The Corporate & Commercial Law Society Blog, HNLU

Tag: Blockchain

  • Assessing the Deal Value Threshold: Shortcomings and the Way Forward

    Assessing the Deal Value Threshold: Shortcomings and the Way Forward

    BY DHRUV MEHTA, FIFTH-YEAR STUDENT AT JINDAL GLOBAL LAW SCHOOL, SONIPAT

    introduction

    Recently, the Parliament passed the Competition Amendment Act, 2023, which makes substantial amendments to the Competition Act, 2002 (‘Act‘). Amongst the plethora of amendments, the most prominent amendment is the introduction of the deal value threshold (‘DVT‘). DVT is the additional threshold that requires notification (in the absence of any exemption) of a merger or acquisition with a deal value threshold of INR 2,000 crores (USD 0.24 billion) where either of the party to the deal has ‘substantial business operations in India’ (‘SBOI‘). Through the introduction of the Competition Commission of India (Combinations) Regulations, 2023 (‘Draft Regulations‘), the Competition Commission of India (‘CCI‘) has brought more clarity with respect to the ‘transaction value’ and ‘substantial business operations’ under the DVT framework. Through this blog post, the author examines the limitations in the CCI’s interpretation of the DVT and offers recommendations to enhance its clarity and effectiveness.

    Once the Amendment Act was passed, the onus was now on the CCI to quickly define what constitutes ‘value of transaction’ and ‘substantial business operations’. The CCI has followed the footsteps of Germany and Austria by rightly defining what exactly constitutes ‘value of transaction’ and ‘substantial business operations’. However, there are a few shortcomings as to how transaction value has been interpreted and defined by the CCI.

    Transaction Value: Shortcomings and Recommendations

    a. Incidental Arrangements

    Regulation 4(1)(c) of the Draft Regulations requires the value of a consideration to include ‘incidental arrangements’ for calculating DVT. The definition of ‘incidental arrangement’ is confusing and excessively broad. Examining whether a transaction is notifiable would be difficult if an incidental arrangement is accepted in its current form as it may encompass unconnected transactions that weren’t anticipated by the parties when entering into the main transaction.

    To ensure certainty for parties involved in a transaction and to reduce ambiguity in applying the DVT, the CCI should limit ‘incidental arrangements’ to those arrangements foreseen by the parties when the transaction was initiated. Such arrangements should also be explicitly documented in the transaction records. Furthermore, under Regulations 9(4) and 9(5) respectively, read along with Regulation 4(1)(b), the CCI has the power to review interconnected steps of a single transaction when the transaction meets the test of interconnection. In the past, the CCI has exercised its powers by reviewing interconnected transactions in proceedings against the Canada Pension Plan Investment Board and ReNew Power Limited under Section 43A of the Act.  

    This makes the proposed provision unnecessary if ‘incidental arrangements’ are linked to the transaction because the CCI already has the power to look at subsequent transactions that are interconnected. It is recommended that given CCI’s ambit to assess interconnected transactions, it should reconsider the need for incorporating ‘incidental arrangements’  under the value of a transaction. Furthermore, in the event that the CCI decides to retain the said clause, ‘incidental arrangements’ should only include, transactions foreseen by the parties which are included in the transaction documents during execution.

    b. Uncertainty in the Valuation of Non-Compete Clauses

    The draft regulations require that the value of any non-compete clauses be included while calculating the value of a transaction for DVT. There are a few shortcomings with the said requirement.

    Firstly, it is often difficult to attribute value to non-compete clauses. The value of such non-compete clauses is often reflected in the purchase price listed in the transaction documents. When a non-compete clause is not listed in the transaction document, it is often challenging to assign an exact value to such a clause, and assigning an exact value would compromise the DVT’s inherent predictability and clarity. This would be against the ICN Recommended Practices for Merger Notification and Review Procedures, which highlight how important it is for merger control systems to have clear, transparent rules- especially in light of the growing number of deals happening across several jurisdictions.

    Secondly, the value of the transaction is the value that is attributed to the non-compete provision. If the CCI wants to attribute a separate and distinct value to a non-compete agreement that is separate from the value of a transaction, it should not speculate on assigning the value to the non-compete agreement. Rather, when the board of directors of the acquirer or the seller gives a specific value to the non-compete agreement at the time of the transaction, the CCI should also value the non-compete at the same specific value as given by the board of directors.

    It is recommended that the CCI amend the Draft Regulations to include the value of non-compete clauses and agreements as part of DVT as listed in the transaction documents. It should also be made clear in the Draft Regulations that the CCI can only assign a value to a non-compete agreement if it has been given careful thought and approval by the boards of directors of the target company and the acquiring company.

    c. Valuation of Options and Securities

    According to the Draft Regulations, the whole value of the options and securities to be acquired, along with the assumption that such options would be exercised to the fullest extent possible, must be included in the consideration for the DVT for a transaction.

    It is observed that by including the whole value of options, DVT could be breached or relatively small transactions could also be flagged. Moreover, including the full value of options that could potentially be exercised may lead to an overstatement or understatement of their value, as the price at the time of exercise could differ from the price when the option is initially granted. In the USA, the Hart-Scott-Rodino (‘HSR‘) rules state that valuation reports presented to the board of directors would be used as a point of reference for determining the value of a consideration when the same value is unknown but capable of being estimated. The CCI could adopt the practice as stated by the HSR rules, where it could consider the value of an option not on the basis of assumption but instead based on valuation reports presented to the board of directors.

    In line with the stance in other countries and the CCI’s own decisional practice, it is advised that the whole value of shares received upon exercising an option be considered only if and when the option is exercised. Further, to eliminate any doubt regarding the value of the options, the CCI could only take into account the entire value of the options if they are exercised at the per-share price paid to shareholders (perhaps as a way to assign a portion of the transaction value to particular persons).

    Substantial Business Operations: Shortcomings and Recommedations

    Under the Draft Regulations, SBOI is established if, within the 12 months preceding the transaction, the business demonstrates that 10% or more of either (a) its global user/subscriber/customer/visitor base, (b) global gross merchandise value, or (c) global revenue from all goods and services in the prior financial year, is attributable to India. The author welcomes the CCI’s target-only approach for judging local nexus. However, to ensure that transactions having a limited nexus to the Indian markets are adequately filtered out, the CCI needs to make a few amendments to the SBOI framework in India.

    • Redefining ‘Users, Subscribers, Customers, and Visitors’

    Considering ‘every download’ as a ‘user’ would be an overstatement and therefore the threshold of ‘users, subscribers, customers, and visitors’ could lead to double counting as the said requirement is extremely expansive. For a single product business, such as a social networking website, there is a possibility to have a different number of subscribers than users or visitors, and these subscribers may not be active users or visitors. Thus, such ‘visitors’ might not contribute towards the economic value of the target enterprise and should be discounted from the threshold.

    Furthermore, the CCI could have taken inspiration from Germany and Austria who have provided adequate guidance on how to compute the user threshold for digital markets. The Digital Markets Act of the EU also includes clear definitions for terms such as ‘active end users’ and ‘active business users‘ tailored to various products and services such as online intermediation services, search engines, social networking platforms, video sharing services, and more. The measurement of such users, subscribers, customers, and visitors should be carried out according to industry standards as providing an exhaustive list is nearly impossible.

    The CCI through a guidance note could narrow down the ambit of ‘users, subscribers, customers, and visitors’ to that of ‘monthly active users’, ‘unique visitors’ and ‘daily active users’ in the digital markets for assessing SBOI as done by German and Austrian Competition regulators. The CCI could further bring more clarity to its implementation of DVT by referring to the rulings of Meta’s Acquisition of Kustomer and Meta’s acquisition of GIPHY.

    Under the ambit of ‘users’ the CCI could consider both direct and indirect users. Taking inspiration from the aforementioned cases, the CCI could define direct users as those who were paying for the product as well as who are licensed customers. Indirect users would be considered as those who accessed the application, for example, GIPHY library through third-party mediums/applications such as Facebook, Instagram, Twitter, and Snapchat. Moreover, it is important to highlight that the CCI ought to establish distinct standards for evaluating activities across various sectors, just as the German and Austrian guidelines on transaction value threshold do.

    Thus, the author suggests that the criteria of ‘users, subscribers, customers, and visitors’ be replaced by ‘active users which consists of daily, monthly, yearly, direct and indirect users, and unique visitors’. Further, as specific definitions are provided in the Digital Markets Act for ‘active business users’ and ‘active end users’ the CCI could provide guidance for the same across various sectors.

    Conclusion

    The CCI is seen to be taking some major strides in regulating competition in new-age deals within the digital sphere. Taking inspiration from Germany and Austria, the Competition Act was amended to introduce the deal value threshold, which effectively provides the CCI the jurisdiction to assess those digital mergers with little or no assets or revenue. The CCI has tried its best to bring more clarity with regard to the interpretation of transaction value and substantial business operations under the DVT framework. However, it remains to be seen as to how the practical implementation of DVT would be undertaken by the CCI. As highlighted, under the ‘substantial business operations’ prong, the CCI should bring more clarity by clearly redefining ‘users, subscribers, customers, and visitors’.  Towards the final step, the CCI also needs to streamline its approach to reviewing interconnected transactions and the valuation of non-compete clauses.

  • Cryptocurrency: A Revolution in the Making

    Cryptocurrency: A Revolution in the Making

    By Aayush Jain and Devansh Parekh, fourth year law students at GLC, Mumbai.

    Introduction

    On 21st April, 2021, for the first time ever, a completely paperless trade transaction between Tata Steel and HSBC India was executed using blockchain technology. The genesis of the technology which enabled this transaction can be traced back to 2008, when a pseudonymous white paper was uploaded online, which envisioned a new way to transfer value over the internet – and thus commenced the era of cryptocurrencies, blockchain and Bitcoin. While they pose significant controversy, fear and caution, cryptocurrencies have attracted immense interest from businesses, consumers, monetary authorities and governments across the world, as they have a promising future to replace the need for the trust in long-standing institutions such as banks.

    The Draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019 defines cryptocurrency in a broad manner as, any information, code, number or token, generated through cryptographic means or otherwise, which has a digital representation of value and has utility in a business activity, or acts as a store of value, or a unit of account. A more comprehensive definition has been given by the Financial Action Task Force as a math-based decentralized, convertible virtual currency which is protected by cryptography.

    Potential Uses

    Companies across the globe have begun raising capital through initial coin offerings – where the company sells cryptocurrency either for money or for another cryptocurrency. The time frame and the costs are greatly reduced when compared to a regulated Initial Public Offering. Another important characteristic associated with initial coin offering is that they do not come with voting rights. Today, crypto assets boast a combined market capitalization of over $1.75 trillion.

    Could we have ever imagined a completely paperless transaction? Just as it was hard to guess in the early 1990s how the internet would help sell products across the world, an attempt to precisely understand the use of blockchain technology today is challenging. The advantages and disadvantages vary depending on the nature of the transaction. This nascent technology has several characteristics as discussed below.

    Instant, Low-Cost, Secure Settlement: Crypto-assets, such as Bitcoin, solve the problem of counterparty risks by creating a single, decentralized distributed database, accessible to everyone, but controlled by no single entity. The technology has the potential to bring about safe, real-time trade verification and settlement, through simplification of administrative processes in settlement, which has the ability to handle high volumes at low costs. Since all parties agree on a single database, without the presence of a financial intermediary, transferring money from one account to another is effortless, cost effective and quick as against a banking transaction that would otherwise require confidence that the payment would happen risk-free. The presence of a more secure payment mechanism has the potential to improve access to credit.

    As per a recent report by the innovation fund of Santander Bank, blockchain technology would result in a cost-savings of USD 15 to 20 billion by 2022 as it reduces financial infrastructure costs and time period for the transactions, as compared to traditional transfer of money, which can be done only during banking hours which would take at least a day or two with fees ranging from 1% to 8%.

    Tokenization: Cryptocurrency has a convenient way of tackling the problem of counterfeiting and fraudulent transactions. Tokenization involves maintaining a record of ownership of physical assets in a secure electronic manner. The only way for someone to ‘own’ a digital asset was if a trusted third party recorded the ownership in a database. Because the database is accessible by everyone and controlled by no one [also called permissionless network], crypto assets can provide ownership guarantees that were previously non-existent in the digital world Therefore, the risks arising from a controlling third party are eliminated. For example, blockchain could provide specific financial services without the need of a bank through distributed ledgers. In fact, one could argue that cryptocurrencies have more secure record-keeping capabilities, providing better ownership assurances, than most of the physical ones, while providing an efficient cross-border payment system.

    Smart Contracts: Other potential applications in finance include smart contracts – electronic contracts that are designed to execute automatically upon fulfilment of terms as agreed to by the counter-parties. For example, an options contract could be set up to be exercised automatically if certain defined conditions exist in the market. Such a ledger could potentially replace the paper real estate deeds currently filed at government offices.

    Key Issues and Analysis on India’s Stance towards Cryptocurrencies

    “Why ban when you can regulate?” New possibilities of cryptocurrencies are being discovered as the trading and usage increases day by day. As recent as March 2021, the Finance Ministry made it clear that it has no intentions of banning cryptocurrency in its entirety after witnessing several benefits of fintech and its dependance on blockchain technology. Interestingly, to battle the COVID-19 pandemic, the Government of Maharashtra has been using blockchain technology to store and maintain COVID-19 test results.  .

    In 2018, the Reserve Bank of India (“RBI”) materialized a circular (“RBI circular”) which required all entities within its purview to stop dealing in cryptocurrencies and rendered it illegal to initiate any such dealings or services in cryptocurrencies.

    Amidst concerns of high volatility and risky venture, what perturbed RBI the most was the anonymity of transactions. This raises significant concerns for consumer protection. No Indian regulation specifically targets cryptocurrencies. They have no sovereign guarantee and are of a speculative nature, hence making them very volatile. For instance, Bitcoin lost nearly 80% of its value between December 2017 and November 2018. Interestingly, recently Elon Musk and his tweetshave made some important headlines that led to  fluctuation in rates of certain  cryptocurrencies like  Bitcoin and Doge to the sky and back to the ground. The essence of money has always been to trust in the strength of its worth.

    Another particular concern with cryptocurrencies is that private keys (a ‘key’ which allows access to a user’s cryptocurrency) are stored by cryptocurrency exchanges, which are prone to hacking, malicious activities, human errors or operational problems of exchanges. On 22 April 2021, one of Turkey’s largest cryptocurrency exchanges had to cease operations due to lack of financial strength, leaving hundreds of thousands of investors in panic as their savings worth $2 billion would evaporate.

    Since cryptocurrencies are pseudonymous and decentralized, they could facilitate money laundering and other illicit criminal activities (such as tax evasion), providing a means for criminals to hide their financial dealings from authorities. It also raises the issue whether existing regulations can appropriately guard against this possibility. 

    If cryptocurrency becomes a widely used form of money, it could affect the ability of central banks to implement and transmit monetary policy in the country.

    The RBI circular aims to tackle the above issues by temporarily holding off trading in cryptocurrencies until a suitable legislation is enacted. However, the same was challenged and struck down by the Indian Supreme Court declaring it a violation of fundamental rights vested in Article 19(1)(g) of the Constitution of India. The Court applied the test of proportionality and concluded that RBI failed to consider the availability of least-restrictive alternatives. It must be noted that though the Supreme Court rejected the RBI Circular on the ground of proportionality, it does not rule out the presence of other risks that come along with this order.

    Conclusion

    The entire growth and foundation of Financial technology (“Fintech”) lies upon the initiative of a Sandbox. The United Kingdom and its regulatory body, the Financial Conduct Authority commenced this to reduce time and cost to get ideas to market, enable greater access to funding for innovators and allow more products to be tested and introduced in the market. Arizona was the first state to adapt this in the USA.

    Although growing at an exceptional speed, the fintech industry is still young. This has put some pressure on the regulators to adapt to the inevitable changes time and again. For instance, the USA has a fragmented structure of regulations that govern fintech. The Initial Coin Offering must fulfill the Howey Test in order to be regulated by the SEC. There is not one but several rules and regulations differing from state to state that govern Fintech in the USA. The State Licensing Requirements ensure that there are annual audits, record keeping as well as examination by regulators. Some of the recent initiatives include: In 2015, New York State Department of Financial Services approved the NY BitLicense that issues business licenses for virtual currency activities. In 2017 the Uniform Law Commission released the Uniform Regulation of Virtual Currency Businesses Act that ascribes certain extensive requirements for a virtual business currency to adhere to before it can engage in business activities with the residents of the state. Even though this act has not been enacted by any of the states so far, it is an exhaustive framework that details the transfers, exchange, definitions, licensing and other requirements as well as potential liabilities that can be enacted in the future.

    As it stands, there is an urgent need to provide clarity on the status of cryptocurrencies. India is working on its own law to regulate cryptocurrencies. However, the approach taken is severe, even more stringent than China. It would be interesting to see where India takes the project of Digital India from here on. If the draft cryptocurrency bill is passed, India would be first prominent economy to ban any form of engagement with cryptocurrency – including its mining. 

    Like other nations, India should regulate rather than ban cryptocurrencies. The aim should be to develop industry standards, promote transparency, work with regulators to detect fraud and misconduct. Crypto firms in India have experienced a successful phase during the pandemic as the volume of trading on crypto exchanges increased manifold. There is an increased inclination towards accepting cryptocurrencies. Around the world, companies such as Starbucks, Visa and Microsoft now accept certain cryptocurrencies as payment for their products/services. Although the crypto market is highly volatile in nature, regulators can introduce margins, limits, circuit breakers as well tax the transactions to ensure open competition in the market.

    It is well established that the nature of the cryptocurrencies is evolving continuously in the global economy. Due to its increasing acceptance, it should not come as a surprise if India publishes its own set of guidelines or regulations. As to which stand it takes is a question which remains to be answered.