Aditi Mittal

Kirti Rathod


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Riya Bhatia


> The proposed law would affect tech companies offering essential digital services like search engines, social networking platforms, video-sharing platforms, operating systems, web browsers, and cloud services. One major worry is the growing dominance of a handful of large tech firms in the digital marketplace, creating advantages for them over smaller businesses and startups.

India is considering enacting a dedicated law to address the anti-competitive behavior of large digital enterprises, or big tech, after the 2024 Lok Sabha elections. This recommendation was made by a parliamentary standing committee in December 2022, prompting the ministry of corporate affairs to appoint an expert panel to examine the advice and draft a digital competition bill.

A major concern raised by both the parliamentary committee and the expert panel is the increasing dominance of a few big tech companies in the digital market. This dominance grants them an edge over smaller businesses and start-ups. The focus is on regulating the anti-competitive conduct of these enterprises proactively, rather than reactively as per the existing Competition Act, 2002.

#### Why Ex-Ante Regulation for Digital Companies is Necessary?

Digital companies move fast, making slow regulatory responses inadequate. The traditional process, including investigation and final orders by the Competition Commission of India (CCI), takes years, often leaving damages unaddressed. For instance, some cases have lingered over four years without resolution, like a complaint from 2012 that, even after six years, was still pending in 2018.

An ex-ante approach is advocated to prevent such delays. It aims to proactively curb anti-competitive behaviors in significant digital enterprises, ensuring market fairness and consumer protection efficiently and effectively, unlike the lengthy ex-post processes.

#### Major Concerns of the Parliamentary Committee

The parliamentary committee expressed concerns about the competitive landscape in the digital market. Unlike traditional physical markets where becoming bigger can lead to diminishing returns, digital players often experience increasing returns to size due to rapidly diminishing marginal costs. This dynamic makes scaling up quickly a favorable business strategy, as larger players can be more competitive in the digital market. These entities benefit from network effects, where newer users are attracted to platforms with a large existing user base, as observed in social networking and messaging apps.

Identifying 10 anti-competitive practices of digital enterprises, the parliamentary committee highlighted issues such as anti-steering provisions, platform neutrality/self-preferencing, pricing/deep discounting, exclusive tie-ups, search and ranking preferences, and mergers & acquisitions (M&As). While the draft bill addressed most of these concerns, the committee decided that M&As could continue to be regulated under the existing Competition Act.

#### Applicability of the Proposed Law to Large Digital Companies

The proposed law will specifically target a select group of big tech companies known as 'systemically significant digital enterprises' (SSDEs). These are digital enterprises identified as providing 'core digital services' and having a considerable influence on the Indian digital market.

To qualify as an SSDE, a company must meet certain criteria, including having a turnover of at least ₹4,000 crore in India or a global turnover of at least $30 billion. Additionally, it should have a gross merchandise value of ₹16,000 crore in India or a global market capitalization of $75 billion over the past three financial years. Moreover, its core digital services must cater to either one crore end users or 10,000 business users. These thresholds align with those set by the European Union's Digital Markets Act and the UK's draft Digital Markets, Competition, and Consumers Bill and will be reviewed every three years once the law is enacted.

Furthermore, even if a provider of core digital services does not meet these thresholds, the Competition Commission of India (CCI) can designate it as an SSDE under certain circumstances if it is deemed to have a significant presence in the identified service.

#### Understanding Core Digital Services

Core digital services encompass various online platforms and tools that are integral to the digital ecosystem. These services include:

- Online search engines
- Online social networking services
- Video-sharing platform services
- Interpersonal communications services
- Operating systems
- Web browsers
- Cloud services
- Advertising services
- Online intermediation services

These services form the backbone of digital interactions and play a crucial role in modern-day communication, commerce, and information dissemination. Global corporations such as Google, Meta, Apple, and Amazon are among the entities that will fall under the purview of the proposed law, given their significant presence and influence in providing these core digital services.

#### Obligations of Digital Companies under the Proposed Law

Under the proposed law, digital companies have specific obligations to fulfill:

1. **Self-Reporting and Notification**: Digital enterprises providing core digital services are required to self-report to the Competition Commission of India (CCI) within 90 days of qualifying as a 'Systemically Significant Digital Enterprise' (SSDE).
2. **Assessment by CCI**: The CCI will evaluate the reported entity to determine if it meets the criteria for designation as an SSDE.
3. **Group Notification**: Entities that are part of a group must notify the CCI about other business enterprises within the group involved in providing core digital services as Associate Digital Enterprises (ADEs).
4. **Designation by CCI**: Based on the information provided, the CCI may designate the group as an SSDE or designate other enterprises as ADEs to the SSDE.
5. **Compliance with Conduct Requirements**: Once designated as an SSDE, the entity must adhere to separate conduct requirements for each core digital service it provides. These requirements include:
    - Prohibiting favoritism towards their own products, services, or lines of business, or those of related parties.
    - Restricting the use of non-public data of business users operating on its core digital service to compete with such users.
    - Not restricting end users and business users from using third-party applications or software on its core digital service.


#### Enforcement Measures for Non-Compliance

In cases of non-compliance with the act and its regulations, the Competition Commission of India (CCI) has several enforcement measures:

1. **Temporary Restraints**: If the CCI finds an entity engaging in uncompetitive conduct or an SSDE failing to comply with the law's obligations, it can temporarily restrain the party from continuing such actions until its inquiry concludes.
2. **Monetary Penalties**: The CCI has the authority to impose monetary penalties for non-compliance. For violations of ex-ante obligations, monetary penalties can amount to up to 10% of the global turnover of the SSDE.
3. **Penalties for Non-Compliance with Orders**: Non-compliance with the orders or directions of the CCI may result in monetary penalties. The minimum penalty for each day of non-compliance can be up to ₹1 lakh.

These enforcement measures aim to ensure compliance with the law and uphold fair competition in the digital marketplace.

A significant worry revolves around the increasing dominance of a handful of major tech companies in the digital market. This dominance provides them with a competitive advantage over smaller businesses and startups.

Why competition law for big tech companies is the need of the hour


> When big companies join forces, it doesn't always lead to success in the stock market. In fact, studies show that mergers where both companies are similar in size often result in underperforming stocks.

These kinds of mergers, called "mergers of equals," usually happen within the same industry. Think finance, energy, consumer goods, and healthcare. But despite some recent buzz about mergers, overall, there haven't been as many deals happening lately. Experts blame this on a slower US economy and uncertainty about interest rates and regulations.

Now, you might think that merging with a similar-sized company is less risky for management. But that's not always true. Sometimes these deals take a long time to go through, like the planned merger of JetBlue Airways and Spirit Airlines. And over the past two decades, statistics show that the stock prices of companies making these kinds of deals tend to fall behind their industry peers by more than 7% over the next two years.

So why do companies still go for these mergers? Well, they might hope for benefits like better pricing power, chances to sell more products, or cost savings. But here's the thing: most of these mergers involve medium or small-sized companies, not the big players. And it's more likely that a company with lower-quality performance will go for a merger of equals than a top-notch performer.

The stock market's reaction to these mergers in the first week can tell us a lot. If it's negative, the merged company's stock tends to keep underperforming compared to its industry peers for the next two years. But if the market reacts positively, there's no guarantee of extra returns.

For companies thinking about merging or investors considering buying the acquirer's shares, there are three key things to keep in mind. First, high-quality companies shouldn't merge as often because they might lose their edge. Second, companies with shaky finances tend to do worse after mergers. And third, if a company is too different from its peers, the promised benefits of merging might not pan out.

In short, merging with a similar-sized company might not be as great as it seems. It's important for companies and investors to look closely at the risks before jumping into these deals.


Understanding the trend of combined company stock underperformance post-deals. Insights and perspectives on this phenomenon and its implications for investors.

Decoding the Stock Market Impact of 'Mergers of Equals’


> Paint company growing its products, reaching more places in India.

##### Key Points:

- Revenue increased by 15 percent compared to the previous year in the first nine months of FY24.
- The core Italian PU business maintained its strong performance.
- Approximately 400 new dealers were added in the last nine months.
- Aiming for 15-20 percent growth over the next few years.
- Currently trading at 28 times FY25 earnings.

December-quarter earnings for Sirca Paints India (CMP: ₹ 325; Market Cap: ₹ 1,780 Cr; Rating: Over-weight) were slightly below market expectations. Despite various challenges like the construction ban in Delhi NCR, extended Diwali break, and labor shortages during the festive season, Q3 FY24 revenues grew by 11% YoY. The company's core Italian PU business showed robust growth, and emerging product categories like Unico, wall paints, and high-end decorative paints continued to perform well.

![SIRCA PAINTS | QUARTERLY RESULT SNAPSHOT | WOONG](https://firebasestorage.googleapis.com/v0/b/woong-club.appspot.com/o/postsCreatives%2Fp2%2Fp2.1.png?alt=media&token=4ccdc045-bcab-4a59-aa5f-0d89e3665af7)

Changes in the types of products being sold have affected the company's gross margins negatively. Operating profits remained the same as margins dropped by 260 basis points compared to the previous year, reaching 19 percent in the last quarter. Although other expenses stayed steady, there was a significant increase of 39 percent in employee costs compared to the previous year. This rise was due to hiring more experienced staff and starting operations in new production units.

#### Expanding Across India

Sirca currently earns 70 percent of its revenue from northern India, with the rest coming from markets in the east, center, west, and south. To broaden its reach across India and diversify its income, Sirca aims to aggressively increase its dealer presence in regions outside the north. Additionally, the company plans to achieve a 10-15 percent growth in dealers across northern markets.

In the third quarter, Sirca welcomed approximately 200 new dealers, marking a significant increase compared to previous quarters. As of December 2023, the company's network comprised around 2,250 dealers and distributors.

![SIRCA PAINTS | FINANCIALS AND ESTIMATES | WOONG](https://firebasestorage.googleapis.com/v0/b/woong-club.appspot.com/o/postsCreatives%2Fp2%2Fp2.2.png?alt=media&token=371213a7-c655-4c0e-9295-e11bd8e9e1a8)

##### Expanding Manufacturing Capabilities

Recently, Sirca has increased the manufacturing capacity of its Sonipat unit from 12,000 tonnes to 16,000 tonnes. Additionally, the company has entered into an agreement with Sirca Italy to produce imported Italian Polyurethane (PU) wood coating products in India, aiming to strengthen its wall paint segment. The initial production batches have already been approved by the Italian parent company, and the final product approval stage from OEMs and other customers is underway. The management expects a significant increase in Italian PU volumes over the coming quarters.

##### Industry Correction

Paint stocks have been undergoing a correction in recent weeks due to Grasim Industries' entry into the sector. Investors are concerned as Grasim has entered the paint business with the Birla Opus brand, and its production capacity is nearly equivalent to that of Berger Paints, the second-largest player in the market. Alongside major competitors like Asian Paints, Kansai Nerolac, Berger Paints, and Indigo Paints, Sirca's stock has also experienced a significant correction of approximately 25 percent from its peak in January 2024.

Despite the competitive market conditions, Sirca is effectively implementing its expansion strategy, and the business possesses various growth opportunities. For long-term investors, Sirca remains an attractive investment option. With a valuation of 27 times FY25 estimated earnings, the company's stock is reasonably priced, and the recent market correction presents an appealing opportunity for investment.


Witness a paint company's nationwide expansion with a diverse portfolio."

Showing posts from woong-research tag

Why competition law for big tech companies is the need of the hour

Decoding the Stock Market Impact of 'Mergers of Equals’

Opportunity in Sirca Paints' Correction: A Long-Term Perspective