The Indian Parliament recently approved significant changes to the Competition Act, 2002
All mergers and acquisitions valued above INR 2,000 Cr will require CCI’s approval if the target enterprise has substantial business operations in India
This exercise might lead to Indian tech startups running the risk of being caught in a relatively long-drawn probe by the CCI causing delays in strategic deals
Young Indian technology firms have largely been insulated from the need to secure the Competition Commission of India’s (CCI) approval for raising funds from private equity and venture capital funds. Equally, most strategic deals involving technology startups have also slipped under the radar. All this is likely to change soon.
The Indian Parliament recently approved significant changes to the Competition Act, 2002. One of these changes is of immediate relevance to Indian technology firms — big or small.
Upon the President’s assent to the Competition (Amendment) Bill, 2023, all mergers and acquisitions valued above INR 2,000 Cr will require CCI’s approval if the target enterprise has substantial business operations in India.
What Exactly Is Going To Happen After This Bill?
Indian startups have secured multi-million-dollar valuations in the past. The recent blip is unlikely to last long. As the valuation cycle picks up, so will the likelihood of transactions involving Indian startups crossing the INR 2,000 Cr mark. But the moment a transaction’s value exceeds this threshold, it will require notification to the CCI. During the CCI’s review, the parties will have to stay still. In other words, they cannot consummate the transaction pending CCI’s blessing.
The CCI now has a decade-long track record of approving transactions and by and large, it has approved most transactions within two to six weeks. However, this track record may not hold true for transactions notified because of this new rule.
The new rule seeks to offer the CCI the opportunity to spot ‘killer acquisitions’ and/or such strategic deals that may help a dominant enterprise further entrench its position by acquiring innovative startups in neighbouring markets.
Identification of killer acquisitions isn’t easy. This ominous-sounding phrase refers to the pre-emptive acquisition of potential competitors by an industry leader to quash future competition.
Is This Bill Going To Slow Down The Process?
In fast-changing technology-driven markets, there can be no bright line tests for who constitutes a potential competitor. For instance, Paytm has consistently innovated around its core business of payment services to expand its offerings across a wide range of services, from air ticket bookings to insurance brokerage.
If the CCI successfully crosses the first step of identifying the target in a transaction as a potential competitor of the acquirer, it will have to probe whether the transaction is motivated by the desire to quash future competition. To do so, it will have to gauge the acquirer’s intent. Economic evidence will not be enough to complete this exercise. The CCI may have to also review internal documents. Despite the best of intentions, a short-staffed CCI may end up taking more time than its average track record of two to six weeks to approve transactions. For startups facing a cash crunch, a wait of two to six weeks may be too long.
The difficulties in spotting ‘killer acquisitions’ pale in comparison to the challenges involved in assessing whether an industry leader seeks to acquire an innovative startup in a neighbouring market only to further entrench its position.
Traditionally, competition regulators have tied their reviews to actual or potential overlaps in the product or service offerings of the parties to the transaction. This approach may not help in determining whether an entrenched industry leader seeks to acquire another firm in a neighbouring market only to ring-fence its position of strength.
In such transactions, competition regulators need to ascertain whether the acquirer may have independently entered the market for products/services offered by the target. Again, this exercise will require the CCI to sift through facts and internal documents, risking the CCI’s average track record of clearing transactions within two to six weeks.
Impact On Indian Startups
The recent failed attempt by the US antitrust regulator, the Federal Trade Commission, to block Meta’s acquisition of Within Unlimited, Inc. highlights the difficulty in probing transactions for such outcomes. The US Northern District Court of California asked two questions.
First, whether Meta had other feasible means of entering the relevant market, apart from acquiring Within. Second, whether the available feasible means offer a substantial likelihood of increasing competition. Inquiries involving similar questions will have to be carried out by the CCI in strategic investments or buyouts involving Indian startups. Doing so will be time-consuming.
Time is of the utmost importance in deals involving startups. Strategic deals involving Indian tech startups run the risk of being caught under the new rule and, in turn, risk being caught in an extended cycle of a probe by the CCI. Dealmakers facilitating strategic deals must remember to align deal timelines to account for a relatively long-drawn review process.