Market share not even a blip in the radar

In a law that clearly frowns on incipient monopolies, there is surprisingly no reference to ‘market share', which ought to be its cornerstone and guiding spirit.

The MRTP Act (that the Competition Act, 2002 has replaced) rightly swore by market share when it sought to rein in incipient and actual monopolies. First, it was one third market share, later on it became one fourth market share. In other words, the MRTP Act was worried about a person controlling 25 per cent of the market lest he comes to hog and control more market share to the detriment of consumers and public which indeed is the raison d'être of any legislation on monopolies — be it the Anti-trusts laws of the USA or the European Union Competition Law.

To be sure, the legislations in the US and Europe do not in terms prescribe market share threshold so as to set the anti-trust or anti-competition intervention in motion, but the latitude given to the authorities implicitly includes the exhortation to look from the market share angle. But Section 6 of the Competition Act notified as recently as on March 3, 2011 though taking effect only from June 11, 2011 pointedly ignores market share criterion in its single-minded obsession with size.

Size yardsticks

And size is measured by two alternative yardsticks — for individual companies Rs 1,500 crore of post-acquisition/merger asset size or Rs 4,500 crore of post-acquisition/merger turnover; for group companies Rs 6,000 crore of post-acquisition/merger assets or Rs 18,000 crore of post-acquisition/merger turnover. These figures represent a 50 per cent revision to account for the raging inflation during 2002 and 2011 and take asset-turnover ratio of three times as the norm.

For companies and groups with overseas operations the figures are different, but they need not detain us for the nonce. In a strange twist to the concept of control, less than 40 per cent voting power would not warrant treatment as a group company. Strange because it is openly acknowledged by the cognoscenti that a company in India can be controlled with a 26 per cent voting clout enough to block a special resolution.

What is more amazing is in the entire discussion on mergers and acquisition, there is not even a whisper about market share. A group may be of gigantic size but a conglomerate with diversified interests and having not more than 5 per cent market share in each of the product categories or service categories. It might acquire a company with 2 per cent market share, taking its total market share to 7 per cent. This group would come under the Competition Commission's (CC) scanner on assets/turnover criteria ,but not a company which does not have the requisite minimum size in terms of assets/turnover being a skill/service oriented entity but with a sizeable market share, say 30 per cent.

An incipient monopoly is identified better by its market share than by its asset/turnover size. Section 6 is rightly worried about Appreciable Adverse Effect (AAE). It is amazing that the reality that AAE on competition is more pronounced when an entity having a stranglehold on the market goes for shopping to acquire more market share has been lost on the policymakers. This omission has not been made good during the nine years ever since the Competition Act was passed by Parliament.

Procedural glitches

The Competition Act's desire to provide something akin to advance ruling is laudable, but by the nature of the scheme of things it will not work. To be sure, the Income-Tax law has a scheme for advance ruling for non-residents and dealings with non-residents, and it has been a roaring success. Its success has got something to do with the binding nature of the rulings, both on the tax administration and the applicant.

The Competition Law gives no such guarantee. Indeed it cannot because unlike the tax dispensation where a high-powered independent body has been appointed for the purpose, what is proposed under the Competition Law is an in-house mechanism which obviously cannot pre-empt any meaningful investigation by the CC. In the event, it should not give unnecessary hopes to those making references to the CC except that the advice given by the designated authority may be of some use in drafting the reference.

Corporates' concerns

The corporate world is worried that the time-limit of 210 days given to the CC is on the higher side and can at times derail the merger or acquisition process itself. The draft regulations made by the CC says the CC would endeavour to dispose of each reference within 180 days. This is neither here nor there. So is the requirement cast on the CC to form a prima facie opinion within 30 days as to whether the merger/acquisition would have AAE on competition and public interest. This is dangerous.

The CC may have to stew in its own juice in case it forms the prima facie opinion that there will not be AAE on competition and disposes of the reference in favour of the applicant, but it later on turns out that after all the merger was anti-competition. To avoid such embarrassment, the CC most certainly would like to err on the side of caution — all such prima facie opinions would be against the applicants. Why then enact this rigmarole?

(The author is a Delhi-based chartered accountant.)

COMMENT NOW