MERGERS & ACQUISITIONS UNDER THE COMPETITION ACT, 2002
INTRODUCTION
In the pursuit of globalization, India has responded by opening up its economy, removing controls and resorting to liberalization. The natural corollary of this is that the Indian market should be geared to face competition from within the country and outside. The Monopolies and Restrictive Trade Practices Act, 1969 has become obsolete in certain respects in the light of international economic developments relating more particularly to competition laws and there is a need to shift our focus from curbing monopolies to promoting competition.
Pursuant to the above philosophy the Government of India passed the Competition Act, 2002. The Competition Act (hereinafter referred to as “Act”) seeks to ensure fair competition in India by prohibiting trade practices which cause appreciable adverse effect on competition in markets within India and, for this purpose, provides for the establishment of a quasi-judicial body to be called the Competition Commission of India (hereinafter referred to as “CCI”) which shall also undertake competition advocacy for creating awareness and imparting training on competition issues.
One of the main components of the Act is the regulation of mergers and acquisitions. This project seeks to critically analyze the provisions of the Act relating to the regulation of mergers and acquisitions.
THE COMPETITION ACT, 2002
The Competition Act 2002 ("Act") has been introduced into Parliament in August and represents the latest piece in the country's economic reform jigsaw. The Act will replace the current Monopolies and Restrictive Trade Practices Act 1969 (hereinafter referred to as "MRTP Act"). Whilst the MRTP Act was designed to govern restrictive trade practices in the context of a closed and centrally planned economy, the new Act draws upon concepts of competition law found in more liberalized economies such as the US and EU. Of particular relevance to multinational companies ("MNCs") operating in India is that the proposed new regulatory body, the Competition Commission of India ("CCI"), will be empowered to scrutinise all mergers, acquisitions and joint venture activity in India where the asset value of the parties involved is more than Rs.1,000 crore within India or $500 million globally, or turnover is greater than Rs.3,000 crore within India or $1,500 million globally.
The Act has four main components:
- Prohibition of Anti-Competitive Agreements;
- Prevention of Abuse of Dominance;
- Regulation of Mergers and Acquisitions;
- Establishment of the 10 members CCI.
Prohibition of Anti-Competitive
Agreements (Section 3)
- Prohibits and voids any agreement which causes or is likely to cause an appreciable adverse effect on competition in India.
- Contains presumption against agreements which indirectly or directly determine prices; control production, supply, markets, technical development, investment or provision of services; share markets or sources of production either by geographical allocation or types of goods or services or market shares; or which either directly or indirectly result in bid rigging or collusive bidding.
Prevention of Abuse of Dominance
(Section 4)
- Prohibits abuse of dominant position.
- An abuse of dominant position may consist of:
o Directly or indirectly imposing unfair or discriminatory conditions in the purchase or sale of goods or services, or setting prices in the purchase or sale (including predatory pricing) of goods or services;
o Limiting or restricting the production of goods or provision of services or market therefore; or limiting technical or scientific development relating to goods or services to the prejudice of consumers;
o Indulging in practice or practices resulting in the denial of market access;
o Making conclusion of contracts subject to acceptance by other parties of supplementary obligations which have no connection with the subject of such contracts;
· Utilisation of a dominant position in one market to enter into, or protect, another market.
Regulation of Mergers and Acquisitions
(Section 5)
- Prohibits and voids any "combination" which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India.
- The following thresholds apply for determining whether a merger or acquisition becomes a "combination" subject to scrutiny:
o Enterprises with operations in India:
Rs.1,000 crore asset value or Rs.3,000 crore turnover;
o Enterprises with global operations:
$500 million asset value or $1,500 million turnover;
o Groups of companies with operations in India:
Rs.4,000 crore or Rs.12,000 crore turnover;
o Groups of companies with global operations:
$2 billion asset value or $6 billion turnover.
- An M&A deal which does not meet these thresholds but which may, however, result in an adverse effect within the relevant market may still be voidable pursuant to section 3.
- Parties to a transaction have an option to seek an advance clearance from the CCI. However, there is no mandatory requirement to obtain an advance ruling.
- The section contains an exemption for share subscriptions, financing facilities and acquisitions by public financial institutions, banks and venture capital funds. However, these entities will be required to submit to the CCI details of such acquisitions along with information on details of controls, circumstances for exercise of such control and consequences of default arising out of any financing facility.
Competition Commission of India
(Section 7)
- Provides for establishment of a 10 member CCI with investigative and judicial powers. The CCI will replace the current MRTP Commission.
- CCI authorised to inquire into whether a "combination" under section 5 has caused or is likely to cause an appreciable adverse effect on competition in India. Any such inquiry must be initiated within one year of the combination taking effect.
- CCI may also inquire into any action which is alleged to be in contravention of section 3 or section 4 on receipt of a complaint.
- CCI empowered to pass a range of orders including: directing an enterprise to discontinue any agreement or practice (e.g. demerging); the imposition of fines from 3-10 percent of turnover for the last three years; the modification of agreements; and an award of compensation to an affected party.
PROHIBITION OF ABUSE OF DOMINANT POSITION
The Competition Act 2002 permits an enterprise to enjoy its dominant position, i.e., its position of strength in a relevant market within and outside India, which enables it to operate independently of competitive forces prevailing in the relevant market or affect its competitors, consumers or relevant markets in its favor. Section 4 of the Act, however, prohibits any enterprise from abusing its dominant position. An enterprise is said to abuse its dominant position if it:
o directly or indirectly, imposes unfair conditions or pricing stipulations, (including predatory price) in the purchase or sale of goods or services;
o limits or restricts the production of goods or services or their market, or the technical or scientific development relating to such goods or services;
o denies market access to others;
o enters into contracts subject to conditions which have no connection with the subject matter of the contract; or
o uses its dominant position to enter into or to protect another relevant market.
Under Section 19 of the Act, the CCI may inquire into any alleged abuse of dominance by an enterprise, either on its own motion or on receipt of a complaint or reference. Section 19 (4) lists out the factors which must be considered by the CCI while inquiring whether an enterprise enjoys a dominant position or not. Some of the factors stated therein include:
o market share of the enterprise;
o size and resources of the enterprise;
o size and importance of the competitors;
o economic power of the enterprise including commercial advantages over competitors;
o vertical integration of the enterprises or sale or service network of such enterprises;
o dependence of consumers on enterprise.
As in the case of anti-competitive agreements, the CCI can direct the enterprise or person to stop abusing its dominant position, award compensation to the affected parties and impose a fine in an amount not exceeding ten percent of the average turnover of the three preceding financial years, on the party abusing its dominant position. The CCI may also recommend to the Central Government that the enterprise enjoying a dominant position be divided to ensure that it does not abuse its dominant position. Based on this recommendation, the Central Government may pass an order in writing, directing division of the enterprise enjoying a dominant position. The order may also provide for the transfer of property, allotment of shares, payment of compensation, the amendment of the memorandum and articles of association of the enterprise, etc.
At this point it is worth mentioning that the Act does not prohibit or restrict enterprises from coming into dominance. There is no control whatsoever to prevent enterprises from coming into or acquiring position of dominance. All that the Act prohibits is the abuse of that dominant position. The Act therefore targets the abuse of dominance and not dominance per se. This is indeed a welcome step, a step towards a truly global and liberal economy.
REGULATION OF COMBINATIONS
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.
Infact 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 2002 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.[1][1] 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. Although Section 6(2) of the Act gives persons and enterprises the option to notify the CCI about the proposed combination, 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 ofcourse 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 ofcourse 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.
CONCLUSION
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 section. 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.
BIBLIOGRAPHY:
1. Jhunjhunwala, Bharat, Protectionism, Free Market and Global Regulator, Business Line, August 27, 2003.
2. Maitra, Neelanjan, Merger Control Under the New Competition Bill, CLC Vol. 2 p.701 (Journal)
3. Ramaya, A., Guide to Companies Act (15th ed.), Wadhwa & Co.
4. The Internet:
ABHAYSINGH BHOSALE
Join LAWyersClubIndia's network for daily News Updates, Judgment Summaries, Articles, Forum Threads, Online Law Courses, and MUCH MORE!!"
Tags :Corporate Law
