MERGERS AND ROLE OF COMPETITION COMMISSION OF INDIA
A CRITICAL APPRAISAL
Utkarsh Kumar Mishra
174Abstract
Mergers are an important phenomena in today’s business world as it helps organizations in polling of resources and expertise.Mergers sometimes leads to competitive practices which in turn leads to monopolisation of the market.The Competition Act,2002 addresses these issues and keeps a check on these practices.The paper compares the earlier legislations with the Competition Act and points out the inefficiencies in those legislations.The earlier legislations did not had extra-territorial jurisdiction unlike the Competition Act.The paper also lays down the role of Competition Commission of India in regulating mergers as the aim of the Commission is to protect the appreciable adverse effect on trade-related competition in relevant market in India.
Introduction
India is a socialist country. The word socialist was added in the constitution by the 42nd amendment with the primary objective of eradicating social and economic inequalities within the society. The need for curtailment of power in a few hands was also felt. The Constitution of India aims at achieving equality - social , political and economic. The Monopolistic and Restrictive Trade Practices Act, 1969 and the Competition Act, 2002 derived their inspiration from these constitutional provisions. The Anti-Trust laws were introduced in India much later after U.S and Canada. In India Mergers are regulated under the Companies Act and the SEBI Act. After the Introduction of the Competition Act, 2002 Mergers have also come under the ambit of this legislation. Countries like U.S and Canada have anti-trust laws since the last decade of the 19th Century. Canada was the first county to enact antitrust law called the Combines Act of 1889 followed by the United States in form of Sherman Act, 1890. The Sherman act was further replaced by the new legislation called the Clayton Act, 1914 which expanded the scope of the general prohibition of the Sherman Act to price discrimination, exclusive dealing and mergers. In 1950 the Cellar-Kefauver Act has amended the Clayton Act which prohibits both stock and asset acquisitions which results in restraint of commerce or creation of monopoly.
Since the MRTP Act suffered from numerous drawbacks and wasn’t able to cope up with the changing dynamics of the International competition. The Raghavan Committee was vested with
the responsibility of formulating a draft of a new law which can overcome the loopholes in the MRTP Act and based upon the recommendation of the Raghavan Committee the Competition Act, 2002 was introduced. The Competition Act controls and regulates the dynamics of the competition in the market and prevents anti-competitive agreements and abuse of dominance.
Mergers and Acquisitions
The Companies Act , 2013 “defines the concept of Merger as a Combination of two or more entities into one; the desired effect being not just the accumulation of assets and liabilities of the distinct entities, but the organization of such entity into one business”175.The main motive behind a Merger
is the pooling of resources and expertise between the companies. We have seen significant cross -border Mergers in the last two years and the legislators should make sure that the legislations does not become a hurdle in the expansion process. We witness a lot of Mergers in India as they help Companies to grow and diversify their business activities, moreover they involve a lower degree of risk as compared to companies, building from the ground.
It is essential to manage and control mergers as they, if not directed would empower undertakings to mishandle the situation of predominance hampering the opposition and Consumer welfare by dispossessing different players from going into the market. Mergers ought to be avoided on the off chance that it offers to ascend to Anti-Competitive agreements accordingly diminishing the number of competitors from the market. The intention behind the Merger ought to be appropriately examined by the Competition Authorities. If the Merger is to be forestalled, steps ought to be taken before the Merger as the cost engaged with de-consolidating the Companies is huge.Enterprises can enter into an agreement and can form "Cartels" to make over the top market control or even a monopoly.
MRTP and The Competition Act, 2002
The MRTP Act had put very strict procedures for the players to enter into the market which resulted in the powers to concentrate in the hands of a few. MRTP Act was not able to cope up with the growing competition in the market and a need for the new law to control and regulate competition in India was felt. The Competition Commission of India experienced a change in perspective, from a reformist preface to one empowering and advancing rivalry in the market.Since the old act was not ready to adapt the advancement and globalization administration ,a Special Committee was setup under the Chairmanship of S.V.S Raghavan.On the inputs given by this committee the Competition Act was enacted.“The background to the enactment of the Competition Act was explained by the Supreme Court in the case of Competition Commission of India v. Steel Authority of India Ltd.”176
175 The Indian Companies Act, 2013 (Act 18 of 2013)
“The decision of the Government of India to liberalize its economy with the intention of removing controls persuaded the Indian Parliament to enact laws providing for checks and balances in the free economy. The laws were required to be enacted, primarily, for the objective of taking measures to avoid anti-competitive agreements and abuse of dominance as well as to regulate mergers and takeovers which result in distortion of the market. The earlier Monopolies and Restrictive TradePractices Act, 1969 was not only found to be inadequate but also obsolete in certain respects, particularly, in the light of international economic developments relating to competition law. Most countries in the world have enacted competition laws to protect their free market economies – an economic system in which the allocation of resources is determined solely by supply and demand. The rationale of the free market economy is that the competitive offers of different suppliers allow the buyers to make the best purchase. The motivation of each participant in a free market economy is to maximize self-interest but the result is favourable to the society. As Adam Smith observed: there is an invisible hand at work to take care of this.177”
The Competition Act bought a huge shift in bringing our law in line with the International regulatory framework prevailing in other developed countries.
Mergers and Competition Commission of India
Anti- trust legislations should govern mergers to protect the interest of consumers in the entire economic ecosystem.The Competition Act prohibits anti-competitive agreements (Section 3), abuse of dominant position (Section 4) and controls mergers, amalgamations and acquisitions (Section 5 and 6)178.The law regulating mergers can be found under sections 5 and 6. Mergers have
been grouped along with amalgamations and acquisitions under the wider category of combinations.179
In India Mergers are regulated by the Indian Companies Act 2013 and the Securities Exchange Board of India Regulations , 2011 (The Takeover Code). Mergers are regulated in the Companies Act to save the interest of the creditors and shareholders whereas in SEBI Takeover code the interests of the Investors are taken care of. The Companies Act and the SEBI Takeover code are concerned with the protection of interests of individuals.The Competition Act has a much wider scope when it comes to regulations .It regulates the entire market including consumers from the adverse effects of Combinations.People used to take things for granted before the Merger Control Regime and references were drawn from other market regulations like SEBI.New elements are
177Id.
178 The Competition Act, 2002 ( Act 12 of 2003) [hereinafter “The Act”]
179 H.R. Tuteja, “Cross-Border Mergers and Acquisitions under Indian Competition Law”,
added to the CCI regime to take into due consideration. As indicated by the Regulation, a mix of both turnover limit and budgetary resources including the endorsement from CCI while procuring shares is vital for exception. According to control 4 of CCI which exclusively discusses requesting exception from CCI, "securing of offers or voting rights, exclusively as a speculation or in the common course of business in so far as the aggregate offers or voting rights held by the acquirer specifically or by implication, does not qualifies the acquirer for hold at least 25% of the aggregate offers or voting privileges of the organisation”180 . Private equities usually use this acquisition in
order to acquire minority position.181
One of the most important agendas of the competition act is to prevent combinations that causesadverse effect on Competition in India.This may include Combinations taking place outside India which may have effect on the Competition in India.Merger Control under the Competition law focuses on ex-tante review which is the preventive step to undertaken before the Merger has taken place.It becomes important because after the Merger has taken place de-merging the enterprises is often a difficult and costly affair for competition and regulatory authorities.Theex-post review
involves abuse of dominance and anti-competitive agreements.The Competition law in India has gone through an amendment in the year 2007 and a number of loopholes in the law were plugged.The Merger Control provisions of the act came into force on 1st June, 2011.As a critical step to implementing the merger control regime, the Commission also notified the implementing regulations titled “The Competition Commission of India (Procedure in regard to the Transaction of Business Relating to Combinations) Regulations, 2011 (hereinafter called ‘the Combination
Regulations’) as per the notification issued on 11 May 2011. These regulations set out the relevant notice forms and details of the review process. These regulations coupled with the relevant provisions of the Competition Act completed the implementation of the merger control framework in India”182
As per this regulation all the mergers above the threshold of a certain amount would require the approval of the Competition Commission of India according to Section 5 of the act.It regulates Combinations and attempts to curb monopolies.
Analysis of Competition Act in context of Mergers
The Competition law in India prohibits anti-competitive agreements and abuse of dominance or formation of monopolies.Combinations are controlled by the order of CCI.In India, as a regular practice mergers are not withheld or rejected.On examination of annual reports of several competition authorities, it is seen that in almost all jurisdictions across the globe 90 percent cases
180PRASAD G. GODBOLE, MERGERS, ACQUISITIONS AND CORPORATE RESTRUCTURING286( 2ed.)(2013).
181 DeekshaDubey ,Role of Competition Commission of India on Mergers and Acquisitions,
http://jcil.lsyndicate.com/wp-content/uploads/2017/10/Deeksha.pdf [hereinafter ‘Deeksha’].
182 Pallavi S. Shroff, “Merger Control”, retrieved from http://www.globalcompetitonreview.com/reviews
of merger notification are allowed and in the remaining 10 percent cases they are either modified or rejected.183This is the reason our Competition law only regulates Mergers and Acquisitions.The
Analysis of the act would be done under the following heads:
1. Combinations: Section 5 of the Competition act explains as to when “acquisition , merger and amalgamation of enterprises would be taken as “Combination” of enterprises.If two organizations are merging , and the turnover exceeds the threshold limit then the combination is said to have an adverse effect on competition184”. The combination of two enterprise in the same field of
business under the same control has the potential to affect competition provided if the value of the assets and turnover of the both the said enterprises is more than the threshold mentioned in section 5(b)185.
Merger or an amalgamation of the enterprise is a combination in case the enterprise remains in existence after a merger or the enterprise created as a result of the merger has more than the assets or turnover above the prescribed thresholds. 186 “Threshold limits provides for the
notification requirements ie; if the combination meets the threshold requirement it should be notified.The ICN”s (International Competition Network) recommended practices for merger notification provide that thresholds should be clear, understandable, based on objectively quantifiable criteria and on information that is readily assessable to the merging parties”.187
2. Threshold limits:
The Commission has jurisdiction to look into mergers which meet the threshold criteria so that it does not have any adverse effect on competition as they are also required to be notified to the appropriate Government Department.
Following are the revised threshold for Combinationswhich have been notified by the Central Government on 4th March,2016 :188
183Aamukthamaalyada, “Competition Regulation of Mergers and Acquisitions”, retrieved from http://
www.indlaw.com, accessed on 4 April 2018 at 10.04 am.
184 The Act, supra note 176 185 The Act, supra note 176
186 Analysis of Competition law
http://shodhganga.inflibnet.ac.in/bitstream/10603/103368/12/12_chapter-iv.pdf
187 ICN Recommended Practices on Merger Notification Procedures, 2002, 3-4,
http://www.internationalcompetitionnetwork.org, accessed on 4th April, 2018 at 3.05 pm.
188 Revised Thresholds,
Assets Turnover
Enterprise level India
Worldwide with
India leg
>2000 INR crore >USD 1 bn with at atleast
>1000 INR crore in India
OR
>6000 INR crore >USD 3 bn with at least
> 3000 INR crore in India
OR
Group Level India
Worldwide with
India leg
>8000 INR crore >USD 4 bn with at least
>1000 INR crore in India
OR
>24000 INR crore >USD 12 bn with at least
>3000 INR crore in India
Setting of thresholds does not solve the purpose completely because small mergers which do not meet the threshold can also have an adverse effect on competition.Large companies may find it difficult to acquire small companies as they alone will meet the threshold and in turn will incur heavy notification fee.Setting up thresholds will also make it difficult for Capital Intensive industries which may lead to an in-consequential merger under the provisions of this Act.
Regulation of Combination
The regulation of combination is dealt in section 6 of the Competition Act. It prevents the combinations to have adverse impact on competition.The Core Component of a Mergers control regime is to check its possible adverse effect on competition and curb them.Substantive tests are to be applied as to the approval of the merger.It is contained in section 6(1) and section 20(4) of the Competition Act, 2002.Section 6(1) states that no person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void.A combination has an adverse effect on the market only if it abuses the dominant position.
they can indulge in abuse and exploit the consumers through market manipulation.189The basic
assumptions which were the foundations of a closely regulated or controlled economy have altered in the present day society.190 Today enterprises have to withstand global competition.
Therefore, a balance has to be brought between the advantages and disadvantages.Every type of merger whether horizontal, vertical or conglomerate should be prohibited when it abuses its position to drive competing businesses from the market and move towards becoming a monopoly in a particular field of business.The Combination in India has to pass the test of section 6(1) which says that “causes or likely to cause appreciable adverse effect on competition within the relevant market in India191”.It also strives to predict such adverse effect on the market in future.
Filing fees in Form I is Rs.10 Lacs and Form II is Rs.40 Lacs.There is no filing fee for Form III.In case of acquisitions the aquirer should file Form I and Form II and in case if mergers and amalgamation both the parties should file Form I and Form II.A Combination cannot come into effect till the Commission has passed the order or 210 days have elapsed , after which it would be deemed approved.The Commission has to form prima facie opinion within a period of 30 calendar days of the receipt of the notice and check whether such combination would have any adverse effect on the relevant market.The Commission may demand for additional information to form an opinion.If the Commission feels that such combination can have an adverse effect on combination it may issue a show cause notice as to why an investigation should not be conducted against such parties.
Cross-Border Mergers and Competition Act
Mergers happening abroad can have implications on the competition in India.Section 32 of the Competition Act provides that “ the Commission has the authority to regulate , control and investigate the mergers happening abroad and which are curbing the competition in the country”192
The MRTP Act did not provide for extra-territorial jurisdiction.The effects doctrine in the Indian context was propounded in the above judgment of the Supreme Court in Haridas Exports v. All India Float Glass Manufactures Association.193"The Court ,in this case, stated that “the effects doctrine
will cloth the Commission with jurisdiction to pass an appropriate order even though a transaction had been carried outside the territory of India, if the effect of that results in a restrictive trade practice in India”.194 The OECD Guidelines for Multinational Enterprises expressly caution these enterprises
to take into account the competition laws of not only the countries in which they operate, but also of
189Competiton Commission Regulations, Competition Commission of India,
http://www.competition-commission india.nic.in/regulations/Comments_Regulations/cii_Regulation_of_Combinations.pdf [hereinafter ‘Regulations’].
16 Id.
191 The Act, supra note 176 192 The Act, supra note 176
those countries where their acts are likely to have an effect.195 Extra-territorial jurisdiction of the
competition law is often subjected to criticism because according to the International laws it does not give enough representation to the states to practice sovereign jurisdiction over their own economic Sphere. There can be certain provisions in the competition act of one country that contradictory with the competition act of another country.Such a situation creates conflicting situations in International Law.Section 18 of the act empowers CCI to enter into Memorandum of Understanding with an agency of a foreign country ignore to carry on the provisions of the act.196The Competition Commission of India is known for its quick turn-around time when it
comes to approval.Section 32 of the act still needs to be tested and further developed.
Conclusion
Competition Commission of India’s part in the Mergers control can look stringent yet such strictness is the need of the hour.It endeavors to forestall threatening takeovers of companies.Mergers help outside coordinated effort and help organizations to confront worldwide competition.
The transition from the MRTP Act to Competition Act is extraordinary compared to other money related reforms.By moving the fixation from the period of simply 'checking forcing plans of action's in the private market to 'propelling contention' the restricted organization in India has achieved affirmation for its dynamic ways.Notification of Mergers beyond what many would consider possible will fragile immensely vital information with the CCI which would be valuable to dismiss competition problems.The Role of CCI in regulating competition is astounding as it is halting each one of the stipulations and murdering all ambiguities in the law.Thus the CCI’s responsiveness to the business concerns and its energy to build up a remarkable assortment of law tantamount to that of further developed wards, is urging and puts to rest any feelings of trepidation of merger control acting a barricade to M&A movement in India.The Competition law ought to have the capacity to coordinate the cutting edge financial requirements , the part of CCI may some of the time appear to be exceptionally strict yet such strictness is the need of great importance.Mandatory pre-merger notification is provided which can help in ensuring that the CCI would have relevant information of all proposed mergers above the threshold limit and would be able to avert the competition problems that may arise in case of certain mergers.197The Mergers
Control regime in India in inspired from the EU and the US Jurisprudence.The competition law in India as of now has proved to e successful in curbing monopolies and preventing anti-competitive agreements and abuse of dominance position.Certain other improvements are needed in the current competition law as to speedy approval after due scrutiny.The case of VijayaMallaya and
195 Commentary on UN Model Law on Competition, as quoted in ShubhamKhare and Niharika Maske,60(2009)
196The Act, 176
MFCL clearly demonstrates that it is difficult to saveoneself from the regulations of CCI. CCIs responsiveness to the industry concerns and its eagerness to develop a unique body of jurisprudence comparable to that of more advanced jurisdictions is encouraging and puts to rest any fears of merger control acting a road block to M&A activity in India.198The true test of the
capabilities of CCI would be tested when substantial question of law relating to competition comes before it.Till then CCI is enjoying a position of comfort and ease.According to Ashok Chawla, ex-chairman of CCI there are internal and external challenges in the implementation of competition law. Overall, the Competition law in India focuses to create an economy which would be free from all adversities and will promote healthy competition.
