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Should competition law focus on `concentration'?
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Globally, most competition regulators put greater emphasis on concentration or market share, while deeming which all combinations should fall within its ambit..
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Mr Prasanto Sengupta, Director, Corporate Finance, KPMG India.
The Competition Act, expected to be operationalised soon so as to supersede the archaic MRTP (Monopolies and Restrictive Trade Practices) Act, is seen as an attempt to make the Indian laws more contemporary and bring them in line with the modern anti-trust laws.
But there seem to be a few niggling areas of concern, such as whether deals that not long ago raced at a fiery pace may now meet with obstinate speed-breakers.
The new Act deals with the challenges of monopolies and seeks to ensure the sustenance of competition for the benefit of industry and consumers, concedes Mr Prasanto Sengupta, Director, Corporate Finance, KPMG India.
"While doing so, however, the Competition Commission must ensure it does not stifle the growth of India Inc, which has increasingly resorted to M&As (mergers and acquisitions) for acquisition of skill, creation of better scale, and resultant efficiencies for the benefit of consumers and the economy," he adds, during the course of a recent email interaction with Business Line.
Excerpts from the interview:
The Competition Act deals with various situations under which competition may be adversely impacted, but the one on combinations (M&As) has attracted the maximum attention. Why so?
M&As have been a huge growth engine for India Inc. over the last 3-4 years. M&As have resulted in Indian companies acquiring skill, creating better scale and deriving resultant efficiencies. By introducing a `size of person' test in the regulation relating to `combination' under the Competition Act, the number of M&As which will come under the scanner of the Act will be reduced. However there are still certain areas of concern.
Do you fear that the Competition Act, once it becomes operational, can stifle M&As?
The regulations put a premium on `size of person' vis-…-vis `concentration' for deeming which all combinations should be referred to the Commission. The regulations are applicable to any M&As above a certain size, in terms of turnover and assets, of the acquirer and the acquiree.
This will make a large number of M&As fall within the ambit of the Act, even if they may hardly have any impact on competition. Conventional wisdom suggests that `market share' or `concentration' can probably be the best way to judge whether a combination can adversely affect competition. Therefore, globally, most competition regulators put a greater emphasis on concentration, while deeming which all combinations should fall within its ambit.
What about the time period?
The time period of 210 days is way too long and is not necessarily in harmony with other regulations.
Under the Act, the acquirer has to inform the Commission of the proposed combination within 30 days of the board of directors' meeting approving the acquisition or execution of agreement. After this there is a waiting period of up to 210 days, for the combination to be effective.
If the Commission deems that a combination adversely impacts competition, then it has the powers to order reversal of the same. If the acquiree is a listed entity, the acquirer has to, in the interim, complete the formalities relating to open offer following a well-laid-out procedure, including timeline, and non-compliance thereof attracts penalty. This increases uncertainty.
Similarly in the case of a merger of two or more entities through the court route, there are milestones that the merging entities have to follow. The 210-day timeline may substantially increase the uncertainty relating to such mergers, especially if the combining entities are large and are in similar industries.
The court will certainly wait for the Commission to approve the merger, before passing its orders. In this time, the `business plans' of the entities may be impacted, because of market changes or other factors beyond the control of the merging entities.
Can there be an alternative?
There is a need to introduce a shorter timeframe for approving combinations, which prima facie do not impact competition.
For example, the forms which an entity has to submit require the entity to fill `market share' data of the products manufactured / services provided by the combining entities.
Prima facie, if these data reveal that the combination will not impact competition either nationally or regionally, and the Competition Commission does not have any data to the contrary, the same should immediately be approved.
The Chairman of the Commission has spoken about a short and a long form - the short form for such combinations which the combining entities believe are unlikely to impact competition and can be approved within 30 days.
The same is yet to be incorporated. Also, most Competition Commissions worldwide have a maximum timeframe of 60-90 days to approve or reject a combination or suggest modification in structure.
Don't we already have some kind of competition regulation already in place, in certain industries?
Yes, as for example telecom, where most M&As have benefited the consumer, with continuously falling tariffs. So, for a telecom combination, with the introduction of the Competition Act, the multiplicity of approvals will increase.
We should also remember that thresholds possibly representing competition in one industry may not be applicable in another.
Telecom is a shining example of an industry where regulated competition, avoiding both a free-for-all as well as monopolies, has resulted in the creation of great value for both business enterprises as well as consumers in India.
However, this logic cannot be extrapolated across industries. For instance, certain commodity industries worldwide are highly consolidated, either globally or regionally (example, mining globally, and cement in regions). Does it mean that consumers are worse off? In fact, in several commodity industries it is a proven fact that consolidation leads to better scale and resultant efficiencies, which ultimately benefit the consumer.
Your views on how the Commission will address the talent issue and also the current crisis.
The Competition Commission will need to attract the best talent from the market. Judging whether or not a combination impacts competition, quickly and professionally, will require a significant investment of efforts by the Commission.
Clearly, there is no single threshold on which a combination can be deemed as `adversely impacting competition' across industries and several data points have to be considered. This may require judgment calls on the part of the Commission.
The Commission would therefore need to create a quality database across industries and companies and the best talent to interpret the same and respond to the filings of the entities.
As for the stressful times, such as what we witness today, a combination may be necessary in spite of any negative impact on competition, in the greater interest of the economy. Under the takeover code, there are special provisions for stressed situations; the Competition Act is, on the contrary, largely silent on this point.
Bio: Mr Sengupta, who has around 15 years of experience in investment banking, was earlier heading the eastern zone M&A practice for Ernst & Young, prior to which he had led the national M&A practice of a leading domestic investment bank. Among the transactions he has worked on are: private equity for Subhash Projects and Marketing Ltd; induction of a strategic partner, Prysmian SPA, in the cables business of Nicco Corporation Ltd; disinvestment of Videsh Sanchar Nigam Ltd; sell-off of Tractebel SA's (now Suez Energy) stake in Jindal Tractebel Power Company Ltd; and project financing of the first LNG project in India, Petronet LNG Ltd. Mr Sengupta has also managed over a dozen initial public offers (IPOs) and a number of debt raisings from the capital markets.
D. MURALI
(Illustration by R. Rajesh)
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