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Sirwin

Byju-Aakash merger as a case study for impact on the extant laws vis-a-vis judicial pronouncements and recent regulatory trends

By bitiuris | lawonchain | 8 Jul 2022


BACKGROUND OF THE DEAL 

 

The acquisition of Aakash Educational Services Ltd. (Hereinafter, “Aakash”) by Byju’s (Think and Learn Pvt. Ltd.) - an educational technology or ed-tech upstart from India founded in 2011 by Byju Raveendran and Divya Gokulnath at an estimated valuation of $950 million is one of biggest, by value, deals in the Merger and Acquisition space in the year 2021. It had made Byju’s the “world’s most valuable” ed-tech company leaving no legitimate, and parallel, competition in this space, at least in the South-Asian market.[1]

A cash and stock deal of this magnitude is particularly interesting given the market potential combined with the SaRS CoVID-19 pandemic accelerated online / electronic agnostic approach for consumption of various services as well as goods, across the globe.  India, in particular has a huge demand for education and allied services which until recently was limited to a brick and mortar model for supply and relatively high cost. However, there was a burgeoning young population which was willing to pay a premium price for ‘quality’ school level education, professional skill training and certifications.

Aakash, hailed as one of the premium and established ‘coaching institutes’ had a proven track record for preparing school level students for medical and engineering entrance exams with a proven track record. This model was partially and temporarily affected by the lockdowns during the ongoing pandemic hence the board of investors of Byju were, perhaps, comfortable bridging the gap through a strategic acquisition whilst retaining their brand value and venturing into this segment following a marquee of ed-tech acquisition such as Tutor Vista and Scholr hoping to introduce an omni-channel delivery of Aakash’s offerings.[2] 

 

MERGERS AND ACQUISITION & ITS REGULATION IN INDIA

 

Section 31(1) of the Competition Act, 2002 (Hereinafter, “Act”) vests the powers with the Competition Commission of India(“CCI”) to determine and rule on any proposed transaction for a listed or unlisted / private limited company either by the way of a merger or an acquisition after assessing the impact on the market conditions. The intention of the legislation, vide Section 4 of the Act was to prevent monopolistic practices from affecting free trade and fair competition in the country for which the CCI was established, as a statutory body and to act as a watchdog, for ensuring effective administration of the Act.

 

In addition to the aforementioned, principal, Act; the CCI is also empowered with rules and regulation through which it administers its powers and duties. The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 vide Regulation 13, requires the CCI to publish a summary of the ‘Proposed Transaction’ in case of any Merger and Acquisition taking place in the Indian jurisdiction or involving India incorporated entities. This is followed by a Press Release of the finding of the CCI and an interim decision, as was done in the ‘Complete Buyout’ acquisition of Aakash via Press Release No. 14/2021-22[3] following which the holding entity or the ‘Target Company,’ that is, Aakash ceased to exist. Although the brand name ‘Aakash’ was retained as an Intellectual Property. This is followed by a detailed order of the CCI after which is regarded as the final approval. Unless a company is listed on the stock exchange, in other words a publicly traded company, an additional requirement of filing it with the market regulator, SEBI is not required and the ‘Acquiring Company’ can directly approach the NCLT to close the deal and complete the acquisition or merger, whatever the case may be.

 

Role of CCI in this deal and critical appraisal of its decision

 

While the CCI had been cognizant in its approach in considering the ‘network effect’ in the cab-aggregation market vis-a-vis the offline taxi service in FastTrack Call Cab Pvt. Ltd. v. ANI Technologies Pvt. Ltd.;[4] it delineated from its stance on the holding that merely because the medium of delivery or distribution of services is separate - does not mean the market segment for its consideration under the Act would also be different. This is in direct conflict with its observation made by the CCI in the Flipkart-Snapdeal cases.[5]

 

Similarly for ed-tech market and physical classroom environment, as in the aforementioned case, this distinction is necessary as the ultimate market serviced by these two entities, that is, Aakash and Bjyu’s is educational services. Further, as per Section 4(2)(e) of the Act, “leveraging of market share” is a phenomenon where a particular enterprise or group of enterprises uses its ‘power’ in one segment to capture the profits in another segment or market through a common user base, leading to monopolistic or oligopolistic tendencies. The CCI thus failed to evaluate any Appreciable Adverse Effects on the Competition(“AAEC”).[6]   

 

EFFECT OF POLICY AND RETROSPECTIVE LEGISLATION: VODAFONE TAX CASE AND RECENT JUDICIAL TRENDS

 

The two entities, namely, Aakash and Byju’s under the present discussion, albeit the same broader market segment, were operating in different spaces; one in the offline market whereas the latter in an online market. This not only poses a challenge from an anti-trust perspective but also from data privacy, e-commerce policy and taxation perspective. It may also have an overarching effect on other social and welfare policies, including the National Education Policy which was introduced by the Central Government in the recent past.

 

Although the services offered by Byju’s and even Aakash may not directly fall under a definition of primary or secondary level education, which is by and large governed under the various state and national educational boards such as NCERT in the country. Nonetheless, the denial of service or misuse of consumer data, especially children could be quite problematic, at least until laws such as the Personal Data Protection Bill, 2019(“PDP Bill’) is not promulgated. Further, given the size of the user base, a sterner public policy law - if made retrospectively applicable may be catastrophic for the investors and shareholders of the Byju’s perchance it plans to do an IPO listing as with current trend in the India market with the likes of Zomato.[7]

 

Thus an analysis into the Vodafone-tax case, before the apex court and the retrospective amendment to the tax law by the Legislature of the Parliament of India, is important to consider as the ed-tech venture’s omni-channel delivery model is vulnerable to be hit by various legal, fiscal and regulatory issues as enumerated above.

 

Vodafone-tax case: a lesson for JVs and M&A deals in India

 

Indian taxation laws, like other advanced countries, allow for ‘tax-avoidance’ while it sternly penalizes ‘tax-evasion’. Although corporations across the globe have been structuring their enterprises in a manner best situated to pay the least tax in a jurisdiction which is most favorable to them, also commonly known as tax-havens, by creation of Joint Ventures(“JVs”), Wholly Owned Subsidiaries (“WoS”) and strategic partnerships with locally registered entities or as Permanent Establishments carefully modeled basis the Tax Treaties between the countries where it operates, ever since the dawn of a globalized economy.  

 

In Vodafone’s case,[8] an investment into a WoS by the Dutch ‘Parent Company’, in Cayman Islands, through which it held a 67% share in  an Indian registered JV entity called Hutchison Essar Limited, helped Vodafone avoid large tax amounts claimed by the Income Tax Authority. Since there was no express legislation on Capital Account Transactions under the Income Tax Act, 1961 (“Income Tax Act”), the tax liability of the corporates on the income accrued is determined by the Source Country as per Section 9 of the Income Tax Act, there is a provision of income deemed to accrue on a particular transaction. 

 

The Supreme Court of India held that,“[t]he tax is levied on the basis of the source and the source is the location where the sale takes [place] and not where the product is derived or purchased from.” While reversing the decision of the Income Tax Appellate Tribunal, it dealt with multifarious issues such as ‘Piercing the Corporate Veil.’ There it held that, although the companies and its subsidiaries are separate legal entities and so are the liabilities arising from them a separate obligation. However, if it is done to achieve a wrongful objective, the ‘Parent Company’ can be made liable for the negligent and illegal acts of its subsidiaries. Thus separate transactions warrant a holistic view and should not be subjected to individual examination.

 

Further, Radhakrishnan, J. opined that the ‘Limitation of Benefits’ clause in the Indo-Mauritian Tax Treaty provided for Tax Residency Certificate provision for Foreign Direct Investment(“FDI”) which cannot be further subjugated to further enquiry so long as the provisions contained therein were complied with. It was held that it was irrelevant for the purpose of determining whether the FDI from a Mauritian registered enterprise was routed through a different jurisdiction or directly emanated from the country itself.

 

Retro-tax amendment by the Parliament

 

Even though the apex court decided in favour of Vodafone holding that it had engaged in ‘tax-avoidance’ through legitimate means, by exploiting the loopholes in the India taxation laws, it was in no manner an illegal act; the legislature cured the said provision after promulgation of requisite amended and made it retrospectively applicable. Therefore, despite winning the battle in the apex court of law in India, Vodafone was made liable for dues claimed and defeated by the Tax Authorities.

 

Although, this was later contested by Vodafone in the Permanent Court of Arbitration, in the Netherlands against the Government of India and it was held that India was in breach of its International obligations as per the Bilateral Investment Treaty enforced between the two Nations for Promotion and Protection of Investments, to no avail. Thus, from an international taxation and private international law perspective, this case has a highly negative and significant impact leaving many investors wary of investing in India. Similarly, Cairn Energy Plc was retrospectively taxed by the Indian Tax Authorities.[9]

 

Concern for Byju’s board of investors

 

Byju’s claim to the title of being the first Indian ed-tech unicorn - a billion dollar or more startup by valuation, is at potential risk in the currency legislative trends continue on retrospective applicability of tax or other such regulations such as the PDP Bill were to be made retrospectively applicable and other extant ‘data localization’ norms or  rules, notified by the RBI or any other regulator, of some ‘transaction leg’ falling under the jurisdiction of the regulators were treated in a similar fashion.

 

Their boards of investors include marquee venture capital funds such as BlackRock and Tencent as well as social initiative funds like the Chan-Zukerberg Initiative and Canada Pension Plan Investment Board.[10] Most of the such investors may not even have the defense used by Vodafone case on the basis of Tax or Bilateral Investment Treaties which may be using the public money for investment in this Indian upstart. Besides violating the international conventions and the rule of law, India may be at a reputational risk of losing further business and investment opportunities as this trend continues.

 

Now, if one is to carefully consider the decisions and observations by the CCI in the Flipkart (supra) and ANI Technology (supra), such inconsistencies may even have a adverse impact from an anti-trust law perspective which would make strategic acquisitions more risky leading to a downtrend in Mergers and Acquisition activity which in a lot of cases, especially during the pandemic, has helped or saved many smaller enterprises from winding up which would have led to severe unemployment in a national where there is already a dearth of jobs.

 

Recent regulatory and policy trends

 

During the ongoing pandemic, the Government announced a slew of measures including moratorium on interest paid on loans, either by way of ordinances or new policies such as the MSME Pre-Pack Regulations and the E-commerce policy. In the former, the Micro Small and Medium Enterprises Act, 2008 which is a ‘Lex Specialis’ was amended along with concomitant policy measures to safeguard the interest of the small business owner for continuity of trade and safeguarding jobs for millions of people in this various industry clusters.

 

Earlier, the Central and State Goods and Services Act, 2015 had tried to standardize a list of services including online educational services in an exhaustive manner with a standardized set of ‘coupon rates’ applicable for each type of service. As ‘Education’ was not defined in the Central Goods and Services Act, 2015, following a Supreme Court decision on the same, certain educational services rendered through recognized institution were exempted from the indirect tax liability while others fell into the category of Online Information Database and Retrieval(“OIDAR”) liable to be taxed[11] at 18% by virtue of the medium of rendering such services. A further sub-classification under ‘Heading 999293’ is warranted for “commercial training and ‘coaching services’ which is also taxable and, perhaps, the appropriate GST rate for Bjyu’s services. However, omni-channel delivery, in whole or part following the acquisition of Aakash in the physical environment, might pose a challenge while determining the appropriate rate.

 

CONCLUSION 

 

The law of Mergers and Acquisitions in India is still at a nascent stage which includes careful evaluation of a plethora of regulation and policy measures promulgated by the Parliament from time to time. The dynamic business model in rapidly evolving technical and regulatory trends require careful consideration and more so in the case of international investments in Indian entities.

 

Vodafone’s case is particularly disconcerting from the point of view of an investor for a binary risk of retrospective taxation which would negatively impact the profit projections of the enterprise as it can have devastating effects on the future returns. It is aggravated if public funds such as the investment made by the Canadian Pension Investment Board in Byju’s. A sovereign has a legitimate right to introduce laws or any amendments thereof; it must be carefully done. In fact a retrospective application may also be feasible unless it is intentionally done to defeat the decision of the judiciary.

 

On the other hand, powerful regulators such as the RBI should have mechanism as SEBI’s informal guidance letters which is actively used by many market participants seeking clarity on grey areas of law. The way forward, in my opinion, would be to learn from the best practice from international jurisdictions and adapting the best business practices by issuing clarification and notifications, as done by RBI from time to time, following consultation papers. For example, defining a standard for ‘market access’ or for determining the effect of ‘network effect’ on the basis of an econometric analysis as done by the anti-trust regulator in the United Stated of America should be welcomed by the Indian regulators. This would not only help foster a suitable environment from a FDI perspective but also give the indigenously developed corporations a fair opportunity to shield themselves from forced takeover. SEBI’s efforts in this regard have been remarkable as it had published a consultation paper on the Takeover Code in 2019. Lastly, the GST Council should also learn from RBI and SEBI to have such mechanism instead of unilaterally issuing notifications and revising the applicable rates.

 

[1] Sneha Shah and Alnoor Peermohamed, ‘Byju's Acquires Aakash Educational Services In Nearly $1-Billion Deal’ (The Economic Times, 2021) <https://economictimes.indiatimes.com/tech/startups/byjus-to-acquire-aakash-educational-services-in-700-million-deal/articleshow/81910598.cms> accessed 28 July 2021.

[2] J Vignesh, ‘Tutorvista: Byju's Acquires Tutorvista, Edurite From Pearson’ (The Economic Times, 2021) <https://economictimes.indiatimes.com/small-biz/startups/byjus-acquires-tutorvista-and-edurite/articleshow/59427281.cms> accessed 29 July 2021.

[3] Press India, ‘Competition Comm Clears Byju's Buyout Of Aakash Educational Services’ (Business-standard.com, 2021) <https://www.business-standard.com/article/companies/competition-comm-clears-byju-s-buyout-of-aakash-educational-services-121060801276_1.html> accessed 31 July 2021.

[4] Anirudh Singh, Victoria Daskalova and Samuel Beighton, ‘Predatory Pricing Vis-À-Vis Dominant Entity: Highlights Of The Meru-Ola Tussle - Kluwer Competition Law Blog’ (Kluwer Competition Law Blog, 2021) <http://competitionlawblog.kluwercompetitionlaw.com/2018/10/03/predatory-pricing-vis-vis-dominant-entity-highlights-meru-ola-tussle/> accessed 1 August 2021.

[5]  CCI(Combination Registration No. C-2017/09/528)

[6] Tapamoy Ghose and Khushi Dua, ‘The Byju’S- Aakash Deal: A Missed Opportunity For The CCI' (Arbitration and Corporate Law Review, 2021) <https://www.arbitrationcorporatelawreview.com/post/the-byju-s-aakash-deal-a-missed-opportunity-for-the-cci> accessed 31 July 2021.

[7] ‘Zomato Share Listing Tomorrow. How To Check Allotment Status’ (mint, 2021) <https://www.livemint.com/market/ipo/zomato-ipo-share-allotment-how-to-check-application-status-11626777576865.html> accessed 31 July 2021.

[8] [2012] 1 SCR 574.

[9] Tapamoy Ghose and Khushi Dua, ‘The Byju’S- Aakash Deal: A Missed Opportunity For The CCI’ (Arbitration and Corporate Law Review, 2021) <https://www.arbitrationcorporatelawreview.com/post/the-byju-s-aakash-deal-a-missed-opportunity-for-the-cci> accessed 31 July 2021.

[10] ‘Our Investors - Know Who Are The Investors For BYJU's’ (BYJUS, 2021) <https://byjus.com/our-investors/> accessed 1 August 2021.

[11] Under Heading 9992 vide Notification No. 11/2017-Central Tax (Rate).

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