Published on: November 27, 2023 at 13:21 IST
In the corporate environment, mergers and acquisitions are critical for growth, efficiency improvement, and market expansion. These company mergers, however, are subject to tight regulatory frameworks to maintain fair competition and prevent market power concentration.
The Competition Act, 2002 in India governs these activities, requiring compliance to protect consumer interests, prevent anti-competitive behaviour, and foster a competitive corporate environment.
In layman’s terms, market rivalry refers to competition between competitors’ comparable things or potential benefits to achieve income, benefit, and a piece of the pie. Such a severe market structure does not generally flourish, but the government should foster, ensure, and regulate it through an opposition strategy.
Such an approach must include not only accessible resources for improving rivalry in the local and public business sectors but also centres around opposing infrastructure restrictions.
India has opened its economy to achieve globalisation, removed restraints, and resorted to liberalisation. The natural implication is that the Indian market should be prepared to compete within and outside the country.
Mergers might be horizontal, vertical, or conglomerate in nature. Companies at the same level of the supply chain are involved in horizontal mergers. It is, therefore, a merging of parties that compete at the same production and/or distribution level of goods/services, i.e., in the same relevant market.
Vertical mergers include enterprises at various levels of the supply chain. They are mergers of enterprises that operate at separate but complementary stages of the same end product’s manufacturing and/or distribution chain. Typically, in such mergers, one business creates an input used by another.
Conglomerate mergers are mergers that are neither vertical nor horizontal and involve firms from essentially entirely diverse industries. Conglomerate mergers can be classed based on the products’ connection into complementary, neighbouring, or unrelated products. Though they are typically innocuous to competition, they are viewed with mistrust owing to the “deep chest” idea, which indicates mergers that would significantly contribute to a company’s existing significant turnover, strengthening its market position.
The Monopolies and Restrictive Trade Practices Act, 1969 has become outmoded in some ways due to worldwide economic trends, notably those relating to competition laws, and there is a need to shift our attention from preventing monopolies to fostering competition.
The Government of India passed the Competition Act, 2002 following the ideology above. The Competition Act (hereinafter referred to as “Act”) seeks to ensure fair competition in India by prohibiting trade practices that have a significant adverse effect on competition in Indian markets and, to that end, provides for the establishment of a quasi-judicial body to be known as the Competition Commission of India (hereinafter referred to as “CCI”), which shall also undertake competition advocacy for creating awareness and imparting competition training.
The Act’s principal component is the regulation of mergers and acquisitions. This article aims to examine the Act’s provisions governing mergers and acquisitions critically.
The Competition Act, 2002 used the term ‘Combinations,’ which encompasses mergers, acquisitions of shares and assets, and taking control of a business. The fundamental justification for a combination or merger is that the combined entity’s value is projected to be larger than the sum of the independent values of the merging commodities.
Limiting or eliminating competition is feasible by choosing the proper manner and amount of acquisition. The goal of any competition regulation is to guarantee that individuals or businesses gaining autonomy via mergers and acquisitions do not undermine the competitive system.
It is critical to limit monopolisation to encourage competition. However, the Competition Act, 2002 aims to move the focus from monopolies to practises that harm competition both within and outside India.
Mergers/combinations are a structural issue impacting competition, as opposed to anti-competitive agreements and abuse of dominant position, which are fundamentally behavioural concerns.
Furthermore, anti-competitive agreements and abuse of dominant position operate post-facto or while the problem is still in effect; mergers, on the other hand, must be disclosed before the merger. This is done to avoid the damage that is expected.
Following liberalisation measures compelling businesses to reorganise their enterprises to survive and compete in the new environment, it was deemed necessary to make provisions for merger control to avoid anti-competitive effects and provide for an appropriate competition policy for the country.
The openness of the economy to foreign investment and the loss of government control over investment choices have altered the operating environment for firms, preeminent multinational corporations operating in India.
Mergers have an anti-competitive effect because they raise the probability of collusion among a smaller number of players or create excessive market dominance or even monopoly. Other reasons include:
- One of these implications is that it can potentially remove or reduce the advantages of successful competition, such as better consumer welfare, higher levels of efficiency, and more innovation.
- Second, dealing with a merger is more accessible than dealing with post-facto market power or collusion.
- Third, ordering a de-merger may be extremely expensive both socially and economically.
- Fourth, without merger review, collusive firms might avoid penalties by simply merging, thereby contradicting the objective of the legislation.
- Fifth, mergers alter the industry structure and continue longer than collusion.
The Act defines ‘Combinations’ under Section 5,1 which covers mergers, amalgamations, and acquisitions. However, only certain mergers, amalgamations, and acquisitions that meet the act’s threshold limit would qualify as a “combination.”
Section 5 jurisdictional thresholds entail a two-step analysis: the target’s global turnover or assets; and the aggregate global and Indian turnover or assets for either the parties or the post-completion group (i.e. the acquirer group comprising the target).
A ‘group’ is defined as two or more enterprises that, directly or indirectly, have:
- the ability to exercise 26% or more of the voting rights in the other enterprise; or
- the power to appoint more than half of the members of the other enterprise’s board of directors; or
- the ability to control the affairs of the other enterprise.
Control, as used in the definition of group, refers to the control of one or more enterprises, either jointly or separately, over another enterprise; or one or more groups, together or singularly, over another group or company.
The asset and turnover threshold limitations are to be changed every two years based on the Wholesale Price Index or variations in the exchange rate of the rupee or foreign currencies.
If the jurisdictional thresholds are reached, Section 5 of the Competition Act provides for three types of transactions that must be reported to and cleared by the CCI before completion:
- Section 5(a): any transaction involving acquiring control, shares, voting rights, or assets.2
- Section 5(b): a person gaining control of an enterprise when that person already has direct or indirect control of another enterprise engaged in the production, distribution, or trading of similar or identical or substitutable goods or the provision of an equal or identical or substitutable service.3
- Section 5(c): a merger or amalgamation.4
It is worth noting that India has one of the highest threshold limits globally compared to other countries.
This is done to stimulate mergers, which also benefit the economy. According to worldwide experience, 85% of mergers are allowed without a full investigation and 10% after an inquiry. Around 5% of mergers are allowed or granted provisional approval.
Section 6 of the Act requires any ‘enterprise’ or ‘person’ engaging in such a combination to notify the commission of the intended combination. The Act was amended in 2007 to make such notice mandatory.5
The maximum approval term for a combination was extended from 150 to 210 days by the 2007 amendment. The merger is presumed allowed if the Competition Commission does not issue an order within 210 days.
According to Section 20 of the Act, the Commission shall have the jurisdiction and authority to investigate combinations to determine if such combination has an ‘appreciable detrimental effect’ on competition inside India.6
The provision provides the Commission legislative authority to investigate any combinations, either on its initiative or in response to an application received by the Commission. However, the commission will not be allowed to launch such an investigation once one year has gone since the combination went into force.
Section 20(4)7 specifies the considerations to be considered in evaluating whether the combination will have a considerable detrimental effect on competition or is likely to have such an effect:
- the actual and potential level of competition in the market from imports, the extent of market entry barriers, and the level of combination in the market.
- the degree of countervailing power in the market; the likelihood that the combination would result in the parties to the combination being able to significantly and sustainably increase prices or profit margins.
- the extent to which effective competition is likely to be sustained in a market
- the extent to which substitutes are available or are likely to be available in the market
- the market share in the relevant market of the persons or enterprises in a combination, individually, and as a combination
- the likelihood that the combination will result in the removal of a vigorous and effective competitor or competitors in the market
- the nature and extent of vertical integration in the mark the possibility of a failing business; the nature and extent of innovation
- relative advantage in terms of economic development contribution by any combination having or likely to have an appreciable adverse effect on competition
- whether the benefits of the combination outweigh the negative impact of the combination, if any.
These are the fundamental standards for determining whether a specific combination is forbidden or permitted under the Act.
Aside from the elements above that must be met before any matter is legally admitted for inquiry and investigation, the AAEC must also occur in India’s relevant product/geographic market. If the cause of AAEC cannot be proven to have happened in relevant product/geographic markets, the action against a merger notice fails again.
Relevant markets have two dimensions: product markets and geographic markets. The relevant product market is described in terms of product substitutability. On the demand side, the relevant product market contains all substitutes the customer would move to if the product’s price under inquiry rose.
On the supply side, this would encompass any manufacturers who could transition to manufacturing such alternative commodities using their existing facilities. It may be defined as the smallest group of interchangeable items in the face of a modest but significant non-transitory price increase (SSNIP).
For example, whether aerated and fruit drinks are in the same product market may be questioned. However, a low-cost Maruti 800 may compete in a different product market than a high-end BMW.
The Act defines a relevant geographic market as “the area in which the conditions of competition for the supply of goods or provision of services or demand of goods or services are distinctly homogeneous and distinguishable from the conditions prevailing in neighbouring areas.” As a result, it encompasses the area where supply and demand circumstances are homogeneous.
In cement, a relatively heavy but low-value commodity, the question of whether the relevant market is the entire country or a small area or region may emerge. Interstate limitations can have an impact on the relevant regional market.
In its adjudicatory efforts, the Commission must consider whether a combination’s benefits outweigh the negative impact on competition. The Act’s investigation procedure gives the merging firms ample chance to defend the merger and consider any amendments the Commission offers.
It also allows opposing parties to make their case before the Commission. In summary, the procedure is business-friendly, rather than the Commission issuing a notice and passing a quasi-judicial ruling when a reference or information is received.
One of the most contentious components of the 2002 Competition Act is the regulation of combinations. Some of the points highlighted are discussed below.
- The Indian business sector requires consolidation to produce appropriately sized enterprises and players capable of competing effectively in the home and international markets. In other words, mergers will not be discouraged unless they are anti-competitive and, more specifically, harmful to consumer interests. This must be understood in the perspective of Indian firms competing in India and the international market. Therefore, to have a foothold in the global market, Indian companies must first have a stronghold in the Indian market.
- The asset and turnover threshold restrictions are high enough that most mergers will fall outside the scope of combination regulation. Furthermore, Indian corporations have lower threshold restrictions than international companies. For example, an Indian company with a turnover of Rs. 3000 crore cannot acquire another company without prior notification and approval from CCI. In contrast, a foreign company with a turnover of more than $ 1.5 billion (or Rs. 4500 crore) outside India may acquire an Indian company with a turnover of less than Rs. 1500 crore.
- The “Domestic Nexus” requirements proposed by the 2007 amendment harm Indian companies’ interests.
- Beyond the threshold restrictions, the parties have only a voluntary (rather than obligatory) premerger notice requirement.
- The term “combinations” does not contain the phrase “joint ventures.” Some business chambers were concerned that including ‘joint ventures’ would depress industrialization in the nation since the road of ‘joint ventures’ was a pragmatic and popular one followed by its constituents.
- The idea of ‘group’ is contained in the combination regulation regulations.
- There was a request to exclude it because a conceivable and likely bureaucratic approach may link unrelated endeavours. Many mergers may be derailed due to an activity being seen as belonging to some group.
- Even intra-group acquisitions by promoters of publicly traded companies, as well as internal reorganisations within a business group, need statutory notification, even if they do not affect competition.
- Notifying such papers is likely to jeopardise the secrecy of commercial arrangements before they are concluded and may be detrimental to efficiency.
- The previous time frame for the CCI to act was 150 days, which has been raised to 210 days by the 2007 Amendment, which is too long for commercially significant deals with high stakes.
The goal of mergers and acquisitions is to promote economic growth and enhance trade practices that can assist and benefit customers in various ways. Adding the MRTP Act to the Competition Act substantially influenced society and resulted in several changes.
The Competition Act made mergers and acquisitions mandatory for the commission around 2007. In this statute, the Competition Commission is given extensive authority. It primarily focuses on decreasing the negative consequences damaging to customers.
To summarise, managing the amalgamation and merger process while complying with the Competition Act of 2002 necessitates precise preparation, thorough evaluations, and adherence to legal standards.
Ensuring compliance not only speeds up the clearance process, but also helps to a competitive and fair business climate that benefits customers and the market as a whole.
- Regulation of Combinations: Law and Policy in India by Sankalp Jain
- Mergers & Acquisitions Under the Competition Act, 2002
- Merger Dominion: Impression On Competition In India
- Mergers Acquisitions Under The Indian Competition Regime
- Merger control and private equity transactions
1. The Competition Act, 2002, s.5, No.12, Acts of Parliament, 2002 (India)
2. The Competition Act, 2002, s.5(a), No.12, Acts of Parliament, 2002 (India)
3. The Competition Act, 2002, s.5(b), No.12, Acts of Parliament, 2002 (India)
4. The Competition Act, 2002, s.5(c), No.12, Acts of Parliament, 2002 (India)
5. The Competition Act, 2002, s.6, No.12, Acts of Parliament, 2002 (India)
6. The Competition Act, 2002, s.20, No.12, Acts of Parliament, 2002 (India)
7. The Competition Act, 2002, s.20(4), No.12, Acts of Parliament, 2002 (India)