TREATMENT OF
COMBINATIONS
(UNDER COMPETITION ACT, 2002)
State Level Seminar
On
Competition Policy and Law
9th January, 2009
KOLKATA
By
AUGUSTINE PETER
ECONOMIC ADVISER
Competition Commission of India
Tel: 011 26701681: Fax: 011 26107131: email [email protected]
@Augustine Peter
DUTIES OF COMPETITION
COMMISSION
Competition Act,2002 notified in Gazette in
January, 2003. Preambles stated objective is to
establish the Commission which has the duty to:
Eliminate practices having adverse effect on
competition;
Promote and sustain competition
Protect consumers interests
Ensure freedom of trade carried on by other
participants in markets, in India
[Section 18]
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MAIN FEATURES OF
COMPETITION ACT
With the above objective, the Act:
Prohibits Anti-Competitive
Agreements.
Prohibits Abuse of Dominant
Position.
Provides for Regulation of
Combinations, and
Enjoins Competition Advocacy
[Sections 3, 4, 5, 6 and 49(3)]
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COMBINATIONS
(MERGERS +) (Sec 5, 6)
Combination covers
Merger & Amalgamation
Acquisition
Acquiring control
Any combination which causes or is
likely to cause appreciable adverse
effect on competition (AAEC) in
markets in india is void
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WHY REGULATE MERGERS? - 1
I. Mergers are likely to have adverse effect on
competition
- Unilateral effects: Due to increase in market power of the
merged entity. Higher concentration is associated with higher
market power, which enables post-merger prices to move up,
in spite of efficiency gains of merger.
A merger may be profitable even in the absence of
efficiency gains
Coordinated effects: Merger may raise the prospects
of coordinated effects arising in which a reduction in the
number of industry participants increases the threat of tacit
coordination
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WHY REGULATE MERGERS ? - 2
II. Avoid Heavy Social Cost
Easier to deal with proposed merger than to
post facto control market power or collusion
De-merger could have high social and economic
costs
Collusive enterprises could escape punishment
by resorting to merger, thereby defeating
purpose of law
Mergers then would have to be dealt with as
agreements under Sec. 3
For such reasons older jurisdictions like USA &
EU introduced merger regulations
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WHY REGULATE MERGERS? - 3
III. Market power from merger not same as that
gained through fair competition /sheer
efficiency in operation. Sec 4 does not suffice
-
Merger involves willful acquisition of market power as
distinct from growth or development on account of
superior product, business acumen or historical
accident ( la dominance)
When two enterprises combine to increase their
profitability the source of profitability may be
increased market power and not increased
efficiency
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WHY REGULATE MERGERS? - 4
IV. Conglomerate mergers can harm competition
through agreement to remove potential
competitors
Conglomerate mergers in neighbouring markets (markets
for substitutes or complements) results in leveraging
problems like:
Tying
Pure bundling
Fore
- closure
Financial leverage and predation (in imperfect financial
markets)
Market extension/ product extension mergers
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WHY REGULATE MERGERS? - 5
V.
While horizontal merger works through higher
market power, vertical mergers give rise to market
fore-closure
For example, depriving rival producer of a distribution
network if a producer merges with a retail chain (Case of
vertical integration)
Or foreclosure of a share of the market otherwise open to
competitors e.g. the acquisition of ready mixed concrete
firms by cement suppliers was said to foreclose the
market for cement to non-integrated cement suppliers
Or by raising rivals costs, through:
> Input fore-closure; or
> Customer fore-closure
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WHY REGULATE MERGERS? - 6
VI. Anti-competitive issues raised by vertical
mergers are similar to exclusive dealing
Vertical Merger: Anti-competitive theories:
- Vertical mergers may put potential competition
at a disadvantage by raising the cost of entry
(entry deterrence)
- A vertical merger may put existing
competitors at a disadvantage by raising
their costs (Raising rivals costs) (e.g. by
locking up rivals necessary inputs)
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WHY REGULATE MERGERS? - 7
Vertical Merger: Potential Competition Theory
Harm to consumers by removing a potential entrant.
This can affect competition and consumer welfare in
two ways:
Potential competition would have put pressure
on the incumbent(s), reducing their market
power, benefiting
Actual entry at a later stage would bring
more competition in the market (Benefits to
consumers in the future: Can be estimated in the
form of present value)
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COMBINATIONS
THRESHOLD LEVELS
Assets
India
No Group Rs. 1000 cr
Rs. 3000 cr
Rs. 4000 cr
Rs. 12000 cr
Group
Assets
Total
In India
and
Outside
India
Turn over
Turn over
Total
In India
No Group
US $ 500 ml
In India
US $ 1500 ml -
Rs. 500 cr
Group
US $ 2000 ml
Rs. 1500 cr
US$ 6000 ml
Rs. 500 cr
@Augustine Peter
Rs. 1500 cr
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COMBINATIONS
APPRECIABLE ADVERSE EFFECT
While determining whether a combination has
appreciable adverse effect on competition in the relevant
market Commission shall have due regard for all or any
of the following factors:
- Actual and potential level of competition through
imports
- Extent of barriers to entry into the market
- Level of concentration in the market (HHI, CR)
- Degree or countervailing power in the market
- Likelihood of post combination price/profit
increase
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COMBINATIONS
APPRECIABLE ADVERSE EFFECT (Contd.)
- Extent of effective competition in the market post combination
- Removal of vigourous and effective competitor
from the market
- Nature and extent of vertical integration in the
market
- Possibility of failing business
- Nature and extent of innovation
- Contribution to economic development
- Whether the benefit of combination outweigh
adverse effect of combination
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ISSUES IN COMBINATION REGULATION
MANDATORY NOTIFICATION
-
Mandatory notification is the norm internationally.
Only 8 out of the 106 jurisdictions have voluntary
notification
Voluntary system results in uncertainty and
is costly for enterprises in long run.
Cost of such unscramling would be enormous
for the merging parties, the economy
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ISSUES IN COMBINATION REGULATION
TIME PERIOD FOR CLEARANCE
-
Outer time limit of 210 days for CCI to clear
combination notifications as per the Act
This would be reserved for cases where prima facie
competition angle exist (10
- 15 % of cases)
CCI regulation of combinations will have time
lines for clearance of cases with no prima
facie completion angle. Such cases would be
cleared in < 30-60 days (Deemed approval)
Time limit of 210 days compares well with
mature jurisdictions like EU, Japan and with
South Africa, China etc.
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ISSUES IN COMBINATION REGULATION
OTHER ISSUES & DEFINITIONS
Domestic nexus to exclude cross border
combinations having no AAEC in India
Indian threshold for notification and
coverage under combination regulation
among highest in the world
Draft regulations address the issue of
minimum threshold for transaction size
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DEFINITIONS
COMBINATION
Acquisition of control, shares, voting rights
or assets (s 5(a))
Acquiring of control already having
direct or indirect control over another
enterprise in identical or substitutable
goods/services (s 5(b))
Merger or amalgamation (s 5(c))
@Augustine Peter
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DEFINITIONS
ACQUISITION
Means, directly or indirectly, acquiring or
agreeing to acquire
Shares, voting rights or assets of an
enterprise; or
Control over management or control over
assets of any enterprise; (s 2(a))
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DEFINITIONS
CONTROL
Inclusive definition
Control includes controlling the affairs or
management by
one or more enterprises, either jointly or
singly, over another enterprise or group
one or more groups, either jointly or singly,
over another group or enterprise
(Expln (a) to s 5)
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DEFINITIONS
GROUP
Group means two or more enterprises
which, directly or indirectly, are in position
to:
exercise 26% or more of voting rights in other
enterprise or
appoint more than 50% of members of the
board of directors in the other enterprise
control the management or affairs of the
other enterprise
(Expln (b) to s 5)
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DEFINITIONS
VALUE OF ASSETS
By taking book value of the assets shown in
audited books of accounts in the
immediately preceding financial year (FY),
w.r.t. FY of date of merger
And Adjusted for depreciation
Value of assets to include
Intangibles - brand value, goodwill, copyright,
patent, registered trade mark or similar other
commercial rights
(Explan. (c) to s 5)
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CONSEQUENCES OF NOT
NOTIFYING
Failure to notify a combination will attract
penalty, which may extend to one
percent of the total turnover or of the
assets, whichever is higher, of such a
combination (s 43A)
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SUSPENSE REGIME
Waiting period of 210 days before
consummation of combination (s 6 (2A))
Combination coming into effect, before 210
days, unless having approval of the
Commission by then, is void
Deemed approval, if no order of Commission
up to 210 days (s 31(11))
Through regulation, Commission can fix lower
time limits within the overall limit of 210 days
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TIME CAPS FOR REVIEW ELSEWHERE
COUNTRY
STAGE ONE
STAGE TWO
EU
25-35 W days
90-125 W days (35+125=160 W days or 224 days in
the least)
France
5-8 weeks
Additional 4 months. Further extended by 4 more
weeks (thus 5 Months in total)
Spain
1 month
7 months
Singapore
30 W days
120 W days (30+120=150 W days)
China
30 W days
90-150 W days
Mexico
40 C days
145 (in complex cases)
Japan
30 C days
120 C days (more if information is late)
USA
30/15 C days
-----
Germany
1 month
3 months (1+3= 4 months)
India
30 c days (draft
regulations)
210 C days (150 w days)
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THANK YOU
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