The deal value threshold rule, a new antitrust law in India, is expected to tighten regulatory scrutiny of any M&A involving the country. Introduced six years ago, the regulation aims to prevent "killer acquisitions" and highlights India's regulatory conundrum of balancing excessive and insufficient action. As of this week, the Competition Commission of India must approve transactions for more than 20 billion rupees ($240 million), provided that the target company maintains a sizable presence in India. Because they are mostly dependent on the income and asset size of the transacting parties, India's current transaction reporting thresholds frequently elude the country's current system. However, focusing only on the deal value barrier is not the most excellent strategy to close gaps; also, increased regulatory scrutiny may make it more difficult for start-ups that want to be bought in the early stages of their development to obtain finance and grow. This could discourage creative thinking. India is hardly the only country looking for ways to oppose significant tech platforms' acquisitions of startups. The new threshold applies to various transactions, including selling local roads and highway assets, e-commerce transactions, cement purchases, and movie theatre chain mergers. The Competition Commission of India (CCI) wants to strengthen its oversight of big digital companies to stop harmful practices, including self-preferring and bundling certain services.
This new era of regulation will likely result in more red tape and increased scrutiny for businesses. Additionally, there is no transitional provision in the new regulation, so agreements that were announced before September 10 but haven't closed yet could still require CCI clearance.
Understanding the New Anti-Trust Rule
Aiming to tighten the regulatory environment around M&A transactions, India's Competition Act has undergone more extensive modifications, including introducing a new anti-trust provision. This new rule's primary characteristic is lessening the required CCI approval requirement. In the past, the CCI had to be alerted only to bigger transactions for an antitrust review, depending on the target company's asset worth or turnover. Smaller transactions must be submitted for regulatory approval, especially when they include businesses with unique business structures or target market niches.
This lower threshold is coupled with a broader jurisdiction for the CCI to scrutinise deals based on their potential impact on market competition. The new rule gives the CCI the power to investigate deals even when they do not meet the traditional financial thresholds, if there is a concern that the deal might reduce market competition or create a monopoly. This has sparked concerns that routine deals, often necessary for startups and small enterprises to grow or secure funding, could now face extensive delays due to regulatory investigations.
Rising Compliance Burdens
The immediate fallout of the new rule has been the rise in compliance burdens on companies. In the past, if a startup or smaller company's contract size fell below the predetermined financial criteria, they may avoid a CCI review. This made it possible for M&A deals to move quickly and effectively, which was necessary for industries like technology, healthcare, and finance services, where getting products to market quickly is vital.
Businesses now have to prepare for new legal and regulatory requirements, including comprehensive CCI notifications. Costs associated with this might be high, particularly for startups that usually have tight finances. Due to rising legal costs, compliance paperwork, and CCI engagement times, deal-making will undoubtedly become more complex.
Impact on Foreign Investment
The new regulatory environment has alarmed foreign investors, who have significantly fostered India's startup scene. In industries like e-commerce, technology, and financial services, where foreign businesses have bought Indian enterprises to access the expanding market, India has been a preferred location for foreign direct investment (FDI). Because of the increased regulatory scrutiny, international investors may be discouraged from pursuing M&A deals in India because they fear drawn-out clearance processes or the possibility that the CCI may reject a deal. For example, global private equity and venture capital firms, which have been instrumental in supporting Indian businesses, should reconsider their approaches.
These companies usually rely on fast exits through mergers or acquisitions to recover their investment costs. India may become a less appealing investment destination than other countries where regulatory clearance processes are more rapid and predictable due to the potential rise in transaction closing times resulting from the new anti-trust regulation.
Delays in Deal-Making
In the world of mergers and acquisitions, timing is everything. The implementation of a stricter antitrust law might cause considerable delays in the closing of deals. Even a few months' delay in concluding an acquisition might cost a company working in a fast-paced industry like fintech, e-commerce, or healthcare, causing them to miss out on opportunities, lose market share, or fail vital growth plans.
Adding a "gun-jumping" clause to the new law, which forbids businesses from carrying out a merger or acquisition before they have obtained CCI clearance, is among its most alarming features. This clause, meant to stop businesses from engaging in anti-competitive behavior, may cause transactions to be delayed by many months. A backlog of unfinished work and uncertainty for enterprises may result from corporations waiting for the CCI's formal clearance, even when there are no significant anti-competitive issues.
Sectoral Impacts: Tech and Startups at the Forefront
All industries are affected by the new antitrust law, but the startup and technology sectors are the most at risk. Indian startups have emerged as top acquisition targets in recent years, drawing interest from local and foreign businesses seeking to grow their market share and innovate. Many digital firms have found success in their ability to scurry on acquisitions. These companies frequently rely on strategic alliances, mergers, and acquisitions to thrive in a highly competitive industry. Due to the new rule's emphasis on even small-scale transactions, there are worries that many Internet startups—particularly those engaged in specialised markets like finance, blockchain, and artificial intelligence—may come under more intense regulatory scrutiny. Even in cases where the deal amount is relatively small, companies that hold a dominant position in a particular technology specialty now risk having their acquisition by a bigger company banned by the CCI if it is shown to be anti-competitive.
A Blow to Exit Strategies
Early-stage investors and company founders have long seen M&A as a crucial exit strategy that allows them to cash in on their investments and move on to new projects. Startups may find it easier to obtain takeover bids that pass regulatory scrutiny if the new antitrust law is implemented, which might upset this ecosystem. Due to their concern that the absence of a workable exit plan would lower the total return on investment, venture capital firms may be reluctant to participate in new startups, and founders may find it difficult to exit their companies.
Furthermore, because even minor transactions are now closely monitored, early-stage startups—which frequently depend on being purchased by more prominent companies for their expertise or technology—may find themselves entangled in drawn-out legal procedures. This would affect their capacity to raise capital and India's appeal as a startup destination as investors would turn to less restrictive economies.
Comparative Analysis: India's Rule vs. Global Standards
The new antitrust law in India is contrasted with international M&A laws, including the European Commission's scrutiny of mergers surpassing specific thresholds and the US's Hart-Scott-Rodino Act. The regulatory framework of the European Commission is intended to ease the process of doing deals for startups and smaller enterprises. In contrast, the US has stricter standards than India's CCI. Given the necessity of promoting innovation and expansion through acquisitions, nations such as Singapore and Israel have relatively lax regulations around mergers and acquisitions. Despite being a global leader in startups and technological innovation, India's new regulation appears to adopt a stricter stance. Regulators in India face a challenging challenge in juggling expansion and competition. The government must acknowledge that mergers and acquisitions (M&A) are a significant source of innovation, particularly in the technology and startup industries, even as it is imperative to stop monopolistic activities. If regulatory supervision and a pro-growth policy framework are balanced, it will be easier to predict whether India's M&A market will flourish or become too bureaucratic.
Way Forward: Potential Adjustments
The future of M&A activity has become uncertain in light of India's new anti-trust law, especially for startups and international investors. The rule aims to stop anti-competitive behavior, but many have worried about how M&A activity in India may develop. The government and the Central Commission for Investigation (CCI) should consider many changes to alleviate these worries. One choice for smaller transactions, particularly those involving startups or developing industries, is to implement a fast-track clearance procedure. Raising the financial criteria for required CCI reviews is another way to emphasise more significant transactions that have a greater influence on market competition. The approval process may be streamlined with increased openness and cooperation between the CCI and the business community. Policymakers in India will need to find a balance between encouraging competition and the development and innovation that have made the nation a worldwide economic powerhouse as the country negotiates this new regulatory landscape.
IP Round-up
Manipur’s Iconic Shawls applied for copyright protection: Basanta Lukram of Basan L K Enterprises are modernizing Manipur’s iconic shawls and applying for copyright protection to prevent imitation. Their designs include the Leirum Phee, a ceremonial shawl symbolizing peace, power, and unity, now adapted into coats for wider appeal. The Shapee/Lanphee, historically given to Naga chiefs and soldiers, features motifs representing the cosmos and parental figures. This initiative preserves Manipur’s rich textile heritage while promoting women’s economic empowerment and sustainable livelihoods, with aims to reach global markets. (East Mojo)
Squid Game sued for Plagiarised: Indian filmmaker Soham Shah has filed a lawsuit against Netflix and "Squid Game" creator Hwang Dong-hyuk, accusing them of plagiarizing his 2009 film Luck. Shah claims that the global hit Squid Game took inspiration from Luck’s central theme, which revolves around a deadly competition where participants fight for a massive prize. According to Shah, this concept was originally portrayed in his film, long before Squid Game became a worldwide sensation on Netflix. This legal move has raised significant questions about intellectual property in the entertainment industry. (Economic Times)
Panacea Biotec and Sanofi Settle Patent Dispute, Shan6 Vaccine Halted in India: Panacea Biotec Ltd. and Sanofi Healthcare India Pvt. settled their patent infringement dispute regarding a fully liquid hexavalent vaccine. The case, resolved through a joint application with the Delhi High Court, involved Panacea’s patented EasySix vaccine, the first fully liquid hexavalent vaccine. Under the settlement, Sanofi agreed not to launch its competing Shan6 vaccine in India and to withdraw its patent opposition against EasySix. In exchange, Panacea Biotec will forgo claims for damages and financial compensation. Panacea Biotec had initially filed the lawsuit in May 2021 to prevent Sanofi from marketing Shan6, which it claimed infringed its patent. The resolution of the dispute had no financial impact on Panacea Biotec. Following the announcement, Panacea Biotec’s shares rose by 4.57% to Rs 332.95, while Sanofi’s shares increased by 0.98% to Rs 7,225.95. (NDTV Profit)
IBM Wins $44.9 Million Verdict Against Zynga in Patent Case: IBM won its patent infringement lawsuit against Zynga, the developer behind Farmville. IBM had accused Zynga of misusing its "foundational" web technology, including data capture and analytics, after failed licensing negotiations since 2014. The federal court found that Zynga's games, including Farmville sequels, Crosswords with Friends, and Wizard of Oz Slots, violated IBM's patents. IBM has been awarded $44.9 million in damages. Zynga disputes the validity of the patents and plans to appeal the verdict. This case is part of IBM's broader legal actions against various tech companies. (Game Developer)
Amul Triumphs in Trademark Battle Against Italian Imitator: The Delhi High Court has granted an injunction in favor of Amul, India’s largest dairy brand, against the Italian company Terre Primitive for trademark infringement. Terre Primitive's ‘Amuleti’ products, resembling Amul’s trademark, were deemed to have imitated Amul's script and design. The court prohibited the use of the infringing mark and ordered the removal of related products from the company’s website and social media. Recently, Amul was named the world’s strongest food brand with a Brand Strength Index score of 91 and a brand value of $3.3 billion, reflecting its strong market presence and performance. (Business Standards)
Reference:
Business Standard. (2023). How India’s new M&A law is raising concerns among investors. Business Standard. https://www.business-standard.com
Carter, J. (2024, September 16). IBM wins $44.9 million patent infringement suit against Zynga. Game Developer. https://www.gamedeveloper.com/business/ibm-wins-44-9-million-patent-infringement-suit-against-zynga
Competition Commission of India. (2023). Amendments to the Competition Act. Competition Commission of India. https://www.cci.gov.in
EastMojo. (2024, September 14). Manipur entrepreneurs seek copyright for traditional shawls. EastMojo. https://www.eastmojo.com/news/2024/09/14/manipur-entrepreneurs-seek-copyright-for-traditional-shawls/
Economic Times. (2023). CCI's new M&A regulation: A game changer for India's startup ecosystem. The Economic Times. https://economictimes.indiatimes.com
Economic Times. (2024, September 15). Netflix denies plagiarism allegations as Squid Game faces legal challenge from Luck director Soham Shah. Economic Times. https://economictimes.indiatimes.com/news/new-updates/netflix-denies-plagiarism-allegations-as-squid-game-faces-legal-challenge-from-luck-director-soham-shah/articleshow/113361165.cms?from=mdr
European Commission. (2023). EU competition policy and M&A rules. European Commission. https://ec.europa.eu
Federal Trade Commission. (n.d.). Hart-Scott-Rodino Act. Federal Trade Commission. https://www.ftc.gov
Financial Express. (2023). New CCI rule and its impact on foreign investments. Financial Express. https://www.financialexpress.com
Kumar, A. (2024, September 11). Delhi HC blocks Italian firm Amuleti’s use of Amul trademark in key ruling. Business Standard. https://www.business-standard.com/companies/news/delhi-hc-blocks-italian-firm-amuleti-s-use-of-amul-trademark-in-key-ruling-124091100453_1.html
Nishith Desai Associates. (2023). India's antitrust landscape: A review of recent amendments. Nishith Desai Associates. https://www.nishithdesai.com
Sur, S. (2024, September 16). Panacea Biotec, Sanofi settle patent dispute over hexavalent vaccine. NDTV Profit. https://www.ndtvprofit.com/business/panacea-biotec-sanofi-settle-patent-dispute-over-hexavalent-vaccine
