The Corporate & Commercial Law Society Blog, HNLU

Category: Competition Law

  • Navigating Open Market Purchases Under The Competition (Amendment) Act, 2023

    Navigating Open Market Purchases Under The Competition (Amendment) Act, 2023

    BY BIANCA BHARDWAJ, A THIRD-YEAR STUDENT AT NLU, JODHPUR

    [Note: The following post is Part-II in a two-part series]

    Having expounded upon the merger control regime in India along with the dilemma of open market purchases as well as compliances in the previous part, the following part details the impact of the draft combination regulations along with the global position and suggestive solutions.

    V. Impact of the Draft Combination Regulations, 2023 

    The CCI Draft Combination Regulations, 2023 further clarify the rights that can be safely acquired in such transactions. Under Regulation 6, the acquirer would be allowed to avail certain rights such as dividend, subscription to rights issue, bonus shares, etc. The acquirer can also dispose the shares or securities acquired and exercise voting rights only to the extent of liquidation and/or insolvency proceedings. 

    These regulations are crucial because they adequately address the problem of acquiring de facto control through such transactions. By specifying that the voting rights of the acquirer would only be allowed in limited circumstances, it does away with the problem of acquisition of control in public bids.  The European Commission, for example, recognised this issue in the case of Marine Harvest ASA, whereby it was held that exemption to a public bid would not be provided if the seller acquires a significant block of shares amounting to de facto control. The element of de facto control is adjudged based on the votes cast at previous ordinary and extraordinary general meetings. Lastly, even the proviso to Regulation 6 also states that exemption would not apply where the acquirer directly or indirectly, influences the target enterprise.

    VI. Global Position 

    A quick sojourn of international antitrust laws would also reveal that similar dispensations have been made worldwide.Article 7(2) of the European Union Merger Regulation (‘EUMR’) provides that standstill obligations shall not prevent the implementation of a public bid or of a series of transactions in securities including those traded on a stock exchange and Article 7(3) gives the Commission the power to grant derogations. However, statistics reveal that the EU has rarely granted such exemptions. These derogations are subject to a twofold-criteria: (1) high degree of urgency in the transaction and (2) the lack of any plausible competition issues raised by the proposed transaction. Moreover, the EU has repeatedly held that while acquiring voting rights is not prohibited on securities purchases, the exercise of these rights is actively discouraged to prevent gun jumping. 

    Similarly, in Brazil, the transactions made through stock markets or organized over the counter market do not need the approval of the antitrust authority for their consummation. On the other hand, certain sophisticated merger regimes of UK and Italy do not impose any standstill obligations and parties are free to implement transactions without approval 
    by undertaking a self-assessment of the potential competition concerns. 

    In comparison, the Indian regime reflects a balanced approach as the regime retains its suspensory character without any absolute derogations. At the same time, there is no absolute ban on exercise of voting rights attached to shares bought in such transactions like in the EU. Moreover, there is sufficient scope for the parties to provisionally implement their transaction and subsequently wait for clearance while retaining certain rights. 

    However, a suggestion must be noted in this regard. It is not clear why the amendment did not adopt the CLRC report’s recommendation to mandate an escrow account. If the transaction is later disapproved by the CCI, the reversal of the transaction could be eased by selling the shares in the escrow account and undo any competitive harm.  

    VII. Way Ahead

    The rationale behind merger control in antitrust is to promote economic efficiency and enhance the process of corporate restructuring in the country. In this context, the amendment is welcome as it aligns with international best practices and will boost transactional efficiency in India. However, there is still uncertainty regarding how the Takeover Code would complement the amendment, given the requirement of obtaining a statutory approval for open offer still stands. In the meantime, as fertile jurisdictional ground develops and the Draft Regulations are adopted, it is crucial that parties tread with caution and avoid acquiring beneficial rights before securing the watchdog’s approval and attract potential scrutiny. 

  • Navigating Open Market Purchases Under The Competition (Amendment) Act, 2023

    Navigating Open Market Purchases Under The Competition (Amendment) Act, 2023

    BY BIANCA BHARDWAJ, A THIRD-YEAR STUDENT AT NLU, JODHPUR

    [Note: The following post is Part-I in a two-part series]

    Introduction

    The merger control regime in India has undergone monumental changes with the recently passed Competition (Amendment) Act, 2023 (‘Act’). One of these changes include the dilution of standstill obligations for open market purchases by way of introduction of section 6A in the Act. This amendment is crucial as it lifts the blanket prohibition on combinations to await the approval of the Competition Commission of India (‘CCI’) before executing a combination and facilitates the ease of doing business. 

    Consider this example: Company A and Company B announce a merger. The merger deal is structured as a multi-stage process where firstly, Company A will acquire 30% equity shares in the target B through an existing shareholder; and secondly, Company A announces a public bid for buying up the remaining shares. The following day the Board of Directors of the respective companies authorize and complete the market purchase and a notice is also filed with the CCI for approval of the merger.

    Earlier, Company ‘A’ would receive backlash for implementing the open offer without clearance from CCI. However, with the recent amendment, the CCI is expected to take a lenient view to open market transactions subject to certain conditions. In this context, this article discusses the ambiguities leading to the amendment and appraises the consequences of the same, especially in the context of the Draft Combination Regulations, 2023.  

    II. Merger Control Regime in India

    In order to understand the development introduced by the Amendment, it is necessary to appreciate the scheme of mergers and combinations in the competition regime. Essentially, the merger control regime in India is a mandatory and suspensory one. In broad terms, this implies that parties that propose to enter into a merger (referred to as ‘combinations’ in India) must first, give notice to the CCI in accordance with the requirements prescribed by Section 6(2) of the Act. Second, as part of the suspensory regime, the parties are pre-empted from carrying out any integration before receiving the approval of the CCI. 

    Section 5 and Section 6 of the Act are the key provisions regulating such mergers.  Any potential merger or acquisition that fulfils the thresholds laid down under Section 5 must be mandatorily notified to the CCI. Thereafter the CCI proceeds to investigate under section 6 to determine if the combination has or is likely to have any adverse effect on competition (‘AAEC’) in India.

    Standstill obligations are embodied under Section 6(2A) of the Act. Before the amendment, the Act prescribed a standstill obligation of 210 days, or until the approval by the CCI – whichever is earlier – on the parties to a proposed combination, from the date of notifying the proposed combination to the CCI. During this period, the parties were prevented from giving effect to the combination and must operate their businesses as independent entities. Notably, this period has now been reduced to 150 days, along with an exemption for open market purchases to implement the acquisition without approval.

    Later on, if the CCI is of the opinion  that the combination is likely to hamper competition, it can modify the combination through remedies, for example, by divestiture of assets, or it can revoke the combination altogether. 

    III. The Dilemma of Open Market Purchases or “Open Offer”

    The relevant laws governing open offers are the Competition Act, 2002 and the Securities and Exchange board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (‘Takeover Code’). An open offer is made by the acquirer to the shareholders of the target company inviting them to submit their shares at a specific price.  As per the Takeover Code, an open offer is triggered when the acquirer takes control over a target company or shares or voting rights in the target company beyond certain threshold limits. There are primarily two threshold limits:

     (i)  Acquisition of 25% or more shares or voting rights 

    (ii) Acquisition of more than 5% shares or voting rights in a financial year

    Further, Regulation 8 (11) of the Takeover Code mandates that the acquirer is responsible for obtaining the necessary statutory approvals before concluding the open offer. In practice, such statutory approvals generally consist of approvals from regulatory bodies like CCI, Reserve Bank of India (‘RBI’), Telecom Regulatory Authority of India (‘TRAI’) etc. 

    Therefore, as soon as the threshold limits were crossed, the acquirer was simultaneously required to notify the open offer to the CCI and await its approval. However, unlike negotiated transactions, market purchases have low liquidity leading to significant volatile conditions. The acquirer has to seize the small window of opportunity on a stock exchange platform before the cost of acquisition rises in a few minutes. Moreover, these obligations also impeded confidentiality concerns as notifying the transaction could trigger public scrutiny and drive the price of the stock. Resultantly, the acquirer was placed in a dilemma- whether to await the CCI’s approval and forego the window of opportunity or to face penalty for gun jumping?

    The rationale behind standstill requirements was stated in the Ultra Tech Cement case, where the CCI was of the opinion “the objective of standstill obligations is to ensure that the parties remain as independent competitors as they were before the proposed transaction”.  As a result, a perusal of CCI’s decisional practice reveals that it had previously adopted a stringent approach against such transactions. For instance, in the combination between Thomas Cook India Limited (‘TCIL’) and  Sterling Holiday and Resorts India Ltd. (‘SHRIL’), the CCI imposed a penalty of Rs. 1 crore. TCIL had issued an open offer to purchase 26% equity shares from public shareholders of SHRIL. The open offer, which was part of an interconnected transaction, triggered the thresholds under Section 5 and was authorized before submitting notice to the CCI. Hence, the parties were held liable for gun jumping under Section 43 of the Act which was upheld by the Supreme Court.  

    In contrast to this stringent approach, the amendment offers several benefits. First, it removes the challenges associated with the volatility of the markets, allowing companies to move quickly in response to market changes, which is crucial in fast-moving sectors like tech and e-commerce. Second, as the EU experience shows, it could improve cross-border investments in the Indian economy. Third, it would also expedite the merger approval process for the CCI with respect to securities transactions and unarguably, quicken the process of combinations. 

    IV. Compliance requirements under the amended law

    As per the newly inserted Section 6A, an acquirer is permitted to implement the open offer or an acquisition of shares or securities by way of a secondary transaction, either as a single transaction or a series of transactions. This is subject to the conditions that:

    (i) the notice for the combination transaction has been given to the CCI as per the Act and the regulations thereunder; and

    (ii) the acquirer does not exercise any ownership or beneficial rights or interest in relation to such shares or convertible securities (including voting rights and receipt of dividends or any other distributions), except as may be specified by regulations, till such time that the combination is approved by the CCI.

    Notably, this amendment is in line with the recommendations of the Competition Law Review Committee (‘CLRC’) Report. The report had identified the dilemma and observed that “…mandating a standstill on acquiring of shares pending the approval of the combination may hamper the viability of acquisitions via public bids”. Accordingly, it suggested that the CCI allow parties to such transactions to purchase securities, provided they surrender all beneficial rights (of dividend and voting) attached to such securities until the combination gets a green signal. However, the amendment does not prescribe that such securities should be placed in an escrow account pending CCI’s approval, a proposal which was put forth in the CLRC report. 


  • Unlocking Competition Law For Public Sector: Challenges & Prospects

    Unlocking Competition Law For Public Sector: Challenges & Prospects

    BY ANOUSHKA ANAND AND MD. HASHIR KHAN, FOURTH-YEAR STUDENTS AT NLU, JODHPUR

    Introduction

    India’s journey towards industrialization began in the mid-20th century, shortly after gaining independence from British colonial rule. The country sought to reduce poverty, promote self-sufficiency, and enhance economic growth. The establishment of Public Sector Undertakings (PSUs), thus, became a cornerstone of India’s planned development strategy, which aimed to harness and channel resources effectively for national development. Since then, PSUs have been instrumental in the development of strategic sectors such as defense, energy, telecommunications, and transportation. These sectors are crucial for national security, self-sufficiency, and infrastructure development. Examples include Bharat Heavy Electricals Limited in the power sector and Bharat Electronics Limited (BEL) in defense electronics. PSUs have also aided in regional development – Oil and Natural Gas Corporation is a prime example of a PSU that has contributed to the development of several regions in India through its oil exploration and production activities.

    After the enactment of the Competition Act 2002, which aimed to prevent anti-competitive practices and maintain a level playing field in the market, anti-trust scrutiny was made applicable to PSUs and private entities alike. However, under Section 54, the act provided for an exemption for activities related to sovereign function and allowed the central government to exempt the act, by notification, for enterprises performing a sovereign function or if such exemption is necessary for the public interest. Despite this, the application of the act to PSUs has not been smooth, with various concerns regarding the definition and demarcation of ‘sovereign function’ and ‘non-sovereign function’. The recent Supreme Court ruling in Coal India, however, settles the dust to an extent, when it comes to implementation of the act to PSUs.

    The Supreme Court Ruling

    The case arose when the Competition Commission of India (CCI) fined Coal India Limited (CIL) ₹591.01 crore for imposing unjust and discriminatory terms in fuel supply agreements (FSAs) with power producers for non-coking coal. In essence, CIL was found to provide lower-quality essential resources at inflated prices, along with unclear conditions in the contract regarding supply standards and quality. The regulator argued that Coal India and its subsidiaries operated without market competition and held a dominant position in the Indian non-coking coal production and supply sector. CIL contended that it bases its operations on the ideas of advancing the common good and making sure that coal, a crucial natural resource, is distributed fairly. Further, it argued that it uses differential pricing to encourage the production of captive coal with the aim of preserving the greater functioning ecosystem and pursuing welfare goals. The court, however, took a two-tier approach to reject the contentions of the appellants in this case. Firstly, it delved into Section 2(h) of the Competition Act to investigate if CIL fell within the definition of “enterprise” which is defined as a “person or a Department of the Government who or which is, or has been, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services, of any kind”. The court held that CIL would fall into the category of a person since the term includes a company or a corporation under Section 2(i). Further, under Section 2(i) the term goods includes products manufactured, processed, or mined, thus the court concluded that there is no doubt that the appellant is a person, who is engaged in activity relating to production, storage, supply, distribution, and control of goods. Secondly, the court analyzed Section 2(h) to see if CIL fit within the exception carved out under the provision– the same being an activity of the government related to sovereign function. It went on so far as to say that what is excluded from the act is a government department performing sovereign functions and not a government company. Following this, the court concluded that carrying on business in mining, cannot, by any stretch of imagination, be described as a sovereign function.

    Implications

    The judgment’s pivotal advantage lies in its recognition of the paramount importance of competition in driving efficiency and fostering performance improvements within state monopolies and Public Sector Undertakings. By subjecting these entities to the purview of competition law, the market environment is revitalized, thereby cultivating a culture of innovation, cost optimization, and enhanced service delivery for consumers. This measure not only instills healthy competition but also stimulates these entities to evolve and adapt to changing market demands, ultimately benefitting the broader economy. Further, the endorsement of divestment and privatization by the court is a welcome move since if PSUs are subjected to market-driven pressures, they are compelled to streamline their operations, reduce inefficiencies, and elevate the quality of goods and services provided to consumers.

    However, at the same time, the judgment’s accentuation of competition and efficiency may have inadvertent ramifications on general welfare schemes provided by PSUs. As these entities grapple with the imperatives of competition and profit optimization, there is a prospect of diverting focus from welfare objectives to revenue maximization. For example, a government-owned telecom service provider offering reduced tariffs for rural areas to ensure connectivity for all citizens might start to focus on more lucrative urban markets, potentially neglecting the expansion and maintenance of services in remote or less profitable regions, impacting connectivity and communication access for marginalized communities. The complexity further deepens when considering turnover calculation, a fundamental aspect in assessing the applicability of enforcement mechanisms. Unlike private enterprises, PSUs often operate in sectors with complex interdependencies and cross-subsidization, making the calculation of turnover more intricate. When it comes to sanctions, traditional mechanisms might not be as effective for PSUs. Turnover-based fines, a common approach in competition enforcement, might prove cumbersome to compute given the intertwined roles of PSUs in both economic and social spheres. Additionally, monetary penalties might not effectively deter anti-competitive behavior if the financial burden is borne by taxpayers, diverting from the intended purpose of competition enforcement.

    Unsettled Concerns

    While the debate has been settled to an extent, it is still unclear as to what other activities would be qualified as “sovereign functions” other than those dealing with atomic energy, currency, defense and space. Additionally, Section 54 gives the Central Government powers to exempt an enterprise in the name of public interest – however, there is a lack of specific guidelines as to what comprises “public interest” and to what extent can these enterprises be exempted. In the absence of specific guidelines, the act bestows a wide discretion to the government which could be easily misused and exposed to subjective interpretations. Furthermore, exceptions must be defined to encompass a wide range of essential services, such as government-delegated water supply to economically disadvantaged or remote regions.

    A Way Forward

    There needs to be legislative changes to address the aforementioned concerns and to clear ambiguity regarding the extent and scope of competition law on PSUs. A solution could be the introduction of a public interest assessment mechanism that allows competition authorities to consider the broader public welfare implications when evaluating the competitive conduct of PSUs. This assessment should involve weighing the benefits of competition against the potential adverse effects on public services, national objectives, or other social and economic factors. An example of balancing the applicability of competition law on PSUs or State Owned Enterprise (SOEs) and public interest can be taken from the Italian Competition Authority’s (ICA) decision on breaches of competition rules by Ferrovie dello Stato (FS), the Italian incumbent railway undertaking. While the authority qualified the conduct of FS as a serious competition breach, it levied on it a competition fine of a negligible amount, relying on a special provision that allows the authority to impose the fine of a symbolic amount in certain circumstances. In this case, the authority considered the economic efficiencies and public welfare due to the long-awaited electrification of the Bulleno link as a strong factor for the minimal fine imposed.

    Further, it is time to consider a strict demarcation between the social and commercial functions of Public Sector Undertakings. In essence, this proposition advocates for a deliberate separation of roles that PSUs undertake in the realms of social welfare and commercial enterprise. While PSUs historically embraced multifaceted responsibilities, the interplay of competition law and changing economic landscapes necessitates a refined approach. By delineating their functions, much like the distinct poles of a compass, PSUs can navigate the course more effectively, shedding the inefficiencies that stem from blurred roles and curbing the rampant issue of free-riding. A cardinal benefit of demarcation is the enhanced accountability it ushers in. With delineation, PSUs are better equipped to define their objectives and allocate resources accordingly. This crystallization of purpose not only simplifies governance but also paves the way for enhanced transparency, making it easier to track performance against set goals. Additionally, the separation of roles allows for a more precise evaluation of how PSUs interact with markets and whether their actions may have adverse consequences on competition. For instance, when the social and commercial functions are distinct, it becomes easier to scrutinize whether a particular PSU is using its dominant position in one sector to gain an unfair advantage in another, potentially anti-competitive manner.

    While the concept of clear delineation holds promise, its execution is not without challenges. Identifying the line that separates social and commercial functions demands meticulous analysis, considering factors such as public interest, economic impact, and market dynamics. Striking the right balance between social welfare and business viability requires deliberate calibration. Nonetheless, navigating the delicate balance between PSUs and the Competition Act underscores the need for a nuanced approach that fosters both public welfare and fair market dynamics.

  • Revisiting the ‘Adverse effect’ factor in unilateral commissions: ZOMATO/ SWIGGY CASE

    Revisiting the ‘Adverse effect’ factor in unilateral commissions: ZOMATO/ SWIGGY CASE

    BY PRANAY AGARWAL, THIRD-YEAR STUDENT AT GNLU, GUJARAT

    Introduction

    Unilateral terms of an agreement are seen with suspicion and are often subjected to legal challenge on the grounds that it is arbitrary and unreasonable in nature. The unilateral terms which are abusive and are imposed on others under a‘compelled’      agreement, are also covered within the purview of ‘practice’ encouraging anti-competitive agreements under Section 3(3) of the Competition Act, 2002 (“the Act”). Such a broad interpretation can also be traced to the judgment of BMW Belgium SA v. Commission of European Communities , where the European Court of Justice (“ECJ”) defined the scope and validity of the agreement promoting unilateral conduct of a party. The principle was even adopted for Indian market in Aluminium Phosphide Cartel case to recognise bid rigging as a ‘practice’. However, for the application of the Section, the conduct should have an Appreciable Adverse Effect on Competition (“AAEC”).

    In a recent letter addressed to Competition Commission of India (“CCI”), the Jubilant FoodWorks, the holding firm of Domino’s have indicated their intention to pull out from the deals with food delivery platforms like Zomato and Swiggy due to high commissions charged by these food delivery giants. The letter is a shockwave of the allegations of National Restaurant Association of India (NRAI) against exorbitant commissions charged by the food delivery platforms which ranges between 10% to 30% and the resultant investigative raids by CCI.

    In the case that ensued, the CCI made the order in favour of the food delivery giants to hold their unilateral conducts not anti-competitive. While normally, the judgment of CCI is in accordance with the principles enshrined in the Indian Contract Act, 1872 (“Contract Act”), the Indian watchdog neglected in taking note of the future outcome of such unilateral terms and the adverse impact it may have on the competition in the market.

    In view of these contemporary developments, this article analyses the status of the unilateral conducts like charging of high commissions, which are however part of the agreement and are therefore valid under the Contract Act, in light of the competition laws and principles of the country. The article then investigates deeper into the facets of AAEC and the importance held by ‘public interest’ in the determination of the case, thus giving a critical analysis of the CCI’s stance. 

    Unfair terms of agreement and unilateral conduct

    Unfair terms of a contract have been a contentious issue in the contract law of every jurisdiction. While some protection has been offered under Section 23 of the Contract Act which considers contracts with objects opposed to public policy     ,reliance is often placed by both the consumers and the courts upon the principles of equity and justice embodied under Article 14 of the      Constitution to escape its pre-conditions. In the recent case of NRAI v. Zomato Ltd. & Anr., one of the major contentions of NRAI was related to the one-sided terms of the contract, particularly      the commission clause. However, from the principle given in the United States v. Parke Davis & Co., the concurrence by even an unwilling party will result into a valid contract.

    This makes it apparent that Section 23 will not be applicable in the present case, even if the Restaurant Partners (“RPs”) did not have any choice but to agree with the unilateral terms. However, the unilateral conduct of the dominant players and unfair trade practices has been a      major issue in the country since the initiation of debates around the Monopolies Restrictive Trade Practices (Amendment) Bill, 1983. The legal void in the contract laws was also recognised in the 103rdReport of the Law Commission of India which recommended the insertion of the provision dealing with unconscionable conducts.

         Given the above legal position, the CCI’s order seems legally justified. However, the order will have dire consequences on the market competition in the future due to its economic and legal value. The problem however could have been avoided if CCI had interpreted Section 3 of the Act from a broader perspective like the ECJ did in BMW Belgium SA case . Although it can be inferred that the provision has been applied in the CCI’s order, the commission made a narrow interpretation of the adverse effect factor by failing to note of the provision, thus showing its ignorance of its prior legal instance and relevant circumstances of the case. This mistake can have a huge impact on not only the market and RPs, but also their customers, thus affecting the economic structure as a whole. 

    Looking from a broader perspective: A Review of the ‘Adverse Effect’ factor

    Section 3(1) of the Act introduces the principle of Appreciable Adverse Effect on Competition       violation of which prohibits the enterprises from entering into anti-competitive agreements. It refers not to a particular list of agreements, but to a particular economic consequence, which may be produced by different sort of agreements in varying time and circumstances. It majorly deals with the acts, contracts, agreements, conducts and combinations which operate to the prejudice of the public interests by unduly restricting competition or unduly obstructing due course of trade.

    However, for the factor to be applicable, reliance has to be placed upon the words ‘appreciable’ and ‘effect on competition’. In the present context, therefore, it is pertinent to       effectively analyse           the food delivery market of India, especially with respect to the separate relevant markets of both Zomato and Swiggy. Moreover, the nature of the restraint and conditions in the respective relevant markets before and after the restraint also has to be judged for giving a proper application to the principle of AAEC.

    The term ‘appreciable’ has been defined by ECJ in Volk v. Vervaeke, where reliance was placed upon the probability ofthe pattern of trade such that it might hinder the very objective of the competition law. Similarly the Commission Notice on Agreement of Minor Importance provides for the circumstances under which actions are not viewed as significantenough to appreciably restrict competition. This further gives a concrete meaning to the term ‘appreciable’.

    Unlike the term ‘appreciable’ which has been given restricted to certain circumstances, the phrase ‘effects on competition’ has to be judged with reference to the market share in the relevant market and thus it becomes an important task to define ‘relevant market’. In the present context, the mammoth task was attempted by both NRAI and Zomato/Swiggy giving narrow and wider interpretations respectively. But in this aspect, it is safe to accept       the position of CCI to simply refer Zomato/Swiggy as online intermediaries for food ordering and delivery.

    Zomato and Swiggy are the biggest food delivery platforms in India, who conjointly holds      90-95% of the Indian food delivery business. Further, as on January 2022, the market valuation of      these giants stood at $5.3 billion and $10.7 billion respectively which shows the dominant position enjoyed by them, which is also prima facie evident by the circumstances of the case.

    Bad news for consumers? Highlighting the significance of ‘Public Interest’

    While the economies of scale can be achieved with the reasonable commissions and the reduced costs will benefit the customers in the form of higher quality and lower prices, exorbitant prices will instead result in the reduction of the profits. The impact of such losses will then be passed down to the ultimate customers, thus having a negative effect on the consumers and RPs. Hence, the unilateral act of charging high commissions without any formal communication to the RPs hurts the interests of the general public and also takes away the ability of RPs to compete independently if they come out of the contract.

    In light of the above, the public interest test cannot be ignored while considering the economic consequences the AAEC may cause. Therefore as indicated in Standard Oil Co. v. United States, the factor of AAEC operates on the prejudice of the public interests. Public interest in this sense is the first consideration before the courts while considering the validity of the agreements under Section 3 of the Act. Moreover, Section 19(3) of the Act which provides for factors determining AAEC under Section 3 gives due regard to the accrual of benefits to the customers.

    However, the term ‘public interest’ has to be constructed from a wider perspective with respect to the circumstances of every case. This proposition was made clearer in Haridas Exports v. All India Float Glass Manufacturers Association, where the Apex court clarified that public interest does not necessarily mean interest of the industry but due regard has also to be given to all possible customers in the market for ensuring that the law achieves its objective of fair competition and public justice. 

    Conclusion

    Unilateral fixing of commission rates by the players like Zomato and Swiggy who enjoy a dominant position in the food delivery market in India has been declared by the CCI to be not anti-competitive. However, such narrow application of Section 3 of the competition act influenced by the provisions of contract laws of the country does more harm than good and has the potential to defeat the object of the competition laws. In such scenario, the importance of AAEC factor and test of ‘public interest’ should be relied upon to secure fair competition in the market as well as the interests of both the producers and the customers. While the decision has huge ramifications, one can only hope that the position is rectified in the subsequent decisions.

  • Antitrust Implications of Dual Role Played by Food Intermidiaries vis-a-vis the Recent Tussle Between NRAI and Zomato-Swiggy

    Antitrust Implications of Dual Role Played by Food Intermidiaries vis-a-vis the Recent Tussle Between NRAI and Zomato-Swiggy

    BY PRIYAM INDURKHYA AND RITURAJ SINGH PARMAR, THIRD-YEAR STUDENTS AT NLIU, Bhopal

    Introduction

    CCI, the antitrust watchdog of India, has ordered a probe against food service aggregators like Zomato and Swiggy (FSAs) on a complaint filed by National Restaurant Association of India (NRAI) for the violation of section 3 of the Competition Act. Out of the several anticompetitive malpractices alleged by NRAI, the CCI, vide order dated April 4, 2022, has observed that a prima facie case exists against Zomato and Swiggy on the following three conducts— (i) dual role played by FSAs by listing their own cloud kitchen brands exclusively on their platform, akin to private labels, thereby creating an inherent conflict of interest in their role as an intermediary on one hand and as a participant on the other hand, (ii) entering into exclusive contracts with restaurant partners, (RPs) thereby compelling them to be exclusively listed with FSAs, (iii) imposing price parity terms on the RPs, thereby restricting them to offer lower prices or providing better terms to customers on the platforms other than that of the FSAs. 

    In light of the recent developments, this article attempts to analyse the anticompetitive concerns arising out of the dual role played by Zomato and Swiggy. The authors, in addition to examining the violation of section 3, also delves into the violation of section 4 of the Act.

    Analysis of probable violation of s. 3(4) read with s. 3(1) of the Act

    The Act, under s. 3(1), prohibits enterprises from entering into an agreement which causes or is likely to cause appreciable adverse effect on competition within India. Furthermore, s. 3(4) of the Act defines vertical agreements as those agreements which are entered into between enterprises which operate in different markets, and at different levels of the production chain. In the present case, the agreement between the FSAs and the RPs is in the nature of vertical agreements since both of them are in different markets and at different levels. The FSAs are in in the market of application-based food delivery platforms in India, while the RPs cater to the market of providing food services. 

    Vertical agreements are not per se anticompetitive and they require a rule of reason analysis to determine their legality. The rule of reason analysis under s. 19(3) of the Act entails weighing various procompetitive and anticompetitive effects of the agreements. The authors herein contend that the vertical agreements entered into by Zomato and Swiggy with a select few RPs fail to pass the rule of reason test, and are therefore, in violation of section 3(4) read with s. 3(1) of the Act.

    The anticompetitive effects arising out of the dual role played by the food intermediaries significantly outweigh the procompetitive effects, if any. The anticompetitive effects listed under s. 19(3)(a)—(c) include creation of entry barriers to new entrants in the market, foreclosure of competition, and driving existing competitors out of the market. It is contended that the listing of cloud kitchens on their own platform certainly causes these anticompetitive effects.

    Having their own vested interests in the downstream market, the food intermediaries are more inclined towards those RPs which are either their private labels or those which pay huge commissions to them. This inclination can be manifested in a host of ways which include, but are not limited to, skewed search results, customer reviews, favourable listings, among others. The data masking and lack of transparency in sharing the modus operandi of the intermediaries further exacerbates the situation. Given such a background, it becomes extremely difficult for the new entrants to cross the entry barrier and break into the market. Moreover, such a conflict of interest is also detrimental to the interests of the existing players in the market. The vested interest of the intermediaries in favour of a select few RPs puts other players in a disadvantageous position, and has a potential to drive them out of the market. Thus, Zomato and Swiggy acting as a participant as well as an intermediary, gives rise to anticompetitive effects listed under s. 19(3)(a)—(c). Moreover, such a dual role neither promotes any technological innovation, nor does it lead to accrual of benefit to consumers.

    In fact, the Competition Commission of India (CCI) had earlier released a Market Study on E-Commerce. The study focused on competition aspects pertaining to e-commerce marketplaces and platforms. Out of the five major concerns identified by CCI, the first one was the Platform Neutrality (or lack thereof). The other concerns included, deep discounting, i.e., discounts of preferred sellers being selectively funded by the platform, price parity clauses in the agreements,  exclusive agreements, and the skewed search rankings along with misuse of data The study delineated two major issues concerning the neutrality of e-commerce platforms. The first is the intermediary’s access to competitively sensitive transaction data on its platform. This data is utilised by the intermediaries to enter into and strengthen their position in the downstream market through private labels. The second is the intermediary’s control over search parameters and results which gives preferential listing and favoured placement to its own brands and preferred sellers on the website. Interestingly, the concerns identified by the CCI in the Market Study are similar to those which are identified by the Commission in its prima facie order against Zomato and Swiggy.    

    Analysis of probable violation of s. 4 of the Act

    It is to be noted that the prima facie order passed by the CCI only suspects the probable violation of section 3 of the Act due to the dual role played by the intermediaries. However, the authors herein contend that the said conduct of Zomato and Swiggy also attracts section 4 of the Act.

    For analysing the violation of section 4 of the act i.e., Abuse of dominance, it is indispensable to firstly, delineate the relevant market, secondly, show that the enterprise is dominant in the relevant market and thirdly, it has abused its dominant position. 

    Relevant market

    Unlike section 3, section 4 in strict sense requires delineation of relevant market to assess the competitive constraints that the enterprise faces. The relevant market in the present case is the ‘market of application-based food delivery platforms in India’. The market has two major players viz., Zomato and Swiggy. The said delineation of relevant market is justified because, firstly, there is substitutability in the delineated market, which is an essential criterion for the relevant product market under section 2(t) of the Act. The service of app-based food delivery is user friendly and unique as it allows customers to order food hassle free from any location. It also provides an array of choices to the consumers in terms of budget, cuisine, restaurant partner ratings, mode of payment and safety classifications. These attributes make app-based food delivery services non substitutable with other services of like nature viz., dine-in, take out, direct orders and vertically integrated food chain services. Secondly, the market of app-based food delivery also satisfies touchstone of section 19(7), like the consumer preferences, and price of goods or services. Furthermore, CCI has also approved this delineation of relevant market in the case of In Re Prachi Agarwal & Ors. v Swiggy..  In this case, it was alleged by the informant that Swiggy was abusing its dominant position in the market by charging unreasonable and unfair prices. CCI, in that case, had delineated the relevant market as “App based food delivery with restaurant search platform across territory of India”. Given that Swiggy is involved in the present case as well, the delineation of the relevant market should be on similar lines in this case as well. The relevant market delineated in the present analysis, i.e., “Market of application-based food delivery platforms in India” is similar to that of the market delineated by the CCI in the Prachi Agrawal case. Therefore, the said delineation of the relevant market is justified. 

    Dominance 

    After establishing relevant market, the next stage is to assess dominance of Swiggy and Zomato in the relevant market. There is a twofold approach in assessing dominance of any enterprises under the Act viz., the definition of dominance under section 4 and the factors enunciated under section 19(4) of the Act. The definition provides that dominant position means position of an enterprise which enables it to operate independently of competitive forces prevailing in the market. In the much-celebrated DLF case, CCI has held that the presence of one-sided agreements generally results in loss of customers, however, if such agreement doesn’t result in loss of customers, then this amplifies the ability of enterprise to operate independently of the competitive forces. Zomato and Swiggy also entered into one-sided terms and conditions with the RPs, like committing them exclusively to be listed on their respective platforms, charging exorbitant commission ranging upto 25%-30%, imposing price parity terms, and compelling the RPs to fund the discount provided by platforms. Despite these unviable conditions, Zomato and Swiggy have duopoly in the market of food delivery business with a cumulative market share of 95%.This shows the dependence of consumers (RPs) on these platforms which in turns reflect their ability to operate independently of competitive forces prevailing in the market.  

    The conduct of Zomato and Swiggy also satisfies factors mentioned under section 19(4). The first factor is market share of an enterprise. Market share of around 50 per cent could be considered large enough for an undertaking to be presumed as dominant. The market share of Zomato and Swiggy is 52% and 43% respectively. The second factor to be considered is the creation of entry barrier in the market. It is pertinent to note that there has not been an entry of any significant player in the food delivery market from the last three years. The application-based food delivery market requires huge fleet in order to deliver food on time. Both Zomato and Swiggy have a fleet consisting of 1.5 lakh and 1.3 lakh drivers respectively. Mobilising such a huge fleet of drivers on a pan India level is not a cakewalk for a new entrant. The third factor is the countervailing buying power. The presence of duopoly between Zomato and Swiggy in the relevant market left RPs with a Hobson’s choice because despite of anticompetitive practices of Zomato and Swiggy, RPs have no other option but to keep availing services of these FSAs. This reflects the sheer absence of countervailing buyer power in the relevant market. Moreover, the acquisition of Uber Eats, Blinkit, and other app-based food delivery platforms by Zomato further reflects upon its dominance in the relevant market. Thus, the cumulative factors of market share, entry barrier, countervailing  buying power, and the acquisition of existing market players establish the dominance of Zomato and Swiggy in the market of application-based food delivery platforms in India. 

    Abuse of dominance 

    The next and final stage is to prove abuse of dominance as dominance per se is not prohibited under the Competition Act. The market of application-based food delivery platforms in India provides wide array of food choices to customers and they have to choose in accordance with their taste and preferences.  But it is not that easy because human character is tuned in a way that it directs more attention towards the thing it sees and the entire advertisement industry is cashing on this tendency.  Thus, a product’s visibility is directly proportional to consumer’s propensity to purchase it. Both Zomato and Swiggy have equity participation in their platforms through their cloud kitchens and their private labels. It is alleged that they manipulate the search results and divert user traffic to increase visibility of these kitchens. Furthermore, the platforms provide access to data like consumer preferences and patterns to their cloud kitchens and private labels. The cumulative effect of all these is that it puts the other RPs in discriminatory conditions for sale and therefore the act of FSA squarely falls under section 4(2)(a)(i) i.e., imposing discriminatory condition in sale of goods.

    The conduct of FSA also violates section 4(2)I of the Act, i.e., using dominant position in one relevant market to enter into another relevant market. As discussed earlier, Zomato and Swiggy are dominant in the market of app-based food delivery. In addition to their principal role of acting as a medium between customers and RPs, they also list their own cloud kitchen brands exclusively on their platform, akin to private labels. These private labels like the Bowl Company, Homely and Breakfast Express fall under the relevant market in which the other RPs are operating. Thus, FSAs like Zomato and Swiggy use their dominant position in the market of app-based food delivery to enter into another relevant market in which the other restaurant partners are operating in the first place.

    It is clear from the above analysis that the conduct of Zomato and Swiggy perpetrates abuse of dominance in the market of application-based food delivery platforms in India. 

    Conclusion

    It is pertinent to note that Zomato has not denied the allegations of listing its own cloud kitchen brands on its platform. In its defence, it has only contended that, “…it does not have any ownership in any of the restaurants listed on its platform nor own or operate cloud kitchens or private labels or restaurants. Thus, no claims for discrimination and preferential treatment can be made against it.” The CCI did not find merit in Zomato’s contentions as they solely relied upon the ‘ownership’ of the RPs and cloud kitchens to argue that there can be no anticompetitive malpractice.  

    As highlighted by NRAI, in lieu of providing access to the Kitchen Spaces, Zomato charges a commission from the RPs, on the rents as well as on the orders received by them through the Kitchen Spaces. Therefore, even though Zomato does not ‘own’ the Kitchen Spaces, or the RPs which function through those Kitchen Spaces, the revenue structure employed by Zomato for this arrangement has a potential to attract anti-competitive concerns and thus calls for a deeper scrutiny. Moreover, the Commission should not limit its examination only for the violation of section 3 of the Act. Instead, it should also consider the dominance of the FSAs to enquire into the possible violation of section 4 of the Act.  

  • The Divisive AICOA Weighed: Possible Takeaways for India?

    The Divisive AICOA Weighed: Possible Takeaways for India?

    BY RANJUL MALIK, third-year student at ail, mohali

    Introduction

    Competition regulators across the world including places like Europe, the USA, Australia, Japan and even India are eyeing major amendments in their respective legislatures to better equip themselves in dealing with new and rising antitrust challenges. While there can be a combination of factors leading to this phenomenon, there can be no denying of the inability of regulators to control big tech as the primary factor for such global shifts. To this effect, the Competition Commission of India (‘CCI’) conventionally is likely to implement some changes along the lines of the Digital Markets Act introduced in the European Union.

    It may also be of value for the CCI to draw inference with some provisions from developments taking place in rather far West, in the USA. The American Innovation and Choice Online Act (‘AICOA/the Bill’) is a proposed antitrust legislature which is touted as the tool to regulate ‘selective big tech players’. Though still to be cleared on floor by the Senate, this article aims to focus on facets of AICOA, which might be adopted by the CCI to solve some problems of the Indian antitrust ecosystem, especially with respect to big tech.

    A Look Into the AICOA- Parallels With India

    The bill on the back of bipartisan support in the senate provides new channels to deal with issues like the privacy of users, providing a definition for big tech players that are considered to be a threat to the competition and importantly, the issue of self-preferencing. A breakdown of these three issues vis-à-vis the Indian picture is as follows:

    • Defining big tech (covered platforms)

    Big tech in antitrust has often been constituted by large companies like Amazon, Apple, Google, etc. By quantifying the definition and referring to them as ‘covered platforms’, the AICOA is surely a mechanism provided against tech giants operating digitally. Most of such enterprises thrive on user data and algorithms based on user-generated data. Due to such instance, the new draft has left both telecommunication and financial services outside the ambit of the legislature, effectively applicable to only core tech enterprises dealing with user data. The AICOA shall apply to companies with either a market capitalization of $1 billion in the last one year or a user base of over 100 million users, to ensure both private and public companies are covered within the ambit.

    Secondly, it restricts itself to companies with online platforms either generating user data, involving information queries basis the user, or involving transactions. The Competition Commission of India on the other hand has often failed to regulate big tech due to its inability to define relevant markets in the digital space, largely due to the fact that it still is sticking with the interchangeability or substitutability tests which do not always depict the correct picture with digital and tech-heavy cases.

    Additionally, there is no definition with CCI with regards to big tech, with the Chairman of CCI once going on record to refer to big tech as “centres for entrenched and unchecked dominance“. Therefore, in case of there being difficulty in defining a relevant market for such players and a need to restrict their activities, the proposed definition within the AICOA with its quantitative nature ensures stricter compliance and regulations to such players.

    At the same time, it is necessary to implement such provisions after negating their negative halves. For example, the AICOA definition will be practically limited to domestic players, with the threshold of 50 million US users or 1 lakh business users from USA, thus ousting from its realms the likes of Tencent, Huawei, etc. for USA. To elaborate further, WeChat, whose parent company happens to be Tencent, has only about 1.3 million users in USA while its global userbase is a whooping 1.3 billion. This step is a big drawback as it is pro-competitive for foreign players while impairing domestic competitiveness via restrictions.

    • Selective preferencing

    The issue of self-preferencing by giants like Google, Apple, Amazon has been in contention of many debates and discussions. Self-preferencing has been defined as “a digital platform giving preferential treatment to its own products and services when they are in competition with the products and services provided by other companies”. While conventionally an enterprise’s foray into a vertically related business is known to have pro-competitive and pro-consumer impact, it is only the rapid expansion by big tech and digital enterprises into multiple domains at once that has compelled policymakers to think over the practice of selective preferencing.

    The example in the Senate was of Amazon Alexa promoting Amazon Basic products over its search results for queries related to products, in cases where they might be of sub-par quality to those of third-party sellers too. In the Indian regime questions of self-preferencing have been raised in cases like Matrimony.com Ltd and Google LLC and Ors, Umar Javeed and Ors v. Google LLC and Ors and in complaints received against likes of Apple. But because the self-preferencing is not per se violative under section 4 of the Competition Act, it has led to no strict actions against such enterprises.

    In contrast, the AICOA proposes to impose a fine of 10% of the total revenue of the past year generated within the USA, in case enterprises were to be found engaged in self-preferencing. This thereby ensures that the referred covered platforms need to be neutral in their regular conduct so as not be discriminating against other third-party service providers present on their platforms. While the bill proposes standard exceptions like that for cybersecurity, the more interesting addition is two-layered criteria as an exception. The criteria check an activity vis-à-vis its importance to the core function of the company and comparing it with any less harmful method which could have been used to achieve a similar outcome. The two points as given are:

    1. If an activity seems to be anti-competitive, then to check whether or not  such an act is being done to maintain or substantially enhance the core functionality of the covered platform.
    2. And that the conduct could not be achieved through materially less discriminatory means, meaning there is no alternative which provides equal or effective results while being less discriminatory.

    Hence the bill provides a strong framework which is mechanised with craft to treat unfair self-preferencing.

    • Data and Privacy

    The bill has introduced many terms which remain undefined and abstract and might be responsible for some high stake litigation in the upcoming times if it were to be enacted. Terms like ‘materially harm competition’, ‘generated data’, or ‘core functionality’ might not be defined, yet anyone can join the dots to point out the direction being aimed at is user data and its privacy. Lummis for example highlights how big tech companies use data generated on their platforms to their unfair advantage. This has explained by FTC and Privacy International in two ways, one by big tech having large data sets about consumers in different markets which help them design products of the future, and acting as gatekeepers to other companies who are in need of such user data and are ultimately made to adhere to unfair conditions to acquire such data.  The Google Fitbit merger at its helm was again a timely importance of such data to Big Tech, with google looking to grab hold of the data aquired by Fitbit over the years

    The bill hands down the regulatory powers in entirety to the Federal Trade Commission (‘FTC’). While the powers given to the FTC are an effective step, the term ‘data’ has been broadly and vaguely used and hence the scope of the powers remains undefined and will require regulation in continuance with section 5 of the FTC Act, but the bottom-line is that the FTC is tasked to restrict commercialisation of sensitive user data to unfair advantage and ensuring building of user interfaces which facilitate sharing of such data with the FTC itself, effectively chartering the path to what might be USA’s first central data regulator.

    In India, CCI has often recognized the role of data and IT as an evolving factor to analyze anti-competitive behavior, with the WhatsApp suo moto order talking of need to regulate collection and allocation of excessive data and in the context of platforms like Facebook having ability to process significant data. While data has been recognized by the CCI to be a non-price competitive parameter and even proposes a theory of harm for the same, the powers of the CCI have been at loggerheads with jurisdictional powers of the proposed Data Protection Authority (‘DPA’). A provision solidifying data regulating powers of the CCI in competition pretext would accordingly be a step in the right direction for regulation of this important little space at the hinge of data protection and competition law.

    Conclusion

    The AICOA is not perfect and is far from it, but that should not stop us from implementing some of the unconventionally creative solutions it poses. The bill falters and is criticized for its vague and unclear terminology which can be defined better for perusal in India. In fact, there can be a combination of provisions from a combination of foreign legislatures. For example- on the front of data privacy, creating a data regulatory body and allocating it powers similar to those given to th FTC while properly defining the term data similar to the Digital Markets Act and ultimately reaching a more concrete and multidimensional provision shall ensure better compliance. The possibilities are endless, and while the Competition (Amendment) Act of 2022 is awaited, the amendments across the world seem focused to put fair restrictions upon unfair practices which have been carried out by ‘the big tech’ for a considerable time. From this uniform complexity come uniform new solutions, which if implemented selectively, fit well into the scheme of things of various nations, as is the case of AICOA and implementation in the Indian regime on the front of data privacy, selective preferencing, and demarcating big tech.

  • Funding of Food Aggregators & Competition law: A Post Covid Analysis

    Funding of Food Aggregators & Competition law: A Post Covid Analysis

    By Rohan Mandal and Jeezan Riyaz, fourth and third year students at USLLS, GGSIPU, Delhi and NLIU, Bhopal respectively.

    In an exclusive arrangement as part of its strategic push, the food delivery giants, Zomato and Swiggy are all set to raise more than $1 billion, which will help them to leverage a position of dominance in the food delivery business. Duopolistic designs, coupled with pricing below the belt, and the viability of recuperating losses have led to a strategic dominance for these entities in the food delivery market, thereby harming the consumers in the long run.  Accordingly, the food aggregators have been under the constant radar of the Competition Commission of India (“CCI”) for manipulating pricing, deep discounting and offering of rebates with an intention to distort competition.

    At the heart of the Competition Act, 2002 (“The Act”), lies the principles of fair competition and therefore any activity or strategy that abuses the ongoing competition in the marketplace, is said to fall within the ambit of the anti-competitive activities.  The Act in the explanation under section 4(2) defines “dominant position”, as a position of strength or dominance, enjoyed by any enterprise which enables it to: (a) individually dominate or function without the competing opponents in a marketplace; or (b) manipulate the consumers in a sense, that is grossly disadvantageous to the other forces of the market. This gains more traction particularly in light of the increased use of these apps and reluctance to dine out in light of Covid.

    • Abuse of Competition & Appetite for market dominance

    Section 4(2)(a)(ii), of the Act disallows an enterprise from engaging in predatory pricing, which is understood as selling goods below cost to drive out competition. While, 4(2)(c) prohibits those activities that deny access to the market and lead to foreclosure of competition. Economies of scale may lead to dominance, and if deep discounting and new rounds of funding received by the food aggregators is viewed holistically, a conclusion to that effect can be drawn.

    With Zomato having acquired Uber Eats and other small start-ups alongside its strategy to rechristen Zomato gold to Zomato pro (a premium subscription model), it gets a strategic edge to dominate the marketplace. Swiggy, on the other hand has launched their initiative called Swiggy Super, which has forced small start–ups to wind up their operations by diverting the consumer base to their platform. This comes at a time when people do not have the luxury of going out to a restaurant due to the ongoing pandemic and are reliant on food delivery apps. Section 19(4) lays down relevant factors to be considered to ascertain abuse of dominance, which include the economic power of the entity vis-à-vis their competitors and market share of the enterprise. The Food aggregators have control over the listing of restaurants and have access to consumer data, which is being leveraged for their benefit and to promote their in-house kitchens. Therefore, an argument can be made thatabuse of dominance is prevalent in the marketplace.

    Further, CCI in its report on e-commerce states that the food aggregators have benefitted immensely by establishing cloud kitchens (cooking spaces without a dine-in-option). These aggregator-run-establishments have an edge over normal restaurants on the app in terms of the user data available to them, preferential listing provided and by forcing other restaurants to purchase items from them. This has led to an unequitable profit earning structure, thereby exhibiting anti-competitiveness from the legal standpoint. Therefore, with data in the hands of these in-house-kitchens in the present digital economic paradigm, they are in a better position to maximize sales and entice consumers.

    In Matrimony.com Ltd. v. Google LLC, Google was accused of violating anti-trust provisions by manipulating their search algorithms and giving preferential listing to its own products and features. This caused the complainant to be listed lower, and thereby affected their business. It was held by the CCI that Google was directly manipulating the consumers by diverting their attention from rival services to their own. Google abused its dominant position to exert pressure on other players to exit the market, which was accordingly dealt with under section 4(2)(e). The CCI has laid down in MCX v. NSE, that  activities which are covered under section 4 such as predatory pricing and denying access endanger competition in the market. In a similar vein, it can be argued that the food aggregators are abusing their position of dominance through their in-house kitchens.

    • Assessment of dominance and abusive conduct: CCI analysis

    Fueled by the stiff domestic competition among restaurants, lack of alternative dine-in-options and buoyed by the ever-expanded funding inthe food delivery business, it has paved a way for a duopoly in the Indian paradigm. This makes it imperative on the part of the CCI to conducta thorough investigation from a competition law standpoint.

    In the new normal of the restrictions worldwide, the food delivery aggregators are engaging in anti-competitive practices such as predatory pricing, violation of platform neutrality, exclusivity, barriers to entry and obliging the already existing rivals to exit. Thus, impacting footfalls and diverting the entire consumer rush to their own benefit. The National Restauranters Association of India’s (“NRAI”), a body which represents over 5,00,000 restaurants, in their complaint to the CCI also echoes this sentiment, wherein they allege abuse of dominance by the aggregators. In their complaint they allege that aggregators charge restaurants exorbitant fees, give preferential listing to restaurants on payment of fees, and engage in deep discounting (non-adherence to deep discount schemes means lower visibility for the restaurants).

    The COMPAT in  Schott Glass appeal case, had observed that abuse of dominance and predatory pricing involves the satisfaction of two important requirements: (i) unequal treatment of similar transactions; and (ii) harm meted out to the competition in the marketplace. This places all the sellers on an unequal footing and is disadvantageous to the interests of the buyers. In another important case, the XYZ v. REC Power Distribution Company related to abuse of dominance, the CCI held that “establishing a denial of access”, indicates exclusivity and sizeable degree of market power being controlled by those in position of dominance.

    The NRAI complaint to the CCI has also alleged that the practices of the deep funded aggregators have forced several restaurants to shut down. Consequently, there is a need to reach a middle ground to ensure that there is stability and transparency in the process and that capitalism doesn’t hamper the very essence of competition as abuse of strength can impact both the competition and the consumers in the long run.

    • The Impact of IPO and the new rounds of funding

    The Zomato IPO will raise Rs. 9,375 crores against the backdrop of Zomato posting losses of Rs. 886 crores in the last financial year. On the other hand, Swiggy is set to raise Rs. 9,297 crores  in their newfunding round against losses of Rs. 3,768 crores in the 2019-2020 accounting year. This inflow of cash against the continued loss-making nature of these food aggregators, makes the market interesting from a section 4 standpoint as the entities will have the financial capability to strengthen their grip on the market, while posting losses, therefore, adversely affecting competition. In Uber v. CCI, the Supreme Court dealt with a case involving taxi aggregators offering rides at lower rates while making losses. The Hon’ble Court held that continued losses incurred by aggregators is prima facie indicative of abuse of dominance because predatory pricing helps them to drive out competition and control the marketplace at the same time. The CCI was ordered to investigate the activities of the aggregators. Although, the Commission would later give the taxi aggregators a clean chit, but the principle that continued losses merit an investigation by the CCI still stands, and should be applied in the present case.

    Zomato and Swiggy have stated that they will continue to make losses in the near future in order to develop business. This would be done by starting operations in new cities, and also diversifying to the item delivery market. At the same time, they also continue to give deep discounts and preferential treatment to certain enterprises. These activities should be investigated under section 4 and the possible appreciable adverse effect on trade under section 3 needs to be looked at. This becomes necessary, particularly in light of the fact that the CCI has also investigated such models in the case of taxi aggregators and e-commerce giants,  Amazon in Lifestyle v. Amazon. In this case the CCI held Amazon guilty under the Act  for not granting visibility to the products of the complainant. The decision of the CCI in Ashish Ahuja v. Snapdeal is also relevant for this purpose, where Snapdeal was accused of granting exorbitant discounts on their platform, which affected the business of their competitors. The CCI held that discounts coupled with harm to the market amounts to abuse of dominance. In the current paradigm, it is evident that the food aggregator market is dominated by two players, whose activities such as continuous deep discounts and preferential listing is prima facie indicative of abuse of dominance, and this merits an investigation by the CCI.

    All these factors have been put forward in the NRAI complaint. Further, the new cash inflow means that the aggregators will have the capacity to continue with the above-mentioned activities, which if left unchecked could have serious effect on the market.

    • Conclusion

    To sum up the above discussions, the authors submit that two important factors need to be considered, namely, the new funding and the previous activities of the food aggregators. When these two factors are looked at in tandem, it becomes imperative that a thorough investigation is conducted by the CCI, to gauge the market situation and address the apprehensions of the NRAI. Zomato and Swiggy have maintained that they will continue to make losses in the near future in order to develop business, which further makes it important for the CCI to probe the allegations against the aggregators. Covid has resulted in the popularity of food delivery giants soaring to greater heights. Therefore, there is a need to critically analyze the legal impediments of anti-competitive strategies that form the basis of the competition laws in India.

  • Potentially Anticompetitive? The Need for a New Standard for Judging Competition Law Effects

    Potentially Anticompetitive? The Need for a New Standard for Judging Competition Law Effects

    By Esha Goyal, fourth-year student at NLSIU, Bangalore.

    Introduction

    On 21st January, 2020 Zomato acquired Uber Eats India in an all-stock transaction which gave Uber (the parent company of Uber Eats) a 9.9% stake in Zomato. At the time, Zomato was the second largest player in the delivery sector of the food service industry in India and Uber Eats was the third.  Competition Commission of India [‘CCI’] did not investigate this deal or hold it to be anticompetitive, and hence void immediately, and is only investigating now, a year after the acquisition concluded. The CCI was unable to act – even though it was cognisant of the allegations of price and supply manipulations against the two entities, which would potentially be aggravated by the acquisition – because the current threshold for holding a deal to be anticompetitive is very high and only capable of being addressed ex post. However, this article argues that the creation of a middle standard – of potentially anticompetitive deals being closely monitored by the CCI – would be more suited to fulfilling the goals of the Competition Act, 2002.

    The CCI published its findings of the Market Study on E-Commerce in India where the food service industry was specifically analysed. The report noted that there were only three dominant players in the industry in terms of market share and transaction value: Swiggy, Zomato and Uber Eats, in that order. It further noted the allegations by restaurants against these three platforms which were first, though search results and restaurant ranking were touted as being objective to the customers, the platforms discriminated between sellers by offering better ranking and visibility to the restaurants paying them higher commissions. Second, the platforms unilaterally decided the discount schemes even though the costs of such discounts had to be borne by the sellers, who additionally, were penalized for non-participation. The CCI concluded this report by suggesting self-regulation by the industry by adopting clear and transparent policies for search algorithms, pricing and discount policies. Since this was not a formal investigation, these guidelines were not binding for any of these platforms.

    Balancing the goals of the Competition Act

    Section 3 of the Competition Act, 2002 [‘the Act’] states that “any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India” shall be void. In this context, it is proposed that the acquisition ought to have been held as void as per a strict reading of section 3(2) of the Act. This is of significance in light of the goals of the Act as have been highlighted in the preamble. The Act not only has to protect customers but also has to ‘ensure freedom of trade carried on by other participants in markets,’ which would include the restaurants listed on Zomato and Uber Eats. Further, since the acquisition combined two of the three most dominant entities in the market, it can directly and indirectly affect sale price and limit the market and the provision of services within that market by converting the industry into a duopoly. By giving the resultant food delivery service provider (Zomato) even more economic and market control over restaurants, they would lose the option to migrate to other platforms or control their visibility, pricing or discounts and thus be completely at the mercy of the food delivery service provider. This is especially true in the aftermath of the CCI report which had already recognised the adverse effects of the trade practices being carried on by these two entities, it can be said to have an ‘appreciable adverse effect on competition’ as per sections 3(3)(a) and 3(3)(b).

    However, one faces a dilemma at this point. Currently, as per a conjoint reading of section 3(3) and 3(4) of the Act with 3(1) and 3(2), whether a deal is anticompetitive or not is within the sole discretion of the CCI but rather has to be based on an objective analysis of facts and the market position subsequent to the deal to determine what the real impact on competition in that industry has been. Though the report noted the existence of price manipulations – partially brought about due to the dominance of three platforms to the exclusion of all others – a mere two weeks before the acquisition, CCI nevertheless had to let the deal go forward.

    One reason for this could be the standard of proof required to hold a deal as anticompetitive. The Act itself is broad enough to include even the possibility of an adverse effect on competition by accounting for indirect effects. However, the meaning of the term ‘anti-competitive’ has been held to a higher threshold by the CCI, as is evident from the present case itself, with very few deals being held void for being anticompetitive at the preliminary stage. This standard implicitly adopted by the CCI in practice seems to correspond to the higher standard of ‘beyond reasonable doubt’ analogous to that followed in criminal law, even though section 3(1) itself seems to favour the lower standard of ‘preponderance of probabilities.’ Given that the Act currently envisages only a binary of competitive-anticompetitive, and the severe consequences of holding a deal to be anticompetitive, CCI has taken upon itself to test deals on actual adverse effect on competition and abuse of dominance, instead of the mere possibility of being so, even though section 3(1) seems to grant the Commission the power to nullify the latter.

    However, this leads to an anomalous situation where the goals of the Act have to be sacrificed to meet the standard of proof required by the Act. As mentioned earlier, one of the purposes of the Act is to protect freedom of trade, which could be in the form of breaking down entry barriers or safeguarding against predatory pricing. At the same time, the CCI cannot hold too many deals to be anticompetitive because that itself would vitiate the general goal of efficiency and impose heavy costs on the market and its players by increasing transaction costs. In this scenario, a middle ground is needed to reconcile the Act’s protective goals with the economic development of the country.

    A New Middle Ground

    This could be fulfilled by amending the Act to differentiate between the powers of the Commission for acts which actually have an ‘appreciable adverse effect on competition’ and those which merely have the potential to do so.  While the former would retain the consequences of being held void and other penalties, the latter, instead of being wholly unregulated could warrant a mandatory investigation for a fixed period of time to analyse its consequences. Following this standard in the Zomato-Uber Eats deal would hence require the allegations brought forward by the E-Commerce Report against the practices of these companies to be reviewed for a few months following the acquisition, after which CCI could take an informed decision as to whether it was anticompetitive or not.

    The difference between status quo and the proposed model lies in the fact that while the former deals with ex post measures following the damage to the consumers and the market, the latter through its monitoring of all potentially anticompetitive deals as they happen would be able to prevent anticompetitive behaviour to a large extent and thus sustain a healthy competition in the markets while also protecting the interests of the consumers as well as other market participants, just as the preamble envisages. In the case at hand, it would imply a study of the actual effects of the acquisition on the market, brought on by the mere fact of the acquisition, rather than brushing it under the carpet till the anticompetitive behaviour cannot be ignored any longer.

    Some might argue that the proposed model would give CCI overbearing powers or lead to increased conservatism at the expense of market freedom and economic efficiency. However, the author posits that economic efficiency in the form of lower regulation is not the sole purpose of the Act. It has to be balanced against other goals of sustaining market competition, protecting consumer interest, and ensuring freedom of trade for all market participants. Perhaps as a compromise, a minimum threshold defined in terms of market share, as opposed to the current threshold of net revenue or asset value as mentioned in Section 6 could be a good starting point to determine which cases need to be examined instead of creating unnecessary delay by scrutinizing every single deal in the market. Thus, the proposed middle ground would only further this objective, rather than derogating from it.

    Conclusion

    This article proposes a new way of viewing competition law; instead of merely using it as a post-facto tool to correct a grossly unbalanced market, it should be used as a preventive, regulatory measure as well, similar to the Federal Trade Commission in the USA which also has under its mandate “practices that are likely to reduce competition”. As the Zomato-Uber Eats deal has been used to illustrate, some deals might not be out rightly anticompetitive, but are only one step away from being so because of the market situation at the time. Whatever be the reason, the monitoring of such deals by the CCI would not only fulfil the aims of the Act itself but would also help reduce long term social costs.

  • ESL v. UEFA: Federation(s) Actions Transgress Principles of Competition?

    ESL v. UEFA: Federation(s) Actions Transgress Principles of Competition?

    By Shubham Gandhi, third-year student and Tanish Gupta, second-year student at Dharmashastra National Law University, Jabalpur

    Introduction

    The furore surrounding the proposed breakaway European Super League (“ESL“) has yet again spurred with the issuing of joint statement canned by the three so-called European giants i.e. Barcelona, Real Madrid, and Juventus bolstered up the ESL keeping the faith of the league alive. This came in the aftermath of a preliminary ruling dictated by the Madrid Commercial Court on 20 April 2021 holding the league to be in violation of EU competition law.

    The idea of Super league, much of its disgrace, has posed a serious question to the world of sport. The author(s) in this manuscript will give readers the premise of the formulation of ESL, how the league is in contempt of the EU Competition law, and also distil the legality of the statement made by the Union of European Football Association President (premier governing body for football in Europe) barring the players’ from participating in the domestic league and world cup. 

    Instaurating European Super League

    The European Super League has been in talks for over the years. As early as 1988, a similar move, a two billion deal was signed to establish a new league of elite, surfaced in the world of football, famously known as  Project Gandalf . The ESL President Mr. Florentina Perez who is also chairman of Real Madrid C.F on Sunday, 18 April 2021 trumpeted to the world the newly formed Super league consisting of 20 teams with a total of 15 clubs as founding members and with 5 spots left for other clubs to earn through promotion. For Mr. Perez the league formation was quintessential in order to revivify the TV rights by recuperating the losing interest of fans towards  football and also to provide indispensable financial assistance to the clubs.

    The founding members (European giants) approached by the ESL, will bring exuberance of watching big star studded matches on every midweek, resurrecting the interest of football fans, making the league popularized. The ESL will also provide the clubs necessitated financial stability, by sanctioning 200 million euros every year.

    UEFA right to forswear

    The presence of Article 49 (3) of UEFA statutes grants the federation to intrude in the formation of the ESL. The statues read as: –

    “International matches, competitions or tournaments which are not organised by UEFA but are played on UEFA’s territory shall require the prior approval of FIFA and/or UEFA and/or the relevant Member Associations in accordance with the FIFA Regulations Governing International Matches and any additional implementing rules adopted by the UEFA Executive Committee.”

    The Article accords UEFA and FIFA as the premier body to grant ratification to any new league, planning to engage in football across Europe. Connoting that the ESL were to take prior permission from UEFA for its formulation, perverse to that, the ESL was devised in silence and publicized, as surprise, not to the world but to the players and manager of the clubs as well.

    The riveting point is that many members were part of both the federation this includes Mr. Andrea Agnelli, chairman of Juventus F.C and chairman of European Club Association (“ECA“) who later resigned on the very day when the proposed ESL came into reality. His participation in two opposing federations casted doubt of potential sharing of confidential information for advantage of ESL formation, giving UEFA right of action, based on breach of confidentiality.

    Delving into Competition law

    The European courts have time and again precedented that sports and activities are dictated by competition law. The ECJ in Klaus Hofner and Fritz Elser v. Macrotron GmbH held that the football clubs are termed as “Undertaking” which are capable of affecting competition within Article 101 (1) of Treaty on the Functioning of the European Union (“TFEU”). Also, the ECJ in Meca Medina v. Majcen decreed that competition law does apply to sporting events in relation to economic activities. 

    It renders every restrictive (cartel) agreement as a violation of competition law, but subject to exceptions i.e. if the federation pursues a legitimate objective, are inherent to these objectives, necessary and proportionate.

    The ESL principally infract the principle of equality between the clubs which was endorsed by the courts around Europe. In the Bosman decision of 1995, the court in para 106, summarised the test as “the aims of maintaining a balance between clubs by preserving a certain degree of equality and uncertainty as to results and of encouraging the recruitment and training of young players must be accepted as legitimate”, similar ruling was dictated in the UEFA Champions League decision of 2003. It is safe to say that the ESL being a close league, with 15 members guaranteed spots regardless of their performance, will fail to stand the test of legitimate objective.

    It is to be borne in mind that ESL being a new competition, will gamble upon the existing system and will diminish the financial interest of UEFA, as they are the only federation regulating football in Europe, holding a dominant position.

    The UEFA could be prohibited by virtue of Article 102 i.e. Abuse of Dominant position, from exercising its dominant position by prohibiting other leagues and favouring their  league which is Champions and Europa league. The same be held in Motoe case adjudged by ECJ.

    UEFA’s incongruous statement banning players

    The other wrangle in the brawl between ESL and UEFA is the statement made by UEFA President suspending the players from domestic teams and national teams. The legality of this statement can be posited by Article 102 of TFEU, which declares action taken while holding dominant position as void. The Munich court criticized Fédération Internationale de Basketball (“FIBA“) rule of banning athletes from club and nationals teams, taking part in competition other than the one staged by FIBA. The court while demeaning this rule of FIBA, held them accountable for abusing the dominant position.

    In a much recent case, the EU court in International Skating Union Case 2020 held that International Skating Union (national governing body for the sport of figure skating in the United States)rules regarding blanket ban on players from national teams who are participating in tournaments not accredited by ISU are not proportionate to the legitimate objective as per Article 101(1).

    Moreover, a decision rendered by the regional court of Frankfurt held that, if the federation announces the selection of players for the national team not on the basis of sporting merit, then it will be deemed to be a decision based on abuse of dominant market position.

    Likewise in the German Wrestling League case, the Nuremberg court of appeal while citing the ISU case held though federation are allowed to take measures in order to protect their own economic interest against the competitive organisation but banning players is against the principle of EU and German competition law.

    This in clear terms implies that the announcement threatening to ban all the 12 clubs and players from participating, will not hold a grasp on the courts. The vogue of courts upholding players autonomy is a strong inference that if ESL ever to approach the court, the ruling can be in their favour, same be affirmed by ESL Chairman.

    The banning of players will also stand in violation of the principle of ‘restraint of trade’ as players are free to move, as enshrined in the common law system. The creation of ESL has resulted into a much serious breach of duty on part of the club as the planned league carried out without letting the players know, which is in violation of rules of domestic leagues i.e. to abide by the rules of UEFA and FIFA. This in turn will give the right to players to repudiate the contract on grounds of breach of duty and contractual obligation.

    In the present case all the disputes arising out of ESL, the ban on teams from domestic leagues and the ban of players from playing in the world cup is likely to have breached any law or regulation for the time being in force, will likely be referred to CAS.

    Conclusion

    It will be interesting to watch out how this tale of world football develops in the coming months. The EU courts, while deciding the legality of ESL, also have to set out measures hinting whether TFEU licenses a competitive league ever to be formed finer than ESL or UEFA will continue to hold the dominant positions, concerning all small footballing activities played out in Europe.

    It is safe to say that the decision banning players from all the competition will not hold strong in court and the actions of UEFA will, in turn, violate Antitrust law as insinuated by the court through various precedents.

  • Future of Reliance in Retail: Analysing Competition Concerns

    Future of Reliance in Retail: Analysing Competition Concerns

    by Sampurna Kanungo and Sanjana Bhasin, fifth year students at NMIMS Kirit P. Mehta School of Law, Mumbai

    The recent acquisition of the retail, wholesale, warehousing and logistics undertaking of the Future Group by Reliance Retail Ventures Limited (“Reliance-Future acquisition”) has caused a wave in the market as it is a combination of two key market players in the organised retail segment. Post the acquisition, Reliance would be poised to pose a formidable threat to rivals and local players within the market along with the elimination of a key competitor. Under these circumstances, an investigation into the combination is warranted to ensure that the combination does not cause an appreciable adverse effect on competition in the relevant market.

    The proposed combination has been notified to the Competition Commission of India (‘CCI’) as per the statutory obligation imposed under Section 6(2) of the Competition Act, 2002. In the present deal, the parties to the acquisition have submitted that the relevant markets are (a) market for retail in India; and (b) market for B2B sales in India. In this article, the authors break down the decisional practice of the CCI to determine the extent to which such an assessment holds ground and analyse the treatment conferred upon unique aspects of the acquisition as well as explore the possibility of abuse of dominant position.

    1. Delineation of Relevant Market

    While assessing a combination, the foremost step is to delineate a “relevant market”. The market for retail sales in India is extremely fragmented and comprises of several smaller spheres such as the divide between online and offline segments, organised and unorganised markets etc., each of which are capable of constituting a separate market by itself. Further, a closer look at the parties to the transaction indicates that both have businesses that are spread out across the online/offline retail spectrum.

    a. Online/ Offline modes of distribution as a separate relevant market

    While considering the demarcation between online and offline retail markets, the decisional practice of the CCI, such as in the case of Ashish Ahuja V. Snapdeal,  has been to regard it as merely two modes of distribution of the same product and not two different relevant markets. Similarly, in the case of Jasper Infotech (Snapdeal) V. Kaff Appliances, the CCI considered the overall market share in the broader market of “supply and distribution of kitchen appliances in India” rather than assessing the market shares individually in the online and offline space.

    Interestingly, it is pertinent to note that post 2014, there has been a shift in the outlook of the CCI towards the treatment of online and offline markets. In the case of All India Online Vendors Association v. Flipkart India private limited, the relevant market was exclusively considered as “services provided by online marketplaces for selling of goods in India”, thus highlighting the online retail market as a separate relevant market altogether. The CCI has also acknowledged the growing importance of online commerce in its Market Study on E-Commerce, which highlights the limitation of a unified retail market as a whole on account of the nature of the goods and extent of price differential between sales channels and accordingly calls for a product specific assessment of markets. 

    Thus, the conception of retail sales as a broader relevant market as submitted by the parties may not be viable, given the decisional practice of the CCI in recent times. Further, the extent of substitutability between products available for sale via the online and offline modes has also been thrown into question post the COVID pandemic which has acted as a catalyst for the popularity and development of online channels of retail. The CCI has considered factors like ease of choice, convenience etc. for delineating a separate relevant market (of ‘radio cabs service’) in the case of Fast Track Call Cab Pvt. Ltd. V. ANI technologies Pvt. Ltd.,which could further be used to cement the position of online and offline channels of retail as separate relevant markets.

    b. Assessment of B2B/B2C sales as overlaps within the relevant market

    The other proposed market is the ‘market for B2B sales in India.’ The two common models for retail sales are Business to Business (‘B2B’) and Business to Consumer (‘B2C’). Following previous decisions of the CCI, B2B/ B2C Sales are usually analysed as a horizontal/vertical overlap between the parties and not as a separate relevant market. Overlaps are assessed within the contours of the determined relevant market. An overlap is considered to be horizontal if the parties are close competitors in similar lines of business. On the other hand, a vertical overlap refers to a situation wherein the parties are at different stages of the production chain, such as a combination between a manufacturer and a distributor. A vertical overlap may pose competition concerns since it has the ability to foreclose competition for other distributors.

    In case of the Reliance-Future acquisition, not only does Reliance gain a foothold in the B2B segment via the acquisition of the logistics and warehousing segment, it will also continue to operate a B2C business model by way of retail sales to customers through acquisition of physical stores. Since this transaction involves the presence of both business models, it would have to be assessed as a horizontal/vertical overlap within the relevant market.

    Illustratively, in Re: Walmart International Holdings, B2B business at the granular level of verticals (i.e. individual goods) was considered while assessing horizontal overlaps. This B2B segment had further been divided into organised and unorganised sectors, even though such a distinction had not been made by the parties. Further, B2C sales were considered under the segment of vertical overlaps. Since Walmart was not engaged in any online marketplace business for B2C sales (on account of such prohibition under the extant FDI Policy), the CCI did not find any vertical overlap.

    Thus, the CCI is likely to assess B2B/B2C sales while examining overlaps in the relevant product market.

    2. Assessment of Combination

    Post the determination of a relevant market, the effect on competition within that market on account of the proposed combination must be assessed. Pursuant to the same, certain unique aspects of the Reliance Future acquisition, such as the nature of the non-compete clause as well as the structure of e-commerce market itself and its implication on the proposed combination, warrant a more detailed examination.

    a. Analysing inordinately long Non-Compete Clauses

    One of the features of the Reliance-Future acquisition is the inclusion of a non-compete clause as one of the terms of the transaction. As per the Non-Compete Clause, Mr. Kishore Biyani and his family members have been barred from competing in the retail space for 15 years.

    The guiding principle for assessment of non-compete clauses is whether the restriction is “ancillary” i.e. directly related and necessary to the implementation of the combination. As a rule of thumb, the CCI has prescribed a period of 3 years in case of transfer of goodwill and know-how and 2 years for transfer of goodwill.

    Consequently, while such an inordinately long restriction period is likely to fall under CCI’s scanner, it is unlikely to sound the death knell for the transaction given the regulatory body’s favourable assessment of the same in recent times. CCI has permitted a  longer duration in certain sectors wherein customer loyalty would persist for longer duration. This specific carve out would prove to be beneficial for RRVL in justifying the long duration of the non-compete clause given the expansive loyalty base that has been garnered by Future Group, especially in case of its retail outlets such as Big Bazaar. While the CCI has ordered the reduction of the restriction period under non-compete clauses in numerous cases, a departure from the “ancillary” principle is not considered to be an infringement of the provisions of the Act. Further, the recent stance of the CCI regarding non-compete clauses has been indicative of a more relaxed assessment in view of modern business arrangements,  which can be gauged by a proposal to omit the obligation to disclose details of non-compete clauses.

    b. Increase in level of concentration due to network effects

    A significant threat to competition within the market is an increase in the level of concentration i.e. the presence of limited key players. A peculiar feature of the functioning of e-commerce platforms is the presence of network effects, which acts as a catalyst in increasing concentration in the market. Network Effect is a phenomenon whereby a product/ service becomes more valuable with the increase in number of users. The importance of e-commerce platforms further increases as growing number of users makes the platform more valuable, which attracts more sellers in return and leads to a ‘positive feedback loop’.

    In the present combination, combining both front end and back end services (logistics and warehousing), would make the platform more viable for sellers, which would conversely lead to a larger customer base. This is not only lucrative for emerging platforms such as Jio-Mart which doesn’t have an existing customer base, it can very quickly lead to a concentrated market in this case, especially when combined with the advantages of the existing brand value and loyalty base of the Future Group. Thus, the acquisition of back end services in particular would have the effect of strengthening the network effect of e-commerce platforms of Reliance, and lead to an increase in the level of concentration in the market.

    3. Abuse of dominant position

    The deal provides massive synergies to Reliance by doubling the retail outlets under operation alongside development of strong back-end and front-end retail businesses, conferring the highest market share to them in the organised retail segment. Key factors such as market share of the enterprise, size and resources of the enterprise and size and importance of the competitors are essential to determine the dominant position of the post-acquisition enterprise.

    With Reliance Industries now having access to a strong supply chain and warehousing facility, overlapping with their venture into the online retail space JioMart raises concerns of them abusing their dominant position in one relevant market i.e. offline retail to enter into, or protect, the other relevant market of e-commerce retail. It has been established that the regulator considers not just immediate effects on competition, but also scenarios where the combination may adversely affect competition in the future. Therefore, such vertical integration of the enterprises with large sales and service network puts them in a dominant position, making available the opportunity to indulge in unfair and discriminatory pricing and denying market access to new players in the offline organised retail segment and strengthening their position in the e-commerce retail.

    Conclusion

    The Reliance-Future acquisition is arguably one of the largest and most significant transactions in recent times, which is likely to have far-reaching consequences in the entire retail space. Consequently, it is imperative to analyse the effects of this combination on the overall level of competition in the market. While an analysis of anti-competitive agreements or abuse of dominance is not conclusive at this preliminary stage, an analysis from a merger control perspective highlights some key aspects. The question of delineating the relevant market has always been one of substantial uncertainty, and the CCI’s decision in this particular combination would be especially significant given that all stages of the production chain as well as different modes would have to be taken into consideration. Moreover, some aspects such as network effects and the ability to leverage position in one market to capture another would have a bearing on a subsequent assessment of dominance as well owing to the plausible increase in market share and concentration.