the introduction of a mechanism to settle cases or offer commitments to secure the closure of inquiries, a new test linked to the “value of the transaction” for notifying mergers and acquisitions and a reduction in the timelines for granting approvals for notified mergers and acquisitions. All the changes suggested by the Government were approved by the Parliament.
One of these changes codifies the CCI’s decision to use the turnover from all revenue streams while penalising MMT-Go. Now, the term “turnover” is defined as “global turnover derived from all products and services”. In sum, the Supreme Court’s guidance in Excel Crop Care vs. CCI to restrict penalties to a factor of the relevant turnover alone stands negated.
How Will The New Parameters For Levying Penalties Impact Tech Firms?
For Zomato and Swiggy, the global turnover from all products and services would include revenue from not just restaurant discovery and delivery services, but also other verticals such as grocery, menu management and reservations.
Most platforms start by intermediating two sides of a select market (such as restaurants and diners) and expand to add other adjacent services for a host of reasons. This includes improving consumer experience or utilising their existing networks to add value in a potentially innovative way. They all now run the risk of debilitating penalties should they trip Indian competition rules in any one of their offerings.
The CCI’s approach in penalising MMT-Go now codified through the amendments to the Competition Act, must be tempered to suit the harsh realities faced by platform operators in India. Like MMT-Go, most Indian platform operators have struggled to turn profitable. They face intense competition and must always look over their shoulders to identify and meet competitive threats. This means a long gestation period and significant cash burn. If and when they do start generating cash flow, they must continue to invest in their platform to stay competitive. Lofty valuations apart, most Indian platform operators are a quarter or two away from going bust.
This business reality must inform the CCI’s decisions while it computes penalties. The Supreme Court appeared to recognise this in Excel Crop Care vs. CCI. It clarified that the CCI’s penalties must balance, “two competing interests: harm caused to the society by the infringer which gives justification for penalising the infringer on the one hand and the right of the infringer in not suffering the punishment which may be disproportionate to the seriousness of the act.”
Guidelines For Penalty Computation
Separately, the recent amendments to the Competition Act also require the CCI to issue guidelines to compute penalties for contraventions of the Competition Act. To strike the right balance, it would be useful for the CCI to more closely study the operation of digital platforms. The whole may not always be greater than the sum of its parts for all platforms.
Platforms that cross-subsidise by charging lower (or zero) prices on one side of the platform and generate income from the other side, may exhibit the type of interdependence the CCI was concerned with while penalising MMT-Go. For example, most banks offering credit cards charge little to no fees from the retail customers but recover revenue on the other side of the platform by charging a relatively higher merchant fee.
In contrast, platforms like TATA Neu or PayTM offer a range of intermediation services through their super apps. For example, both TATA Neu and PayTM sell groceries, facilitate airline ticket bookings and provide payment services. TATA and PayTM may derive some synergies by offering several intermediation services through their super apps. But each category of intermediation service they offer is distinct. The synergies derived from offering different services on a platform do not necessarily reinforce the platform operator’s position across all services as the CCI appears to assume in the case of MMT-Go.
The prospect of debilitating penalties for multi-product firms is real. The CCI has sent a clear message through its decision against MMT-Go. The government has strengthened its hand by defining the term “turnover” to mean “global turnover derived from all products and services”.
There’s a need though for introducing clear guidance for the industry on when and how the CCI will exercise its statutory powers. The unique challenges that Indian technology firms face necessitate that the CCI guidelines on the computation of penalties are measured. Its quest for achieving deterrence should not result in disproportionate penalties.