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REGULATION OF COMBINATION(S)UNDER THE COMPETITION ACT,2002
ARITRA DAS22 NILGIRI APARTMENTALAKANANDA, NEW DELHI+919871037757
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IMPORTANT DEFINITIONS AND CONCEPTS
COMBINATION (SECTION 5) Acquisition of control, shares, voting rights or assets. Acquisition of control by a person over an enterprise where such
person has control over another enterprise engaged in a competing business.
Mergers or amalgamations between or amongst enterprises.
Combination is a relationship between two or more persons or enterprises through any agreements or understanding and for the purpose of sharing the properties or interest in any enterprise.
Term combination is wider and a composite expression and includes transactions in
addition to a merger.
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IMPORTANT DEFINITIONS AND CONCEPTS
HORIZONTAL MERGERS: Merger between Competitors which produce or supply similar or identical products.
VERTICAL MERGERS: Mergers between enterprises at different levels in the chain of production and distribution.
CONGLOMERATE MERGERS: Mergers between entities engaged in unrelated business.
RELEVANT MARKET: ( Sec 2 (r) ) “ …means the market which may be determined by the commission with reference to the relevant product market or relevant geographic market or both)
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IMPORTANT DEFINITIONS AND CONCEPTS CONTD…
RELEVANT PRODUCT MARKET: ( Sec 2 (t) ) “… means a market comprising of all those products or services which are regarded as interchangeable or substitutable by the consumers, by reasons of their characteristics, prices or intended use..” Smallest set of products substitutable, given a small but
significant non transitory increase in price (SSNIP) RELEVANT GEOGRAPHIC MARKET: ( ( Sec 2 (s) ) “…means a
market comprising the area in which the conditions of competition for supply of goods or provisions of services or demand of goods and services are distinctly homogeneous and can be distinguished from the conditions prevailing in the neighboring areas...” Geographic area within which substitutes are available at
similar prices
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IMPORTANT DEFINITIONS AND CONCEPTS CONTD…
GROUP ( SEC 5, EXPLANATION (B) ) Two enterprises belong to a group if one is in the
position to exercise at least 26% voting rights or appoint at least 50% of the directors or controls
the management or affairs of the other. CONTROLS ( SEC 5, EXPLANATION (A) )
includes controlling the affairs or management by- one or more enterprises, either jointly or singly,
over another enterprise. one or more groups, either jointly or singly, over
another group or enterprise.
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IMPORTANT DEFINITIONS AND CONCEPTS CONTD…
REGULATION 2 (1) ( C ), SEBI REGULATION 1997.
Right to appoint majority directors. Controlled defined inclusively. Control the management or policy decisions
exercisable by a person or group of persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or any other manner.
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IMPORTANT DEFINITIONS AND CONCEPTS CONTD…
ASSETS
Word has not been defined. Meaning the same as under the Companies Act, 1956 by
virtue of Sec 2 (z) r/w Schedule VI of the Companies Act 1956.
SEC 5, EXPLANATION C ( DETERMINING THE VALUE OF ASSETS)
Determined on book value in the preceding financial year of the proposed merger.
Includes brand value and goodwill, value of intellectual property including permitted use, and commercial rights
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THRESHOLD FOR MERGER AND AMALGAMATION
SECTION 5 (C) (i) (A) & (B) AND 5 (C) (ii) (A) & (B)
Sec 5 (c) Threshold Requirements
For Merger or Amalgamation
Sec 5 ( c ) (i) (A) & (B)Individuals
( Assets/Turnover in India )OR
( Assets/Turnover Outside India)
Sec 5 ( c ) (i) (A) & (B)Groups
( Assets/Turnover in India )OR
( Assets/Turnover Outside India)
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THRESHOLD FOR MERGER AND AMALGAMATION
Sec 5 (c )(i) (A) ( Within India) Combined assets of the Enterprise value more than
1000 Crores OR
Combined turnover more than 3000 Crores.
Sec 5 (c )(i) (B) ( In case either or both the enterprises have assets/ turnovers outside India also )
Combined assets value more than USD 500 Millions, including at least Rs 500 Crores in India.
OR Turnover is more than USD 1500 Millions, including at
least 1500 Crores in India.
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THRESHOLD FOR MERGER AND AMALGAMATION
Sec 5 (c )(ii) (A) ( Combined Assets/Turnover Within India of the Group to which the acquired enterprise would belong after the Merger)
Assets of Value of More than Rs 4000 CroresOR
Joint turnover of more than 1200 Crores.
Sec 5 (c )(ii) (B) ( Combined Assets/Turnover Outside India of the Group to which the acquired enterprise would belong after the Merger)
Assets of value of more than USD 2 Billion including at least Rs 500 crores in India.
OR Turnover of more than 6 Billion, including Rs 1,500Crores in India.
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THRESHOLD FOR MERGER AND AMALGAMATION
Act prescribes sufficient high thresholds in terms of assets/ turnovers for mandatory notification to the commission.
Only big ticked combinations subject to regulation. The threshold are in terms of valus of assets or turnover
+ whether operations are in India, India and Outside or the combining parties belonging to a group.
The concept of domestic nexus has been incorporated in the Act by the 2007 amendment.
Implied Presumption : Small size combinations less likely to cause an appreciable adverse effect on competition on the relevant market, within India.
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REGULATION OF COMBINATIONS (Section 6)
SECTION 6 : KEY REGULATORY PROVISION.
Sub-clause (1)
Combinations declared VOID which causes or is likely to cause an “appreciable adverse effect” on competition within the relevant market in India.
“Appreciable adverse effect” is a question of fact to be determined in each case.
Rule of Reasons approach for assessment. Provision aims to control post merger conduct. Adverse effect treated “prospective” in nature.
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EFFECT OF MERGERS ON COMPETITION
UNILATEREAL EFFECTSWhen a merged enterprise gains sufficient market power to enable it to behave independently of market forces
e.g. Competitors inability to
increase output in response to a unilateral increase in price.
Products are not close substitute of each other.
COORDINATED EFFECTS When a merger facilitates
collusive behavior, either due to express agreement amongst competitors or due to tacit coordination by competitors that have similar effects.
Coordinated effects are relative to the merging firm’s pre merger relationship in the market and the ability of the firm to use knowledge, know how etc and distort competitive tension.
e.g. Cartels
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EFFECT OF MERGERS ON COMPETITION
HORIZONTAL MERGERS ARE THE MAIN FOCUS OF MERGER CONTROL.
Tendency to limit the number of players. Tendency to create or strengthen a paramount
market position. Tendency to eliminate potential competition in a
oligopolistic market by eliminating important competitive constraints.
COMPETITION ISSUES LEAST LIKELY IN CONGLOMERATE MERGERS.
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COMPARATIVE LAW
CLAYTON ACT Section 7 Lays emphasis on the effect of acquisition of stocks
or assets on competition “on any line of commerce” Provision omits the mere value of assets or
turnover of the enterprises for determining the effect of the acquisition of stocks or assets on competition.
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DETERMINATIVE FACTORS FOR ASSESSING AN ADVERSE EFFECT ON
COMPETITION
SECTION 20 (4) sets outs the factors that are to be considered by the commission in determining whether a combination would have the effect, or is likely to have an appreciable adverse effect on competition in the relevant market.
No factor by itself is conclusive in nature Also any benefits that arise from the combination which
outweigh the adverse impact are to be considered. The commission to apply the factors under Sec 20 (4) to assess the combination after the monetary threshold
limits have been crossed under Sec 5 (a) (b) or ( c ), as the case may be.
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DETERMINATIVE FACTORS FOR ASSESSING AN ADVERSE EFFECT ON
COMPETITION CONTD…
BARRIERS TO ENTRY One of the most significant factors in merger
evaluation. Numerous reasons including high initial cost
of investment. Requisite technology not freely available. Governmental restrictions
MARKET SHARE ( individually as well as combinants) High market share definite indicator of
appreciable adverse effect. Factor not conclusive in itself.
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LIKELIHOOD OF REMOVAL OF EFFECTIVE COMPETITOR(S)
THE LEVEL OF COMBINATION IN THE MARKET
In a highly concentrated market a combination of those controlling the market can eliminate competition
EXTENT OF COMPETITION LIKELY TO SUSTAIN IN THE MARKET
Core issue in merger assessment. The combination should be prohibited if in effect it has
the threshold to substantially reduce competition.
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AVAILABILTY OF SUBSTITUTES OR THROUGH IMPORTS Neutralizes the anti competitive effects of a
combination effecting those products or services. Effect similar if products available through imports.
DEGREE OF COUNTERVAILING POWER IN THE MARKET. Scope for buyers to obtain substitutes. Scope of suppliers to consider supplying
substitutes. Acts as a constraint to a combination to likely effect
competition
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POTENTIAL TO INCREASE PRICES OR PROFIT MARGINS.
Implicit in the section that only an excessively high increase of price or profit margins may be considered
VERTICAL INTEGRATION
Where enterprises are in a different stages of the supply of a product or service.
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POSSIBILITY OF A FAILING BUSINESS
Refers to an enterprise that is no longer active and is not really a competitor.
The presence of such enterprises indicate that there may be no competition to be effected by the combination
Whether an enterprise cannot be financially restored is a question of fact to be determined in each case.
BENEFITS THAT MAY OUTWEIGH ADVERSE IMPACT
Relative advantage by way of economic development
Consumer advantage like low price
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COMPARATIVE LAW (FACTORS IN MERGER ASSESSMENT)
UNITED STATES
Administrative guidelines (The Horizontal Merger Guidelines 1992, as amended on April , 1997)
The Department Of Justice has also provided guidance on non horizontal mergers in Sec 4, 1994 Merger Guidelines.
UNITED KINGDOM
OFT’s ‘Mergers-Substantive Assessment Guidance ( May 2l 003) published pursuant to Sec 106 (1) of the Enterprise Act 2002
Substantial lessening of competition is a comparison of prospects for competition with and without the merger.
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COMPARATIVE LAW (FACTORS IN MERGER ASSESSMENT) CONTD…
European Union Competition Policy included in Art. 3 of the Treaty
of Rome. Scope of Enquiry : “ effect of competition in
consumer welfare” . Australia
Sec 50 (3) of the Trade Practices Act 1974 (TPA) Provides a non exhaustive list of matters in assessing whether a merger would be likely to substantially lessen competition.
Other factors: Australian Competition and Consumer Commission (ACCC) Merger Guidelines.
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RELEVANT GEOGRAPHIC AND PRODUCT MARKET
RELEVANT GEOGRAPHIC AND PRODUCT MARKET
Starting point for the examination of the effect on competition, whether
adverse or otherwise.
Determination of the relevant market is not an isolated fact.
The act defines a relevant market, relevant product market and relevant geographic market.
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RELEVANT GEOGRAPHIC AND PRODUCT MARKET CONTD…
OBJECTIVE OF DEFINING A MARKET IN PRODUCT AND GEOGRAPHIC DIMENSIONS
BASIC COMPETITIVE CONSTRAINTS
DEMAND SUBSTITUTABILITY
SUPPLY SUBSTITIUTABILITY
POTENTIAL COMPETITION
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RELEVANT GEOGRAPHIC AND PRODUCT MARKET CONTD…
“Basically the exercise of market definition consists in identifying the effective alternative sources of supply for the customers of the undertaking involved, both in terms of products/services and geographic location of suppliers”
… … … … (EC Notice, dated December 9, 1997)
Summary The concept of relevant market is logical and rational Identifying actual competitors and competitive pressure. Identify and define the boundaries of competition. To calculate market shares and market power. Identify effective alternative sources for consumers both in terms of products/services and geographic
location of suppliers ISSUES MIXED CONSIDERATION OF LAW AND
ECONIMICS
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RELEVANT PRODUCT MARKET
“ Those characteristics of the products by virtue of which they are particularly apt to satisfy an inelastic need and are only to a limited extent interchangeable with other products.”( ECJ in the Continental Can Co Inc (1973) case )
“…singled out by such special features distinguishing it from other fruits that is only to a limited extent interchangeable with them and is only exposed to their competition in a way that is hardly perceptible…”( ECJ in the United Brand’s (1978) case )
Sec 19 (7) : Factors to be considered by the commission.
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Physical Characteristics or end use of goods. Price of Goods/Services. Consumer Preferences. Exclusion of In house production. Existence of specialized producers. Classification of industrial products.
“… Cross elasticity of demand between products- an element of consideration is to be made for the responsiveness of the sale of one product to a price change of the other…”Brown Shoe vs U.S ( 370 U.S. 294)
“…This interchangeability is largely gauged by the purchase of competing products for similar use considering the price, characteristic, and adaptability of the competing commodities…” U.S vs Du Pont & Co. ( 351 US 377 (1956)
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Demand side substitutability: The extent to which customers could and would switch amongst substitute products ---- in response to a --- change in relative price--- quality---availability---other features.
Small but significant non transitory increase in price ( SSNIP/ Hypothetical monopolist test)
“...a market is a narrowest set of products for which a hypothetical monpolist producing all the products in that set would find setting a 5% to 10 % margin above competitive level as profitable…”
Supply side substitutability: Examines the extent to which suppliers of alternative products could and would switch their existing production fcilities to make alternative products in response to a change in relative prices, demand or other market condition…”
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RELEVANT GEOGRAPHIC MARKET.
Relevant Geographic Market: ( ( Sec 2 (s) ) “…means a market comprising the area in which the conditions of competition for supply of goods or provisions of services or demand of goods and services are distinctly homogeneous and can be distinguished from the conditions prevailing in the neighboring areas...” Geographic area within which substitutes are
available at similar prices Uniformity in composition has to be
contradistinguished from condition of services.
Section 19 (6) Factors for consideration
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RELEVANT GEOGRAPHIC MARKET.
(a) Regulatory trade barriers.(b) Local specifications.(c) National procurement policies.(d) Adequate distribution facilities.(e) Transport cost.(f) Language.(g) Consumer preferences.(h) Rapid after sales services.
Boeing/Mc Donnell Doughlas ( E.C case No. IV/M 87)Relevant Georaphic market for large commercial jet aircrafts:
World Market.World Market------Narrow Body Aircrafts + Wide Body Aircrafts.
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ECONOMIST’S TOOLS
Price correlation analysis. Prices of products that are close substitutes will move
in tandem. Need for up to date and accurate data imperative.
Elasticity. Gives an idea about substitutability.
Close substitutes from the relevant product market.
Market has to be defined neither too broadly or narrowly.
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REGULATION OF COMBINATIONS (PROCEDURAL FRAMEWORK)SECTIONS 6(2),(3),(4) & (5)
Merger Notification ( Mandatory Notification Regime) Mandatory pre merger notification of combinations that exceed the
prescribed threshold. Commission having the option to inquire within one year if a notifiable
merger not notified. Commission can order de-merger if enquiry reveals appreciable adverse
effect on competition. Commission can also impose fine upto 1% of the total turnover or
assets of the combination, whichever is higher. Ex-ante action unlike ex post in case of anti competitive agreements
and abuse of dominance.
Exemption from mandatory notification
Share Subscription/ Financing facility/Acquisition By a Public Financial Institution/ Foreign Institutional Investor/ Bank/ Venture Capital Fund Pursuant to any covenant of a loan agreement/ Investment agreement, exempted from notification.
Concerned Institution to file details within 7 days of such transaction.
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REGULATION OF COMBINATIONS (PROCEDURAL FRAMEWORK)
Time Limit for Notification and Approvals
Details of the proposed combination has to be notified within 30 days of its approval by the board of directors.
Or From the execution of any agreement or other document. Proposed combination cannot take effect until commission
passes an order. Commission to arrive at a conclusion within 210 days. Deemed approval after expiry of 210 days. Draft regulation: Commission to dispose of notifications which
have little or no potential for appreciable adverse effect on competition in India
Ministry of Corporate affairs----makes mandatory for the CCI to clear M&A proposals in 180 days ( Source TOI, July 5th 2010)
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PROCEDURE FOR INVESTIGATION OF COMBINATIONS ( Sections 29 & 30 )
Show Cause Notice in case the commission is of the prima facie opinion that a combination has caused or likely to cause adverse effect on competition within the relevant market.
Commission may direct publication of details of the combination inviting objections from the public, affected or likely to be affected by the combination.
Similar procedure to be followed in case of notification under Sec 6 (2).
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PROCEDURE FOR INVESTIGATION OF COMBINATIONS
Most Mergers do not harm competition.
Some may be pro competition and ultimately befifit consumers.
Many others are competitively neutral. Post merger competition will remain and continue to
discipline the merged entity and other players in the industry
World wide over 90% cases are allowed unconditionally and 10 % allowed with modification.
Combinations to be regulated not prohibited.
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REMEDIES UNDER THE ACT
On an assessment of the merger, the commission may decide to
Approve the merger. Reject the Merger. Approve the merger subject to modifications.
Remedies are both structural and behavioral in nature.
Competition Appellate Tribunal to hear and dispose of appeals against any direction issued or decision made or order passed by the commission.
Appeals to be preferred within 60 days of receipt of the order/ direction dicission of the commission.
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RECOMMENDATIONS OF THE COMPETITION COMMISSION ON REGULATION OF COMBINATIONS
Exemption from notification: No enabling provision empowering the commission to exempt any class of transactions from the notification requirement.
The threshold requirement under Section 5 is biased against Indian Companies.
e.g. An Indian Company with turnover of Rs.3000 Crores,
cannot acquire another Indian Company without prior notification.
A Foreign Company with turnover outside India in excess of Rs 4500 Crores can acquire an Indian Company with sales short of Rs 1500 Crores without any notification.
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Single sales/turnover test recommended in Section 5.e.g.(a) Combined world turnover of the parties to the
combination in excess of Rs ………;(b) Each of at least 2 of the parties to the combination
must have a turnover in India in excess of Rs……….;(c) The combination gives rise to market share in the
relevant market in India in excess of, say, 25 % (views are of the competition commission)
Purely conglomerate acquisitions that do not give rise to any additional market shares, can be assessed and cleared within 30 days from, notification.
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Sec 5 will pick up transactions, exempted under the SEBI, take over code. For e.g Regulation 22(12), and transactions that constitute an increase in shareholding by a promoter of a listed public company.
Reduction of maximum waiting period of 210 days. Time period prescribed, do not take cognizance of the
compliance under other statutory provisions like the SEBI, Takeover Code, 1997.
Ministry of Corporate affairs----makes mandatory for
the CCI to clear M&A proposals in 180 days ( Source TOI, July 5th 2010)
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COMPETITION COMPLIANCE PROGRAMME
Deterrent penalties, heightened detection possibilities, introduction of leniency programme, growing vigilance, aggrieved persons right for compensation, no indemnification of fines, disruptive investigations.
Benefits include, reduced risk of contravention, early detection, appropriate action against rivals, ensuring compliance with orders passed, ensures compliance with overseas competition law, beside a mitigating factor.
Tailor made compliance programmes, not possible- it has to be sector or enterprise specific.
