CS Deepak Pratap Singh
We have understood the concepts and some important definition under the Competition Act, 2002. As we have considered the charging provisions of Sections 3 and 4, we have learned that the main object of the act is to promote competition and restrict any activities by any entity or group of entities to restrict competition in the market.
The Act was promulgated keeping in view the development of international trade and commerce and competition.
In this article we are going to discuss about various types of combinations and their regulations under Section 5 of the Competition Act, 2002.
WHAT IS A COMBINATION; (Section 5)
Broadly, combination under the Act means acquisition of control, shares, voting rights or assets, acquisition of control by a person over an enterprise where such person has control over another enterprise engaged in competing businesses, and mergers and amalgamations between or amongst enterprises when the combining parties exceed the thresholds set in the Act.
The thresholds are unambiguously specified in the Act in terms of assets or turnover in India and abroad. Entering into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India is prohibited and such combination would be void.
MERGER EVALUATION INVOLVES FOLLOWING PROCESS;-
(a) The acquisition of control, shares, voting rights or assets,
(b) Acquisition of control by one person over an enterprise when such person has already control over another enterprise engaged in the competition business.
(c) Any merger or amalgamation between or amongst enterprises when the combining parties exceed the threshold limit set in section 5 of the Act.
The thresholds for the combined assets/turnover of the combining parties are:
(i) Combined assets of the enterprises value more than Rs. 1,000 crores or combined turnover is more than Rs. 3,000 crores.
(ii) In case either or both of the enterprises have assets/turnover outside India also, then the combined assets of the enterprises value more than US$ 500 millions, including at least Rs. 500 crores in India, or turnover is more than US$1500 millions, including at least Rs. 1,500 crores in India .
(iii) Combined assets of the group to which the acquired enterprise would belong being more than Rs. 4,000 crores or such group having a joint turnover more than Rs. 12,000 crores after acquisition or merger.
(iv) In case such group has assets/turnover outside India, then the combined assets of the group value more than US$ 2 billion, including at least Rs. 500 crores in India or turnover is more than US$6 billion including at least Rs. 1,500 crores in India.
(v) Group is defined in the Act. Two enterprises belong to a “group” if one is in position to exercises at least 26% voting rights or appoint at least 50% of the directors or controls the management or affairs in the other.
TYPES OF MERGERS;
Mergers are broadly classified into three categories:
(i) Horizontal mergers, which take place between competitors which produce or supply similar or identical products
(ii) Vertical mergers, which take place between enterprises at different levels in the chain of production, distributors etc. like manufacturers and distributors
(iii) Conglomerate mergers, which take place between enterprises engaged in unrelated business activities
Mergers are subjected to review because of their potential adverse effect on competition in the relevant market. Such adverse effect could be the result of a unilateral conduct (exercise of dominance) or of coordinated conduct between two or more enterprises facilitated by the merger. Control of either type of conduct is prospective and aimed at preventing such conduct post-merger. Effect of mergers on competition is thus classified into two broad categories: unilateral effects and coordinated effects.
Unilateral Effects When a merged enterprise gains sufficient market power to enable it to behave independently of market forces, such conduct results in ‘unilateral’ effect on competition. This happens when the rivals in the market are not able to increase output in response to a unilateral increase in price by the merged enterprise. It can also occur when the products are differentiated and are not close substitutes of each other.
Coordinated Effects The anti-competitive effect of a merger is termed ‘coordinated’ when it facilitates collusive behaviour, either due to express agreement among competitors, as in cartels, or due to tacit coordination by competitors that have similar effects, irrespective of whether the coordination is legal or not. Markets that are highly concentrated make such coordination easy. Product markets that are homogenous are prone to such coordination.
Note: The Horizontal Mergers are more prone to restrict or limit competitions in the market. Because this type of merger tend to limit entry to new entrant in the market and tries to limit competition.
NOTIFICATION OF COMBINATIONS TO THE COMMISSION; The notification of merger/acquisition of any enterprise or enterprises or person, which touches the threshold limit, is mandatory to the commission. The commission has power to inquire into such combinations or merger or acquisition within a period of one year from the date of merger/ acquisition.
Any person or enterprise which is going for combination should notify the commission in the prescribed form within a period of 30 days after approval of such scheme by their Board of Directors.
The above combination would take place within a period of 210 days from the date it notified to the commission, or if commission does not pass the order in this regard then it will be assumed that the commission has given its assent after a period of 210 days from the date of its notification to the commission.
The commission can levied a penalty of 1% of the turnover of the combination if it is found that the combination is prone to adverse affect on the competition. The commission may order of de-merger to the entities involved in the combination in this case to check or promote competition.
If the Commission is prima facie of the opinion that a combination has caused or is likely to cause adverse effect on competition in Indian markets, it shall issue a notice to show cause to the parties as to why investigation in respect of such combination should not be conducted. On receipt of the response, if Commission is of the prima facie opinion that the combination has or is likely to have appreciable adverse effect on competition, it may direct publication of details of combination, inviting objections from the public, affected or likely to be affected by the proposed combination, and call for additional or other information from parties to the combination, if considered appropriate.
EXEMPTION FROM NOTIFICATION [Section 6(4)]
The share subscription or financing facility or any acquisition, inter alia, by a public financial institution, foreign institutional investor, bank or venture capital fund, pursuant to any covenant of a loan agreement or investment agreement are exempt from notification as per sub section (4) of section 6. The concerned institution is, however, required to make disclosure to the Commission within 7 days by way of filing details of such transactions
Factors to Be Considered By the Commission While Evaluating Appreciable Adverse Effect of Combinations on Competition;
In The Relevant Market (sub section (4) of section 20 of the Act)
(a) actual and potential level of competition through imports in the market;
(b) extent of barriers to entry into the market;
(c) level of concentration in the market;
(d) degree of countervailing power in the market;
(e) likelihood that the combination would result in the parties to the combination being able to significantly and sustainably increase prices or profit margins;
(f) extent of effective competition likely to sustain in a market;
(g) extent to which substitutes are available or are likely to be available in the market;
(h) market share, in the relevant market, of the persons or enterprise in a combination, individually and as a combination;
(i) likelihood that the combination would result in the removal of a vigorous and effective competitor or competitors in the market;
(j) nature and extent of vertical integration in the market;
(k) possibility of a failing business;
(l) nature and extent of innovation;
(m) relative advantage, by way of the contribution to the economic development, by any combination having or likely to have appreciable adverse effect on competition;
(n) whether the benefits of the combination outweigh the adverse impact of the combination, if any
Approval, rejection or approval; with modification of the merger Based on evaluation of the combination as above, the Commission may decide to approve the merger, reject the merger or approve the merger subject to modifications. International experience shows that less than 10 per cent of mergers evaluated by competition authorities have been found to have adverse effect on competition/have the potential for lessening of competition in the relevant market.
A large portion of such cases are eventually approved by competition authorities subject to modifications. It can be reasonably expected that only a small percentage of the total notified mergers may be found to have appreciable adverse effect on competition in India.
REMEDIES UNDER THE ACT; Most of the expected anti-competitive effects of mergers can be remedied without holding back the merger itself. Merger analysis consists of assessment of the likely anti-competitive effect of the merger under analysis and how such effect could be
APPEALS; The Central Government has notified a Competition Appellate Tribunal (CAT) to hear and dispose of appeals against any direction issued or decision made or order passed by the Commission under specified sections of the Act, such as orders relating to notification of combination, inquiry by the Commission and penalties. An appeal has to be filed within 60 days of receipt of the order / direction / decision of the Commission.