India’s New M&A Rule Could Be Bad News for Startups

Merger Control

A new anti-trust rule put into place this week is set to up the ante when it comes to regulatory scrutiny of any India-related M&A.

Designed partly to prevent "killer acquisitions," the so-called deal value threshold rule is creating its fair share of concern. It’s also underscoring a regulatory dilemma in India — between too much and too little intervention.

Effective this week, deals that exceed 20 billion rupees ($240 million) in size, and where the target has a substantial business operation in India, will need approval from the Competition Commission of India.

The rule was first mooted six years ago in response to a spate of tech acquisitions in the West (and some in India) viewed as having anti-competitive outcomes — such as when a giant incumbent buys a smaller rival just to quash or subsume its technology (so-called killer acquisitions) or deals that could result in an over- concentration of customer data or network ownership.

Such transactions often escaped India's existing deal filing thresholds because they’re largely based on the revenue and asset size of the transacting parties, and therefore only large companies and big deals ended up being targeted.

Still, while the existing framework had its gaps, zeroing in on deal value threshold is not the best way to plug those, said Naval Chopra, partner at Delhi-headquartered law firm Shardul Amarchand Mangaldas, who’s both skeptical of the new rule’s effectiveness and wary of its success.

"Not even gypsies with crystal balls can predict whether a small company being acquired by a large company will result in a killer acquisition," he told me.

Greater regulatory scrutiny could create hurdles for young companies that hope to be acquired in their early years to access funding and scale.

It "could have a chilling effect on innovation," Chopra said.

India is not alone. Policymakers in the US and the EU have also sought measures to more effectively challenge acquisitions of startups by large technology platforms. This implicit “M&A tax” runs the risk of discouraging venture capital investment predicated on the ability of startups to monetize successful early innovations through sales to the bigger companies, Jonathan Barnett, a law professor at USC Gould School of Law in California, wrote last year.

India's deal value threshold won’t be limited to digital economy transactions. It covers all kinds of deals from cinema chain mergers and cement acquisitions — which have thus far remained unvetted — to e-commerce deals and even the sale of small roads and highway assets.

That makes it a handy tool for the competition commission, says Avaantika Kakkar, partner and head of the competition practice at law firm Cyril Amarchand Mangaldas in Mumbai.

Kakkar says the new deal threshold is high enough to spare small startups. "There are no perfect tools and regulators have to constantly evolve along with the market," she said.

The CCI has been doing just that. Beyond the new deal value threshold rule, India is looking to bolster regulation of large digital enterprises, in a bid to pre-empt harmful behavior such as bundling of certain services and self-preferencing. Such ex-ante powers, unwelcome to most experts, mark somewhat of a shift in the broad regulatory approach to prevent anti-competitive behavior instead of acting only after the fact. It’s may be an outcome of a maturing economy.

For companies broadly, this new era of regulation is going to mean greater scrutiny and potentially an increase in red tape.

Chopra at Shardul Amarchand Mangaldas estimates the new deal value threshold could result in an increase of up to 30% in filings with the regulator, which has long been short on resources.

The new rule also has no transitionary provision — hence even deals that were announced prior to Sept. 10 but have not yet achieved closure may need CCI approval.

Whether it’s Apple or Google's search engine dominance, Microsoft's indirect investment in OpenAI, or Illumina's aborted $7 billion takeover of Grail — anti-trust authorities everywhere are being tested on the effectiveness of their tools and jurisdictional reach. India is no exception.