India recently introduced a new metric – the deal value threshold (DVT) – for antitrust review, marking a significant shift in the manner of scrutiny of mergers and acquisitions (M&A).
Traditionally, India’s competition regime has focused on assets and turnover-based thresholds to filter deals which will require prior clearance of the antitrust regulator. However, high-value transactions in sectors such as digital technology and pharmaceuticals often do not meet such traditional thresholds but can significantly impact the market. The DVT was introduced to address these market-altering consequences.
A unique aspect of DVT is that, unlike conventional financial metrics, this test considers the value of the transaction itself, potentially capturing deals that involve companies with minimal domestic revenue but substantial market influence. This development aligns with global trends and reflects India's proactive stance in adapting antitrust law to suit contemporary market realities.
Comparison with Germany and Austria’s DVTs
India’s DVT stands out when compared to similar regimes in Germany and Austria. In 2017, both countries introduced their own deal value thresholds, targeting high-value transactions that escape review due to a low turnover. The German Act was amended to include a DVT that applies to mergers exceeding €400 million, provided the target company has ‘significant business operations’. Austria introduced a similar threshold at €200 million. However, both these laws do not prescribe brightline tests for ‘significant business operations’, thereby rendering the law somewhat ambiguous and challenging to apply in practice.
In contrast, India’s DVT provides a more comprehensive approach to defining significant business operations. The Competition Commission of India (CCI) has outlined precise and objective tests for the assessment of significant business operations. This clarity offers more predictability for businesses navigating M&A reviews.
DVT’s tech focus
Under the Indian law, the DVT applies to transactions where the transaction value exceeds Rs 2,000 crore (approximately $239.52 million) and the target company has ‘significant business operations in India’ (SBOI).
While the DVT is designed as a sector-neutral test, its leanings towards scrutiny of tech deals are manifest. For example, the DVT has special provisions for the assessment of SBOI for companies which provide services over the internet (digital service providers). Accordingly, a digital service provider will be considered to have SBOI if it has in India 10% of its global users or customers, 10% of its gross market value (GMV) or 10% of its turnover.
Interestingly, the additional requirement of GMV and turnover in India to be at least Rs 500 crore (approximately $59.88 million) – which is essential to conclude SBOI for non-digital service provider companies – does not apply to digital service providers.
Accordingly, with a special focus on the tech industry, the DVT has the potential to capture ‘killer M&As’. These are acquisitions where the target companies may not generate substantial revenue during its growth phase but have the potential to attract massive valuations due to their user data, network effects, or strategic potential. This phenomenon is particularly prevalent in the tech industry, where acquisitions such as Facebook's purchase of WhatsApp or Google’s acquisition of YouTube would likely have fallen outside traditional scrutiny, even though they profoundly impacted global markets.
Gaps in DVT for infrastructure and life sciences deals
While India’s new DVT is a step forward in addressing the likely adverse effects of high-value transactions, it does not yet capture significant acquisitions in non-digital sectors, particularly infrastructure and life sciences.
These sectors often involve high valuations linked to tangible assets such as manufacturing plants, research and development (R&D) facilities, pipeline inventions, patents not yet commercialised, etc. Such assets may not yet be revenue-generating but nonetheless represent significant market power.
Accordingly, a deal involving the acquisition of critical assets that have not been commercialised can escape antitrust scrutiny on account of it not breaching the revenue threshold of INR 5 billion. For example, a pharmaceutical company might acquire a large portfolio of uncommercialised patents, resulting in a transaction that commands a substantial valuation due to the strategic importance of the patents.
Similarly, an infrastructure deal involving the acquisition of power plants, ports, or other critical infrastructure could have a significant impact on market dynamics and yet may still fly under the radar of the CCI’s review.
Conclusion
India is the latest to experiment with the DVT, hoping to capture important market-altering transactions. While this approach seems to effectively target M&A in the tech sector, significant deals in other industries may still escape scrutiny.
To address this gap, India could consider incorporating an asset-based criterion into its DVT, especially for sectors where valuations are driven by long-term infrastructure or R&D investments. This adjustment would better reflect the realities of industries that depend on large capital expenditures and extended project timelines, ensuring that all high-impact deals undergo appropriate antitrust review.
(Anisha Chand is Partner and Tanveer Verma is Principal Associate at Khaitan & Co. The views expressed are personal.)