The Hindu Business Line : A review of competition law from an M&A perspective

There are new dynamics at play with respect to the competition that comes from unforeseen quarters through technological advancements or ‘killer-apps’. Access to capital and globalisation has reduced barriers to entry significantly in most industries.

HARISH H. V., PARTNER SPECIALIST ADVISORY SERVICES, GRANT THORNTON

While failures are an integral part of mergers and acquisitions (M&A), Indian industry has realised in the recent past that operating in a global environment with globalised competition requires scaling and ‘skill-ing’ rapidly. Do big M&A deals stifle competition? What should the competition law promote and avoid?

“We believe that while it is important to ensure competition and prevent monopolisation, it is critical that in the process of doing so, impediments are not placed to growth,” feels Mr Harish H. V., Partner Specialist Advisory Services, Grant Thornton. He shares his views (with key inputs from Mr Arun Kumar M. K., Vice-President, Specialist Advisory Services) on the competition law from an M&A perspective with Business Line.

The scope for creation of monopolies has reduced considerably in today’s global environment, he begins. Over to the interaction done through email…

Excerpts from the interview:

Are there new dynamics at play when it comes to competition?

Competition benefits the customers by encouraging innovation and efficiency which, in turn, drives down prices and improves quality. Globally, various policies have been implemented to promote, regulate and protect competition in an industry or market. In India, the Monopolies and Restrictive Trade Practices (MRTP) Act is giving way to the new Competition Act.

Yes, there are new dynamics at play with respect to the competition that comes from unforeseen quarters through technological advancements or ‘killer-apps’. Access to capital and globalisation has reduced barriers to entry significantly in most industries. The scope for creation of monopolies has reduced considerably in today’s global environment. This aspect must be kept in mind while implementing the Act and in the process of determining whether a transaction may result in significantly reduced competition.

Tell us about the evolution of Indian Competition Act.

Historically, competition in India has been regulated by the MRTP Act, which is in force since 1970. The primary purpose of the MRTP Act is to curb unfair, restrictive and monopolistic practices However, to promote competition and to promulgate a modern competition law, Government constituted a committee in 1999, based on the recommendations of which, the Competition Act, 2002 was enacted and notified in January 2003, and the Competition (Amendment) Act, 2007 was enacted in September 2007.

Some changes happened in 2008?

In January 2008, draft regulations were issued inviting comments. The Competition Commission of India (CCI) was established under the Competition Act by Government notification in October, 2003. Since then the Commission has had one Member and acting Chairman, Mr Vinod Dhall, along with a small team of officers and staff. Currently, applications have been sought for appointment of the Chairperson and five other members of the CCI. The sections of the Competition Act relating to enforcement work, that is, for undertaking inquiries into anti-competitive agreements and abuse of dominance, and for regulating combinations have not yet been notified by the Government. Consequently, the Commission has not commenced the enforcement work.

What does the Competition Act look at?

The Competition Act primarily deals with three kinds of arrangements, viz. prohibition of certain agreements which are likely to be detrimental to competition, abuse of dominant position and regulation of combinations. The Indian Competition Act tries to regulate combinations in the nature of acquisitions, mergers, amalgamations, acquiring control.

Are there situations when an acquirer has to alert the CCI?

Kind of. Any person who proposes to enter into a combination shall compulsorily give notice to the Commission if the following threshold limits are crossed:

In India if the acquiring and the acquired entities jointly have more than Rs 1,000 crore (assets), or Rs 3,000 crore (turnover) or the group has more than Rs 4,000 crore (assets), or Rs 12,000 crore (turnover).

In India or outside India if the acquiring and the acquired entities jointly have more than $500 million assets (including > Rs 500 crore in India) or $1500 million turnover (including >1,500 crore in India) or the group has more than $2000 million (including > Rs 500 crore in India) (assets) or $6000 million (including > Rs 1,500 crore in India) (turnover).

Those are not very huge numbers. Anyway, what does CCI do after receiving the notice?

The above-mentioned notice should be given within 30 days of the approval of the proposal relating to the merger by board of directors of the companies or execution of any agreement/document for acquisition. No combination shall come in effect unless 210 days have passed from serving such notice to the CCI or grant of approval by CCI, whichever is earlier.

The Commission may on its own knowledge or based on information received may inquire into whether such a combination is likely to cause noticeable adverse effect on competition in India.

Much has been said about the Competition Act. What are the likely benefits?

The likely benefits of the implementation of competition law in India are as follows:

The competition law gives teeth to competition policy and helps in promoting, regulating and sustaining fair competition in the market.

Protect the interest of consumers against any collusion or unfair trade practices.

Creating a business environment which improves efficiencies in operations and, hence, leading to cost reduction for the concern. This cost advantage is passed on to customers in the form of price reduction.

Competition law prohibits agreements that result in cartel formation and restraint of trade. The law also prevents monopolisation and attempted monopolisation in an industry.

It can successfully trace anti-competitive mergers and tie in arrangements and restrain the same.

Competition law can also reduce the chances of any player to adopt price discrimination strategy to increase profit.

Okay. They are quite a handful. What about deficiencies? Any at all?

There are deficiencies associated with the competition law which can act as an impediment to the M&A activities in India which may in turn result in a slower growth of Indian economy.

The waiting period of 210 days for the approval of any combination appears to be quite long. The trigger for the waiting period is also unclear as the Act stipulates a time period of 210 days from the date of approval of the proposal by the board. The trigger could originate at the term sheet stage itself. However, execution of a term sheet may not always necessarily result in completion of the combination. Although the CCI Chairman has stated that he expects to complete the approval process in most of the cases by 30 days, the fact that the provision exists for time period of 210 days for closure, combined with the fact that the CCI staffing is likely to be inadequate and that the number of cases presented to the CCI is expected to be large, one is not sure whether the approval process will be completed in 30 days.

The Competition Act allows third parties to object to a given combination. This may result in larger number of complaints made by people with vested interests and may in turn lead to wastage of time and resources.

The Competition Act appears to emphasise over-reliance on the thinly staffed CCI.

How would you sum up the deficiencies in two sentences?

The Act rather than adopting a concentration-based approach (as mentioned below), takes the `size' as the criteria which is very inflexible given the dynamism involved in current business situations.

So, how can the gap created by the deficiencies be filled? Should size be given that importance?

One of the conundrums with the law is that it attempts to regulate and govern combination of foreign entities outside India, if the group has assets of specific size in India, that is, these foreign entities have to comply with the notice period requirement even though the said combination has no effect in India. This is at odds with what the law seeks to achieve, which is, to regulate only those combinations that are likely to have a noticeable adverse effect in India.

Rather than looking at entities or group in isolation, their size in relation to peer group in the industry should be looked at while judging whether the combination is likely to cause any impact on the competition per se. A concentration-ratio-based approach as explained above may do better justice to the competition policies in the country. The United States Department of Justice in its 1982 Merger guidelines adopted a HHI index which calculates the level of concentration in a particular industry in a more realistic manner and whether the said combination is likely to have any adverse effect on such concentration. Yardsticks on the lines of HHI index can be used in the Indian scenario too. Also it should be noted that most of the antitrust policies to large extent look at concentration in a particular industry as the factor hampering the competition.

How do feel about the conditions laid down for the threshold of assets set for the merged entity? Do you find them harsh?

The Indian Competition Act takes a threshold of assets and turnover as the judging criteria for a combination to be covered under the Act. This will be troublesome in case of capital intensive industries such as oil and gas, petrochemicals where even an inconsequential merger may get covered by the Act.

The threshold criteria in the Act could create a deadlock because once an entity or group grows to a size of the limits prescribed in the Act, all the combinations (however small it may be), will attract the regulations of the Competition Act and thus resulting in the duplication of effort on part of both the said entity and also the Commission.

Do you mean a larger group will attract regulations for no reasons of it all? Tell us with an illustration, if possible.

Okay. Take the example of Wipro Ltd. If it (whose revenues for the year 2007 stands at Rs 15,133 crore), acquires a $5 million company it has to follow the procedure provided in the Act even if the combination may not have any impact on the competition per se.

Certain transactions have been exempted from the mandatory reference as per the draft regulations, one example of which is the acquisition of less than 26 per cent of a company's share done solely as an investment and not leading to the control of a company.

Also, acquisition of assets not directly pertaining to the business of the acquirer or acquisition of assets done solely in the nature of investment or acquired in the ordinary course of business but not leading to the control of the enterprise whose assets are being acquired would be outside the purview of the Competition Act. Further an acquisition of shares or voting rights, where prior to such acquisition, the acquirer held more then 50 per cent of the shares or voting rights will not be covered under the Act.

What about the time-factor involved, essential in M&A, in getting the CCI's approvals?

The CCI has a view that 90 per cent of combinations will be approved within a timeframe of 60 days. By re-defining the criteria for referrals the number of cases that need to be referred could be minimised and the ones that are referred too could be fast tracked.

Is the CCI prepared to take on a large acquisition, for example, Tata-Corus?

The task of analysing whether any combination is detrimental in nature requires high degree of expertise from the people undertaking such a task. Therefore the CCI would require a large number of trained staff that can be effectively deployed on to the job to achieve the desired results. It is important that this fact be recognised and a multi-skill organisation of legal, economic and industry experts be recruited so that the required analysis can be done.

D. MURALI

KUMAR SHANKAR ROY

http://InterviewsInsights.blogspot.com

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