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On June 1, 2011, the
Merger Regulations of the Competition
Commission of India (CCI) (formally
called Combination Regulations -
Procedure in regard to the transaction
of business relating to combinations)
came into force. With this, a new phase
in the competition regime starts as the
merger review process becomes fully
operational. The launch of the new
regulations, which have been discussed
extensively with all stakeholders,
provides the procedures to implement the
recently notified provisions of the
Competition Act 2002 relating to mergers
or combinations, principally Sections 5
and 6. In this article, we explain some
of the ideas motivating the introduction
of this new regime and briefly discuss
their likely impact on the Indian
economy. The basic criterion used for
evaluation of combinations is to see
whether they have the potential to cause
an appreciable adverse effect on
competition (AAEC) within the relevant
market in India. Hence, a broad
competition test is used to evaluate
mergers.
India’s Merger
Control Regime
Broadly
speaking, the merger control regime in
India envisages two categories of
mergers, among those which are
considered worthy of scrutiny at all
(after satisfying the financial
thresholds and the exemptions). The
first category consists of mergers which
can hopefully be disposed of within 30
days by the Commission because they
raise no competition issue. It is
expected on the pattern in other
jurisdictions that the bulk of mergers
will fall in this category. The second
category of mergers are those which
perhaps do cause an AAEC within the
relevant market in India and therefore,
require a more detailed scrutiny and a
longer period of time (180 days) to
determine whether this is indeed the
case. The Act requires that the
Commission give its prima facie opinion
within 30 days, its first opinion,
generally based on the initial filing.
The informational requirements for the
first category is very much less
detailed (Form 1); here the basic idea
is that if firms have no overlapping
markets in India and therefore, no
horizontal issues, the merger can be
cleared without further scrutiny.
The second category, (analogous to
the practice followed under the US
antitrust regime such as DOJ second
request), where there are overlapping
markets in India, which means that there
are competition issues, require a
detailed investigation in order to
determine whether in fact the merger is
on balance anticompetitive, a detailed
balancing of its costs (in terms of
increased market power) and benefits (in
terms of potential merger synergies).
The information required for this
purpose (stated in Form 2) relates to
the definition of the relevant market,
the demand the industry faces, the
nature of competition in the industry
and barriers to entry into the industry.
Such information is the longest part of
the regulations and is needed to make a
thorough determination of the
competitive impact of the merger.
Schedule 1 consists of a list of
combinations which are exempt from
filing because they are unlikely to
cause an AAEC. However, they can well be
challenged under other relevant
provisions of the Competition Act.
Determination of AAEC
Once it has been determined that an AAEC
is likely to take place, the CCI conveys
this to the parties within 4 days, who
are then required to publish the details
of the combination in a suitable format
(Form 4 of Schedule 2), within 10 days
and submit this to the CCI whence this
info is displayed on the CCI website, at
the websites of the parties and in all
India editions of four leading daily
newspapers, including at least 2
business papers. This format basically
invites comments on the combination from
any person or persons likely to be
adversely affected by the combination
within 15 days of the announcement. As
per Regulation 29(3), the CCI may, in
practice, invite public comments so that
the problem of consultation may not
arise at all.
In the event that
the Commission concludes that there is a
prima facie AAEC, it issues notice to
the parties to respond within 30 days as
to why an investigation should not be
conducted. After receipt of the response
to the notice to show cause from the
parties, the Commission may direct the
DG to write a report. He/she is required
to explain the basis for his
conclusions, (Secs 20-21). A
modification may be proposed by the CCI.
If the parties accept the modification,
then these may take place, else the AAEC
stays in place. The financial thresholds
are not mentioned in the regulations,
but in Section 5 of the Competition Act
and two subsequent notifications on the
CCI website. The financial thresholds
taking these into account work out to
the following:
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If two firms merge and the
combination has combined
assets of atleast Rs 1500 cr
or turnover of Rs 4500 cr,
they must file notice. |
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If the group to which the
combined firm belongs has
assets of more than Rs 6000
cr or turnover of Rs 18,000
cr, they must file notice. |
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When the target company has
assets of less than Rs 250
cr or turnover of less than
Rs 750 cr, the acquisition
has a blanket exemption from
filing for 5 years. |
Impact of New
Regulations on The Economy
Now that the new merger provisions and
regulations are in place, their impact
on the economy is required to be gauged.
There are two important routes by which
the merger regulations have no impact.
Firstly, when a merger is not thought to
affect the relevant market in India and
secondly, when it does not meet the
minimal financial thresholds to be
inspected. The logic of both these is
impeccable; the first needs no
explanation, the second is there because
it is thought that small mergers are
unlikely to have large impacts and that
the cost of evaluating a merger may be
greater than the expected benefit from
doing so. It becomes important to
isolate those mergers which, due to
either of these reasons, do not get
evaluated at all.
It is expected
that the period April 2011- March 2012
will see a sizable number of mergers,
just like in the previous year, April
2010 - March 2011. Moreover, the number
of mergers in the period Jan 2011- March
2011 itself has been high with a total
volume of transactions of $18.31
billion. One may categorize mergers into
four categories for the purpose of the
analysis below: outbound mergers,
inbound mergers, domestic mergers and
foreign country mergers, which take
place outside the country and may have a
local nexus.
Outbound Mergers
In the recent past, there have been
several outbound mergers with cash rich
domestic firms on the hunt for companies
globally for natural resources like coal
mines, oil, gas, coking coal, iron ore
from Africa to Australia, for production
facilities, to enter new markets or
several of these simultaneously. Thus,
for instance, Tata Chemicals’ purchase
of British Salt, Mahindra’s purchase of
Ssang Vong (South Korean Auto major),
Aditya Birla Group’s purchase of US
based Columbian Chemicals, Tata
Chemicals’ purchase of US based potash
miner EPM Mining Ventures, Vedanta’s
purchase of 10% of Cairn, Airtel’s
purchase of the African telecom assets
of Kuwaiti group Zain, Fortis Health
Care’s purchase of Hong Kong’s Quality
Health Care Asia and Hindalco’s purchase
of Novelis, a major North American
aluminium manufacturer, all fall into
one or more of these categories. As long
as these mergers involve purchases of
companies that are not operating in
India in the same market as that of the
buying firm, they do not affect the
relevant market in India and therefore,
most of such mergers will not even have
to be notified to the Indian competition
authority, the CCI. Of the above, if
Ssang Vong was, prior to purchase,
selling automobiles in India within the
same relevant market as Mahindra, the
merger may have to be filed. Thus, the
merger legislation is unlikely to have
much impact on such mergers.
Foreign Country Mergers
A
foreign country merger, where one
company buys another outside the country
and both companies have operations in
India, is required to file with the CCI
provided that they affect a relevant
market in India and satisfy the
financial thresholds. Thus, for
instance, the recent purchase by
Unilever of Alberto Culver, both of
which operate in India, certainly meets
the financial thresholds requirement and
probably affects the relevant market in
India as well.
The present
merger regulations do not work with
retrospective effect; only mergers which
take place after June 1, 2011 will come
under the purview of the merger regime.
This simply depends on where such
mergers are taking place and likely to
take place worldwide in the near future,
whether they have a local nexus and if
they meet the filing requirements.
However, unless such mergers are filed
with the CCI, there is requirement of
seeking the same, as it has to first
build its experience in the area with
purely domestic mergers. Thus, while
such mergers are to be filed with the
CCI on their own, it is expected that
the authority will initially take a
somewhat lenient view towards such
mergers.
Inbound Mergers
Similar in terms of analysis to the
above are inbound mergers where foreign
companies intend buying companies
operating in India. In this case, if the
foreign company is already present in
the Indian market, either through a
subsidiary or a local distributor, which
is how foreign companies normally enter
new markets, then they may have an
effect on the relevant market in India,
and if they meet the filing requirement,
may need to be scrutinized. Such may be
the case in auto parts companies,
pharmaceutical companies (Abbott’s
purchase of Piramal Healthcare’s branded
generics business), personal care
products (FMCG) like the recently
announced purchase of Paras Pharma by
Reckitt Benckiser, where the regulations
will probably come into play. In 2008,
Japan’s Daiichi Sankyo acquired a
majority stake in Ranbaxy Laboratories,
while Abbott Laboratories acquired
Piramal Healthcare’s domestic
formulations business last year.
There is a growing apprehension that
the rising takeovers of Indian companies
by foreign MNCs may lead to a shift in
the intellectual property rights regime
and cause the flexibilities under TRIPS
to become redundant. It could affect the
affordability of cheap, generic
medicines as a rise in prices resulting
from such takeovers is apprehended along
with marginalization of homegrown
companies. Thus, merger regulations
would be useful in conducting the
ex-ante analysis necessary to determine
the likely impact of mergers in the
pharma sector.
Subsequent impact
will depend on the vigour of the
competition authority and the strength
of their analysis which will take time
to evolve as ours is a young
jurisdiction with absolutely no prior
experience of dealing with mergers,
either within the authority (CCI) or in
other regulatory bodies.
Domestic Mergers
Finally,
there are the purely domestic mergers
which are taking place in sectors such
as telecom where mergers are taking
place mostly among owners of telecom
towers for cellular services. Thus, GTL
Infrastructure bought Aircel Towers for
rolling out its 3G services. Here
mergers will probably affect the
relevant market and perhaps meet the
financial threshold requirements as
well. Similarly in the banking sector,
one has the purchase of Bank of
Rajasthan by ICICI. There has been
considerable consolidation in the steel
sector in the recent past as well as in
insurance. In the absence of clear
demarcations with regard to
jurisdictional issues, both telecoms and
banking mergers may have to be reviewed
by the Competition Authority and will
thus be affected by the new merger
regime. The insurance sector will also
be affected as per the mandate of IRDA.
Since the CCI is a relatively new body,
it needs to first start with these
purely domestic mergers to obtain the
expertise in dealing with this new area
of the competition legislation.
In conclusion, we expect that the
primary impact of the new merger regime
is unlikely to be on any mergers, other
than domestic mergers particularly in
telecom, banking and insurance. Of the
others, some of the inbound mergers
which are filed with the CCI may perhaps
be scrutinized, but at the present stage
of learning, lenient treatment of such
mergers is expected, till such time
there is enlargement in the capacity of
the competition authority.
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