Merger Dominion: Impression On Competition In India

Niharika Sharma

8 April 2023 9:37 AM GMT

  • Merger Dominion: Impression On Competition In India

    A merger is the joining of two businesses in order to expand one of them. An acquisition occurs when a large entity buys the assets of a smaller one to take control of it. Businesses use these strategies to boost profits, assemble similar items, expand their market share, and other objectives. In a pertinent market, these actions frequently result in the formation of monopolies. The icing on the cake for the businesses was the absence of primary legislation that would have restricted the same.

    In the year 2002, after seeing adamant misuse of market power, the ministry of corporate affairs introduced “The Competition Act, 2002” (referred as the act), replacing the MRTP act, of 1969. The provisions of the act regulate mergers, acquisitions, and amalgamation, which was absent in the MRTP act. The act aimed at ensuring honest and clear competition in the market by restricting trade activities which may result in an appreciable adverse effect on the competition in the Indian market, for the same it mandates the establishment of the quasi-judicial body “the competition commission of India (CCI)” which shall advocate the awareness and impart the training on competition in markets.

    Merger Control Legislation In India

    In June 2011, the ministry of corporate affairs introduced an anti-merger regime in The Act, 2002 under the heading of the regulation of combinations. The legislation must be read in conjunction with the announcements made by The Ministry of Corporate Affairs (MCA) and The Competition Commission of India-Regulation of 2011.[1].

    The act does not define the term “merger control” however, it defines “control”, which includes external companies managing the operations of one or more other companies.[2] Therefore, it can be interpreted that Merger control is a step towards reviewing mergers or amalgamation and acquisitions entered in the competition act. It is a necessary process for an industry or market in order to become a stable place by hindering the power of the combinations.

    Section 5 of the act defines the combinations as:

    An enterprise's acquisition of control, voting rights, assets, and shares of another enterprise.

    Acquiring company has direct or indirect control over the other entity.

    A merger or amalgamation between enterprises.[3]

    The term acquisition includes all forms of acquisition whether direct or indirect as defined under sec.2 (a) of the act[4]. However, the act does not define the term “merger or amalgamation”.

    Unless the transaction is exempt, M&A transactions that fall within the definition of "combination" under section 5 of the competition act must be reported to the CCI. When a company is acquired, the acquirer must file this notice, and when two firms are merging or amalgamating, the merging or amalgamating authority must file it jointly. Section 5 also indicated the asset or revenue criteria below which a merger and acquisition is not considered a "combination," Hence, only those combinations that are above the section's threshold restrictions are included in the aforementioned section.

    Any combinations that have or are likely to have an appreciable adverse effect on competition (AAEC) in the relevant market in India are prohibited by Section 6.[5] The commission has a responsibility to carefully examine each combination and nullify any that might have an AAEC on the market.

    In addition, the Act requires that notification be filed with the CCI in cases of the combinations within 30 days of the board of directors' approval. The penalty under section 43A of the act, which can reach one percent of total turnover or the assets, whichever is more, is imposed if such a notice is not filed within the allotted period.[6] Additionally, no such combination will be effective until it has received commission approval or 210 days have passed from the notice date, whichever comes first.[7]

    Apart from an adverse effect on the market, there are many other factors that the commission needs to consider every time the notice of establishing a combination is presented, these are:

    • Possibility of a considerable price increase on the market as a result of domination.
    • The size of a market's entry barriers.
    • The degree of vertical integration in the market;
    • The existence or possibility of substitutes; etc.

    In case of an illegal combination, the focus should not only be on its immediate effect in the industry but the focus should also on its future competition conditions. So, it is vital to determine whether such a combination has market power, which will have a negative impact on competition in that specific industry, in order to determine whether it has any influence on competition.

    However, the mandatory requirement has been relaxed in some cases by an amendment in 2019. The 2019 amendment introduced “the green channel route” with the aim to bring easement in business. This route is applicable only to those enterprises or investees who are not engaged or involved in the following:

    • Producing identical goods or services.
    • Any state or level of the business activity.
    • Any level of business activities that are complementary.

    Any enterprise falling under abovesaid classification will be eligible for the relaxation of not waiting for the commission approval, it will be deemed approved after the acknowledgment form is filed. However, if at a later stage, it is found that the said proclamation is incorrect then it will be termed as void.

    Combinations And Their Impact On Competition

    Horizontal combination:

    A horizontal combination takes place when two companies deal in the same industry i.e. rival companies join hands together to have a dominant power in markets. It is the most common type of combination and it may result in an AAEC. These kinds of mergers, usually affect market concentration and enjoy dominance because they amount to a reduction in the number of market competitors and an increase in the share of merged entity.

    An adverse effect of such a merger may happen due to non-coordinated or unilateral actions by the players to merge. That is to say, when the number of players gets reduced as a result of horizontal mergers then they are in a position to increase the profit margins and thus they get the dominant position in the market.

    Moreover, the competition act has listed the arrangement that shall have a negative impact on a correlated industry, these are known as “cartel arrangements”. The four types of cartel arrangements are- price-fixing agreements, market-sharing agreements, big rigging agreements, and agreements between competitors that seek to limit production, supply, or markets. However, if any such arrangement is entered by a joint venture which results in increasing efficiency, then the presumption of AAEC will not arise.

    Vertical combination:

    The second type of combination is a vertical, which takes place when two different enterprises dealing in different production chain comes together. It is a merger of the company and its suppliers. This merger has less chance to cause an AAEC in the markets. A detrimental impact can happen only if there is a potential for “foreclosure of market players”. Otherwise, this kind of merger has a negligible impact on the competition.

    Under the competition act, there is no such presumption of AAEC as far as the regulation of vertical mergers is concerned. Such agreements are subject to detailed examination, and while assessing the effects of abovesaid combination, the CCI may consider the factors prescribed under section 19(3) of the act to examine the effects of the combination in relevant markets.

    Conglomerate combination:

    This third type of combination generally takes place between enterprises that deal in a different industry. Conglomerate combination are of two types:

    • Pure conglomerate combination is when the merging entities have no functional link.
    • Market extension combination is when merged companies desire to go in a new market.

    This arrangement has the least effect on the competition in the market, though it may pose certain threats to competition, such as they may lead to overall industries concentration i.e. enjoying dominance over the various product portfolios in the market. It may also enhance coordinate forbearance behavior which may harm consumers.

    Remedies And Appeals[8]:

    The CCI has the power to propose structural and behavioral modifications, where it assumes that the combinations may likely have AAEC. According to 2018 amendments, parties can offer upfront remedies in phase 1 and accordingly the period of phase 1 review will extend to 15 days.

    In the phase 2 review process, the parties can propose amendments to the amendment suggested by the CCI. If the commission accepts the amendments, then the combination is approved otherwise the time is given to the parties to accept the modification. If such modifications are not accepted by parties then such a combination will be void on the account of having an adverse effect.

    Moreover, the parties have a right to appeal the order of the commission before the NCLAT. Such an appeal can be filed within 60 days of such order. The NCLAT can take time from 6 months to two years.

    Relevant Case Laws:

    Etihad Airways And Jet Airways[9]

    Etihad Airways, a UAE-based airline company, proposed to acquire a 24% equity share of jet Airways, Indian based company. The commission noted that there was at least one rival on each of the 38 routes from/to India that will be included in this transaction. With the exception of seven locations where the parties collectively own more than 50%.

    Therefore, it was held that such a merger will only lead to bettering and expanding service and thereby causing competitiveness in the markets. This was supported by the majority judgement that post-transaction will not significantly affect the competitive dynamics. The minority did note that AAEC would exist in the market for international aviation passenger transportation.

    Wal-Mart And Flipkart [10]

    It was the combination of physical product delivery with digital services. Both parties deal B2B market but this combination will able Walmart to engage in the B2C market. The commission after analyse the deal from both perspectives, held that this combination is unlikely to have any AAEC on the relevant markets.

    SML Isuzu, Isuzu Japan And SumitomO[11]

    SML Isuzu is incorporated under companies act, 1956, it manufacture and sell commercial passenger vehicles. Isuzu japan is incorporated in japan, it provides technical information, assistance, and licenses to SML. Sumitomo is a Japanese company engaged in various activities including the import or export of auto components. According to the notice, Isuzu japan acquired an 11% stake in SML from Sumitomo and thus increased its equity share capital to 15%. The CCI determined that the aforementioned combination is unlikely to have significantly negative effects on the Indian markets after carefully weighing all the relevant information.

    GS Mace & Max India[12]

    A subsidiary of the foreign institutional investor Goldman Sachs with headquarters in Mauritius is called GS Mace. As a result of the subsidiary business acquiring Max India's shares, Max India's Mace equity share capital grew. The commission determined that a 25% share owned by the buyer would not likely have a negative impact on India. Since the commission believed that the aforementioned combination would not negatively impact market competition in light of the updated restrictions, it was allowed as a result.

    Holcim Limited; And Lafarge S.A[13]

    Holcim group is the producer of cement, the group has its presence in India through two indirect subsidiaries - ACC Limited and Ambuja Cements Limited. Lafarge deals in the same sector, it has its two subsidiaries in India i.e. Lafarge India Private Limited and Lafarge Aggregates & Concrete India Private Limited. Shares of Lafarge were acquired by Holicum Group, and as a result, the notice was sent to the CCI.

    The commission noted that while AAEC in eastern regions is expected to result from the proposed merger in the grey cement industry, the combination is not likely to have an impact on competition in the RMC segment in any of the Relevant Markets.

    Considering the likelihood of the aforesaid unfavourable outcome of the proposed combination's impact in relevant Eastern region's market for grey cement, the panel believed that AAEC may eliminated by appropriately changing the combination. Moreover, it's appropriate to suggest divestment as a way to get rid of issues with competitiveness.

    Earlier in India, there was no principal legislation that regulate the combinations and hence give unfettered power to the business holder, which lead to the misuse of the dominant position & hampered competition in the market. Seeing the misuse of power, the CCI introduced the competition act, of 2002 with the aim to bring fair competition to the market. The term combinations include mergers, acquisitions, and amalgamations. Generally, these activities result in an easement of entering into a fresh market and also decrease result of the risk of entering the new industry but sometimes lead a company to a controlling position that could be harmful to industry. Hence, merger control regime became the need of the hour in India. Of all the three types of combination, horizontal mergers have a high chance was causing an appreciable adverse effect on similar markets.

    The Indian merger control legislation is mandatory and suspensory in nature. The act introduced the threshold of the combination on which the provision of the act is mandatory, however, there are some exemptions to these thresholds. The new act set up the regulatory authority to review and assess the M&A deals and approved the one which is improbable to create an AAEC on the competition. Even if after favorable order, it was found that the enterprise has provided wrong information then the commission has all the power to declare such a deal as void.

    The competition (amendment) bill, 2022 has been introduced which proposes some significant changes to the existing law. These new amendments will focus on competition in digital markets, and thus will empower the government with extensive jurisdictional criteria for regulating mergers and acquisitions in the digital economy. These new amendments are in line with Europe regulations. Indeed, such regulations are also needed in digital markets as the competition is increasing in every industry in India, and in order to prevent anti-competitive practices, such legislation is an absolute necessity.

    The author is a student at Faculty of Law, University of Delhi. Views are personal.

    [1] Recent Changes in Merger Control Regime vis-à-vis the Competition Act by Pallavi Mahajan.

    [2] Competition act, 2002, s.5

    [3] ibid

    [4] The competition act,2002, s.2(a)

    [5] Competition act, s.6

    [6] Competition act, s.43A

    [7] Supra note. 5

    [8] India Merger Control by Avantika Kakkar and Vijay Pratap Singh Chauhan.

    [9] CCI order 12TH November, 2013

    [10] CCI order 4th May, 2016

    [11] CCI order on 2nd February, 2012

    [12] C-L2011/12/03

    [13] CCI order on 7th September 2016.

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