New CCI Regulation To Impact Global Multi-service, Product Firms: Experts

The Ministry of Corporate Affairs (MCA) last week notified provisions in the Competition (Amendment) Act, 2023 where the Competition Commission of India (CCI) can levy penalties based on a company's global turnover, allowing for a much higher fine. 

If a company is found to be abusing its dominant position, the CCI can penalise the firm with a fine as high as 10 per cent of their turnover and in the case of cartels, the penalty could be as much as three times their profit for each year of such an agreement or 10 per cent of their turnover for each year of the agreement. 

Previously, the CCI could only impose fines based on the turnover of the relevant domestic entity. Now, experts highlighted that the new provision is going to impact multi-product and multi-service firms with a global presence in a significant way.

“Although the penalty provisions are sector or market agnostic, but multi-product or multi-service companies with global presence are likely to be impacted more. This may particularly be true in the case of companies operating in the digital or technology sectors. CCI will be guided by the penalty guidelines and the amount of penalty in each case will depend upon various factors, including the seriousness of the offence,” said Abhay Joshi, Partner, Economic Laws Practice.

Industry insiders also said that the new provision will consolidate the digital sector with high valuations within the purview of the CCI.

“A major driver behind the changes in Indian merger control regulations was the Competition Commission of India’s (CCI) intention to bring within its purview consolidations in the digital sector that have high valuations but lack significant assets or turnovers. It is these tech companies that will be most impacted by the change in regulations,” said Shreevardhan Sinha, Senior Partner, Mergers and Acquisitions, Desai and Diwanji.

Economic Laws Practice's Joshi said that under the European Union (EU) competition law regime, the European Commission (EC) has the power to impose penalties on contravening entities up to 10 per cent based on their worldwide or total turnover.  Also, the UK competition authority, Competition Market Authority (CMA) has similar powers and can impose penalties up to 10 per cent of the turnover, Joshi added.

Some stated that the new provisions are in line with the global practices. “The amended law and the guiding principles of determining the quantum of penalty, are in line with global trends. It is well known that fear of higher penalty does deter a business entity not to violating the law. As businesses are increasingly becoming global, it is imperative to adopt global best practices that are being followed consistently in India,” said GR Bhatia, Partner, Luthra and Luthra Law Offices India. 

The CCI’s deal value threshold (DVT) framework is very similar to the concept of transaction value thresholds that were introduced in the merger control regulations of the German Federal Cartel Office and the Austrian Federal Competition Authority in 2017, added Desai and Diwanji's Sinha.

The Competition Law Review Committee set up by the Ministry of Corporate Affairs noted in its report dated 26 July 2019 that during its discussion on combinations, the committee observed that in the last decade, the five largest technology companies have made over 400 acquisitions globally. A recent report also stated that some of these acquisitions have been exceptionally high value, peaking with Microsoft paying USD 26.2 billion for LinkedIn.

Against this background, the committee discussed the inadequacy of the existing asset and turnover-based thresholds of notification of combinations provided in Section 5 of the Competition Act.

“India has in recent years witnessed several transactions in the digital markets that have been used as a strategy to consolidate market positions, eliminate potential threats or expand into new lines of business. Having said that, the business model of tech companies is often such that they do not generate any significant revenue for a long period, focussing instead on user growth in the initial stages,” mentioned Sinha.

He further added that since many acquisitions in this sector derive value from data or some business innovation held by the enterprise being acquired, the target usually lacks a large asset base and the services offered can either be free or insignificant in terms of turnover.

In such instances, the value of the target’s sales is a rather poor indicator of the transaction’s significance for competition. “Before the amendment, the CCI had no power to assess transactions of this type even where the potential competitive harm was evident. The new regulations, on the other hand, bridge that enforcement gap,” Sinha emphasised.