Mergers & Acquistions under Indian Competition Law

Throughout the last century, there was a proliferation of competition laws in countries across the globe and, as of now, there are 106 of these. Almost all of these have merger control provisions. Such large number overwhelmingly demonstrates the necessity of having competition law, including provisions of merger control. It is a proven theory that competition brings about lower prices, better quality and spurs innovation. It is widely acknowledged that competition benefits both the consumers and enterprises. Enterprises have an innate desire to acquire monopoly position or substantial market power, even if for a brief period. This desire leads to expansion of business, either through organic or inorganic growth. As for the latter, while most M&As bring about efficiency and are thus beneficial, some can have anti-competitive effects through unilateral or coordinated effects.  

 

The unleashing of Indian Economy has thrown open lucrative and dependable opportunities to Business Communities as a whole. Business has to be done essentially through corporate form of organisation. This structural compulsion has provoked the curiosity of entrepreneurs about corporate laws especially about the Companies Act, 1956, which they would be complying and defying in the process of doing business. Therefore all the eyes are set not only on the form and contents of the Act but also to the changes that are made to the Act.

 

The absence of restrictions on the size and volume of business is encouraging enterprises to opt for mergers and amalgamations with intent to produce on massive scale, to enjoy the benefits of scales of operation, to reduce costs of production and to make prices internationally competitive. For these reason it is imperative to comprehend and understand the provisions of various Corporate Laws including the Companies Act, 1956 relating to mergers and amalgamations. So far, in India there was no need for a merger policy, particularly one with a view to protect competition. However, in the wake of liberalization measures compelling business is to reorganize their enterprises to survive and compete in the new environment, it was considered necessary to make provisions for merger control towards avoiding its anti-competitive effects and provide for an appropriate competition policy for the country.

 

Concerns have been raised regarding the recent amendment to the Competition Act, 2002 which has changed voluntary notification regime into a mandatory regime. Of the 106 countries having competition law, only nine seems to have voluntary notification regimes. Such an overwhelming confidence in mandatory regime leaves little scope for any meaningful debate. A voluntary notification regime brings about lot of uncertainties for business, thus raising risks associated with combining. What would be consequences of deferment of regulation of combinations? Post- combination, if anti-competitive behaviour is proved, de-merger will be a distinct remedy. This will be very difficult for the competition authority and the enterprises concerned. OECD, in its Economic Survey India Report of 2007, has stated that the Indian competition law is state-of-the-art.

 

 

For the purposes of evaluating the effect or possible effect of a transaction between enterprises on competition, or to be more specific, the ability of an enterprise to compete, it is necessary to ascertain the degree of autonomy it has. The objective of any competition law is to ensure that persons or enterprises obtaining the autonomy through merger or acquisition do not impair the structure of competition. The Act uses a composite expression – combination to cover these modes, viz. merger, acquisition of shares, assets, acquiring control of an enterprise. The term ‘amalgamation’ and ‘merger’ are interchangeable hence the word ‘merger’ will be used.

The MRTP Act, 1969, dealt with ‘Concentration of Economic Power’ provided for regulating mergers by undertakings or mergers that would lead to the creation of an undertaking. What was necessary to be examined, by the central government in considering a proposal for merger under that section was, whether the merger would lead to a concentration of economic power. The Act also provided for  regulating takeover of an undertaking by an undertaking to which Chapter III of the Act applied. Sections 30A to 30G of the Act laid down regarding the acquisition of and transfer of shares above the prescribed threshold levels by individuals, bodies corporate that formed a group, or bodies corporate under the same management. The Central Government’s previous approval was necessary for the acquisition or transfer of shares by the entities.The entire Chapter III and all the parts thereof were omitted in 1991, with the result that mergers and acquisitions of shares became subject only to the applicable provisions of the Companies Act, 1956.

Section 5 of the Competition Act wets out when a ‘combination’ is to be taken as to have resulted. The term ‘combination’ is wider and will include transactions in addition to a merger. The basic principle of this section is that a combination would result, subject to the other prescriptions of the section, such as the monetary thresholds of assets or turnover of the enterprises specified therein, on: (a) acquisition of control, shares, voting rights or assets of one or more enterprises one or more persons; (b)acquiring of control by a person over an enterprise when such person has already direct or indirect control over another enterprise engaged in production, distribution or trading of a similar or identical or substitutable goods, or provision of a similar or identical or substitutable service; (c) any merger or amalgamation.

 

Section 6 deals with the procedure for regulation of combinations. For section 6 to apply, the combination, within the meaning of section 5, should be one that causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India. Such a combination would be void. Section 20 (4) sets out the factors that the Commission shall have due regard to, in determining whether a combination would have such an adverse effect on competition. Section 31 specifies what orders may be passed by the Commission on certain combinations.

 

The operative part of Section 6 of the Indian Competition Act, provides for the regulation of combination. According to subsection (1), a combination that causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India is void. According to the relevant provisions of the Act, only those mergers & acquisitions are liable to be regulated that qualify under the definition of combinations under Section 5. Size is currently the only criteria for stipulating the post-merger review of mergers & acquisitions.Other arguably more valid criteria such as the market size of a particular industry or the market share of an industry player are not included. There exist no provisions for the regulation of those mergers & acquisitions that do not fall within the meaning of combination and yet have the potential to affect competition adversely. There may arise a situation where any merger may not come under the definition of combination, yet may give rise to serious competition concern in a market. Therefore, most enterprises with a lower asset value and turnover would be excluded from this stipulation. Let us suppose a situation where there are only two competitors for a product and they decide to merge. However, their asset values as well as turnover are such that their merger would fall outside the definition of combination as given in the Act. Hence, despite causing clear appreciable adverse effect on competition, the merger would go unregulated.

In fact the Associated Chambers of Commerce in India has carried out an analysis of the implications of the Act and its findings report that practically every investment in India by a global major will cross the thresholds stipulated in Section 5. The Competition Commission of India (CCI) will be able to investigate the deal irrespective of the position the investment or joint venture will occupy in the marketplace. Conversely a smaller enterprise which may have a dominant position in the same marketplace will not necessarily meet the criteria and may avoid investigation.

The threshold values indicated serve only as a trigger for the investigative process and do not render the merger bad by themselves. The CCI would carry out a more detailed investigation before any action is taken against the particular merger. However, in view of the dynamics of the Indian economy and the unstable currency rates the threshold values serve little purpose. It is therefore suggested that a suitable compromise would lie in listing several criteria like asset valuation and net turnover, market share, etc, the satisfaction of even one of which could trigger an investigation. The very purpose of Section 5 & 6 of the Act is to restrict combinations which cause or are likely to cause an appreciable adverse effect on competition. It is indeed hard to understand how the above can be achieved without considering market share of the merging and the merged entities.

Section 5 of the Competition Act contains provisions regarding acquisitions, acquiring of control, mergers and amalgamations. However, the Act does not delve into the repercussions of arrangements on competition. Section 390 (b) of the Companies Act, 1956 defines the term arrangement as “including a re-organization of the share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes or, by both those methods.” This term is of wide import and includes all modes of reorganization of the share capital, takeover of shares of one company by another including interference with preferential and other special rights attached to shares. Arrangements can have dire consequences on competition and must, therefore, be specifically included in the provisions regarding combinations under the Act.

 Section 6(2) of the Act gives enterprises and persons the option to notify the CCI of the proposed combination, but it is subject to Section 6(1) which renders the proposed combination, if it has an adverse effect on competition, void ab initio. Thus, a combination falling afoul of the provisions of Section 5 is void in the first instance.

Furthermore, pursuant to Section 20(1) of the Act, the CCI can inquire into any combination, suo moto or upon receiving information, within one year from when such combination takes effect. The pre-notification option granted to enterprises under Section 6(2) and the power of the CCI to inquire suo moto under Section 20 may lead to an anomalous situation, since companies that do not exercise their option under Section 6(2) are not automatically exempt from the investigations of the CCI. The said anomaly can be better explained with the help of the following factual situation:

Company “A” merges with company “B.” A and B do not consider their merger anti-competitive even though they have an asset value and turnover above the prescribed threshold limit. The two companies do not notify the CCI about their merger. The companies invest a large amount on their merger within the first six months. The CCI on receipt of information from a competitor carries out an inquiry and passes a judgment within one year of the merger, that the merger has an adverse effect on competition and should not take effect. In this case, the two merged companies will incur huge losses as a result of the CCI’s order. This inconsistency can be removed by making pre-notification of combinations mandatory for all enterprises that have the prescribed asset value and turnover. In other words rather than have an optional notification requirement, it must be mandated that all combinations crossing the threshold limits must seek the CCI’s clearance. The CCI can then give its judgment within ninety working days from the publication of the details of the combination, as prescribed under Section 31(11). 

This of course may seem against the government’s policy of ‘free market’, ‘minimum restrictions’ and ‘minimum intervention’. But, in the light of the anomaly pointed out it is the most practical solution. But this solution has its problems as well. The Confederation of Indian Industries (CII) has pointed out that together with the provisions of the Competition Act regarding notifications of mergers the Companies Act already required the mandatory nod of the High Courts to complete mergers. This multiplicity of procedures of course acts as a hindrance and deterrent factor to business activities. With regard to this problem it is suggested that a system could be worked out whereby the CCI could be enabled to place its views before the High Court, and thereby cut down on procedures.

Pursuant to Section 29(3) of the Act, the CCI may invite any person or member of the public affected or likely to be affected by the combination, to file a written objection. This Section gives the CCI excessive discretion to decide on which persons are eligible to be invited to file their objection against the combination. This section must, therefore, be amended to allow anyone affected by the combination to file a written objection against the combination.

Apart from suo moto action initiated by the CCI, action may also be initiated at the request of any person affected or likely to be affected by the said combination. A problem may arise in this situation that frivolous complaints maybe filed to harass the companies concerned. As a necessary balance of the two interests it is suggested that on an objection by a person affected or likely to be affected by the said combination the CCI should conduct an internal inquiry and if the objection is found to be reasonable only then should action be initiated against the combination. A welcome addition in the Act is the power of the CCI to suggest modifications in the merger u/s. 31(3) which would otherwise be bad in law. This is a step in the direction of the European Community Law and a very powerful provision which could serve as an engine of growth.

Mergers and acquisitions have gained importance in recent times. Business consolidation by large industrial houses, consolidation of business by multinationals operating in India, increasing competition amongst domestic companies and competition against imports have all combined to spur mergers and acquisitions activities in India. 2006 will be remembered in India’s corporate history as a year when Indian companies covered a lot of new ground. They went shopping across the globe and acquired a number of strategically significant companies. This comprised 60 per cent of the total mergers and acquisitions (M&A) activity in India in 2006. And almost 99 per cent of acquisitions were made with cash payments.

The new Competition Act has indeed sought to promote a merger-friendly line of thinking. It would be difficult to deny that the Act has made significant advances towards this line of thinking. However, this intention is not clearly conveyed through the Act. A few anomalies and low-points under the Act have been mentioned in the previous sections. The points stated therein and the suggestions that follow are not very large in scope but their significance lies in their power to clarify the intention of the legislature. The said suggestions are not against the spirit of the Act, but to enhance the same and make the final outcome more meaningful and perhaps more effective.