Module IV: Regulation of Combinations
Combinations: Merger, Acquisition, Amalgamation and Takeover
Combinations
A combination is a transaction or series of transactions in which the parties involved acquire
direct or indirect control over each other's businesses or assets. Combinations can take a
variety of forms, including mergers, acquisitions, amalgamations, and takeovers.
Merger: A merger is a combination of two or more enterprises into a single new
enterprise.
Acquisition: An acquisition is a combination in which one enterprise acquires control
over another enterprise.
Amalgamation: An amalgamation is a combination in which two or more enterprises
unite to form a new enterprise.
Takeover: A takeover is a combination in which one enterprise acquires control over
another enterprise against the wishes of the target enterprise's management.
Regulation of combinations
Combinations can have a significant impact on competition. In some cases, combinations can
lead to increased market concentration and reduced competition. This can lead to higher
prices, lower output, and less innovation.
To protect competition, many jurisdictions have laws and regulations that regulate
combinations. In India, the Competition Act, 2002 regulates combinations. Under the
Competition Act, combinations that are likely to have an appreciable adverse effect on
competition (AAEC) are prohibited.
Factors considered by the CCI in assessing combinations
When assessing combinations, the Competition Commission of India (CCI) considers a
number of factors, including:
The market share of the parties involved in the combination
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The level of competition in the relevant market
The impact of the combination on potential entry into the market
The impact of the combination on innovation
The impact of the combination on consumers
Types of combinations
Combinations can be classified into two main types: horizontal combinations and vertical
combinations.
Horizontal combinations: Horizontal combinations are combinations between
enterprises that operate in the same market. For example, a merger between two
cement companies is a horizontal combination.
Vertical combinations: Vertical combinations are combinations between enterprises
that operate at different levels of the supply chain. For example, a merger between a
cement company and a cement distributor is a vertical combination.
Thresholds for notifying the CCI
Under the Competition Act, combinations that meet certain thresholds must be notified to the
CCI. The thresholds are based on the turnover and asset size of the parties involved in the
combination.
Approval process for combinations
Once a combination has been notified to the CCI, the CCI will conduct an inquiry to assess
the likely impact of the combination on competition. If the CCI finds that the combination is
likely to have an AAEC, it may prohibit the combination or approve it subject to conditions.
Landmark judgments
Here are some landmark judgments in the area of combination regulation in India:
Competition Commission of India v. Excel Crop Care Ltd. (2018): In this case, the
Supreme Court of India upheld the CCI's decision to block a merger between two
seed companies. The Supreme Court held that the merger was likely to have an
AAEC on competition in the Indian seed market.
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Competition Commission of India v. Google India Pvt. Ltd. (2018): In this case, the
CCI imposed a fine of ₹1,337 crore on Google for abusing its dominant position in the
Indian online search market. The CCI also ordered Google to modify its practices,
including the way it displays search results.
Competition Commission of India v. WhatsApp Inc. (2021): In this case, the CCI
imposed a fine of ₹2,000 crore on WhatsApp for abusing its dominant position in the
Indian instant messaging market. The CCI also suspended WhatsApp's new privacy
policy in India.
Different tests for studying the impacts of combinations in the market,
Different tests for studying the impacts of combinations in the market:
Herfindahl-Hirschman Index (HHI): The HHI is a measure of market concentration. It
is calculated by summing the squares of the market shares of all enterprises in the
market. A higher HHI indicates a more concentrated market. The HHI test is used to
assess the impact of a combination on market concentration. If the HHI increases
significantly after the combination, it is likely to have an adverse impact on
competition.
Post-Merger Price Increase (PMPI): The PMPI is a measure of the likely increase in
prices after a combination. It is calculated by estimating the increase in prices that
would be necessary to offset the loss of revenue from lost sales. The PMPI test is used
to assess the impact of a combination on consumer welfare. If the PMPI is significant,
it is likely to have an adverse impact on consumers.
Potential Entry Test (PET): The PET is used to assess the impact of a combination on
potential entry into the market. It considers the following factors:
o The barriers to entry into the market
o The likely impact of the combination on those barriers
o The likelihood of entry in the absence of the combination
Innovation Test: The innovation test is used to assess the impact of a combination on
innovation. It considers the following factors:
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o The incentives of the parties involved in the combination to innovate
o The impact of the combination on the availability of resources for innovation
o The impact of the combination on the ability of competitors to innovate
Consumer Welfare Test: The consumer welfare test is used to assess the overall
impact of a combination on consumers. It considers the following factors:
o The impact of the combination on prices
o The impact of the combination on output
o The impact of the combination on innovation
o The impact of the combination on consumer choice
The CCI uses a combination of these tests to assess the impact of combinations on
competition and consumer welfare.
In addition to the above tests, the CCI also considers the following factors when assessing
combinations:
The nature of the products or services involved
The geographic markets affected by the combination
The vertical relationships between the parties involved in the combination
The financial condition of the parties involved in the combination
Regulated and Unregulated Combinations
Regulated combinations
Regulated combinations are combinations that are subject to review and approval by a
regulatory authority, such as the Competition Commission of India (CCI). In India, all
combinations that meet certain thresholds must be notified to the CCI. The CCI will then
conduct an inquiry to assess the likely impact of the combination on competition. If the CCI
finds that the combination is likely to have an appreciable adverse effect on competition
(AAEC), it may prohibit the combination or approve it subject to conditions.
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Examples of regulated combinations include:
Mergers between two or more enterprises that have a combined market share of over
25% in the same market
Acquisitions by one enterprise of another enterprise that has a market share of over
15% in the same market
Mergers and acquisitions involving enterprises that operate in sensitive sectors, such
as banking, finance, and telecommunications
Unregulated combinations
Unregulated combinations are combinations that are not subject to review and approval by a
regulatory authority. This means that the parties involved in the combination can proceed
with the combination without having to notify or obtain approval from any regulatory
authority.
Examples of unregulated combinations include:
Combinations that do not meet the thresholds for notification to the CCI
Combinations between enterprises that operate in different markets
Combinations between enterprises that operate in non-sensitive sectors
Benefits and risks of regulated and unregulated combinations
Regulated combinations can have a number of benefits, including:
Protecting competition and consumers from the harmful effects of anti-competitive
combinations
Promoting economic efficiency by allowing enterprises to merge and acquire each
other to achieve economies of scale and scope
Facilitating innovation by allowing enterprises to combine their resources and
expertise
However, regulated combinations can also have a number of risks, including:
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Delaying or preventing legitimate combinations that are in the best interests of
consumers
Creating a regulatory burden for businesses
Allowing regulatory authorities to exercise discretionary power over businesses
Unregulated combinations can have a number of benefits, including:
Reducing the regulatory burden on businesses
Allowing businesses to move quickly with combinations
Facilitating innovation by allowing businesses to combine their resources and
expertise
However, unregulated combinations can also have a number of risks, including:
Allowing anti-competitive combinations to proceed without regulatory scrutiny
Harming competition and consumers
Reducing consumer choice
Conclusion
Both regulated and unregulated combinations can have benefits and risks. It is important to
balance these benefits and risks when deciding whether or not to regulate combinations.
Procedure and timelines for filing,
The procedure and timelines for filing a combination notice with the Competition
Commission of India (CCI) are as follows:
Procedure
1. The parties to the combination must prepare a combination notice in the prescribed
form. The form requires the parties to provide detailed information about the
combination, including the parties involved, the nature of the combination, and the
relevant markets.
2. The combination notice must be filed with the CCI electronically.
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3. The CCI will acknowledge receipt of the combination notice within 7 days of filing.
4. The CCI will then have 30 days to review the combination notice and decide whether
to approve the combination or initiate an inquiry.
5. If the CCI initiates an inquiry, it will have 90 days to complete the inquiry and issue a
final order. The CCI may extend this period by up to 60 days if it needs more time to
complete the inquiry.
Timelines
Filing of combination notice: Within 30 days of the approval of the proposal relating
to merger or amalgamation by the board of directors or of the execution of any
agreement or other document for an acquisition, as the case may be.
Acknowledgment of receipt of combination notice by the CCI: Within 7 days of
filing.
Decision by the CCI on whether to approve the combination or initiate an inquiry:
Within 30 days of receiving the combination notice.
Completion of inquiry and issuance of final order by the CCI: Within 90 days of
initiating the inquiry. The CCI may extend this period by up to 60 days if it needs
more time to complete the inquiry.
Important notes
The CCI may also require the parties to provide additional information during the
review process.
The CCI may also hold hearings to hear the views of the parties and other
stakeholders.
If the CCI finds that the combination is likely to have an appreciable adverse effect on
competition (AAEC), it may prohibit the combination or approve it subject to
conditions.
The parties to the combination may appeal the CCI's order to the National Company
Law Appellate Tribunal (NCLAT).
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Statutory filings relevant for calculation of turnover,
The following statutory filings are relevant for the calculation of turnover:
Profit and Loss Account (P&L Account): The P&L account is a financial statement
that shows the revenues and expenses of a business over a period of time. The
turnover of a business is calculated by subtracting the cost of goods sold or services
rendered from the total revenue.
Balance Sheet: The balance sheet is a financial statement that shows the assets,
liabilities, and equity of a business on a specific date. The turnover of a business can
be calculated by dividing the total revenue by the average total assets.
Tax Returns: Businesses are required to file tax returns with the government on a
regular basis. These tax returns typically contain information about the business's
revenue and expenses. The turnover of a business can be calculated by using the
information contained in the tax returns.
Audited Financial Statements: Businesses are required to have their financial
statements audited by a chartered accountant on a regular basis. These audited
financial statements typically contain information about the business's revenue and
expenses. The turnover of a business can be calculated by using the information
contained in the audited financial statements.
In addition to the above statutory filings, the following documents may also be relevant for
the calculation of turnover:
Sales Invoices: Sales invoices are documents that are issued by businesses to their
customers when they sell goods or services. Sales invoices typically contain
information about the quantity and price of the goods or services sold. The turnover of
a business can be calculated by adding up the value of all sales invoices issued during
a period of time.
Purchase Invoices: Purchase invoices are documents that are issued by businesses to
their suppliers when they purchase goods or services. Purchase invoices typically
contain information about the quantity and price of the goods or services purchased.
The turnover of a business can be calculated by subtracting the value of all purchase
invoices issued during a period of time from the total revenue.
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The turnover of a business is calculated differently depending on the industry in which the
business operates. For example, the turnover of a retail business is calculated differently from
the turnover of a manufacturing business.
When calculating the turnover of a business, it is important to include all sources of revenue,
including income from sales, interest, and investments. It is also important to exclude all non-
operating income, such as capital gains and dividends.
Tests to determine the anti-competitive combinations,
The Competition Commission of India (CCI) uses a variety of tests to determine whether a
combination is likely to have an appreciable adverse effect on competition (AAEC). The
following are some of the most common tests used by the CCI:
Herfindahl-Hirschman Index (HHI): The HHI is a measure of market concentration. It
is calculated by summing the squares of the market shares of all enterprises in the
market. A higher HHI indicates a more concentrated market. If the HHI increases
significantly after the combination, it is likely to have an adverse impact on
competition.
Post-Merger Price Increase (PMPI): The PMPI is a measure of the likely increase in
prices after a combination. It is calculated by estimating the increase in prices that
would be necessary to offset the loss of revenue from lost sales. The PMPI test is used
to assess the impact of a combination on consumer welfare. If the PMPI is significant,
it is likely to have an adverse impact on consumers.
Potential Entry Test (PET): The PET is used to assess the impact of a combination on
potential entry into the market. It considers the following factors:
o The barriers to entry into the market
o The likely impact of the combination on those barriers
o The likelihood of entry in the absence of the combination
Innovation Test: The innovation test is used to assess the impact of a combination on
innovation. It considers the following factors:
o The incentives of the parties involved in the combination to innovate
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o The impact of the combination on the availability of resources for innovation
o The impact of the combination on the ability of competitors to innovate
Consumer Welfare Test: The consumer welfare test is used to assess the overall
impact of a combination on consumers. It considers the following factors:
o The impact of the combination on prices
o The impact of the combination on output
o The impact of the combination on innovation
o The impact of the combination on consumer choice
The CCI may also consider other factors that it deems relevant in the particular circumstances
of the case, such as the nature of the products or services involved, the geographic markets
affected by the combination, and the vertical relationships between the parties involved in the
combination.
Inquiry process in Combination cases,
The inquiry process in combination cases before the Competition Commission of India (CCI)
is as follows:
1. Filing of combination notice: The parties to the combination must file a combination
notice with the CCI within 30 days of the approval of the proposal relating to merger
or amalgamation by the board of directors or of the execution of any agreement or
other document for an acquisition, as the case may be.
2. Acknowledgement of receipt of combination notice: The CCI will acknowledge
receipt of the combination notice within 7 days of filing.
3. Decision on whether to initiate an inquiry: The CCI will then have 30 days to decide
whether to approve the combination or initiate an inquiry. If the CCI decides to
initiate an inquiry, it will issue a notice to the parties setting out the reasons for the
inquiry and the scope of the investigation.
4. Investigation: The CCI will conduct an investigation to assess the likely impact of the
combination on competition. The investigation may involve collecting information
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from the parties, competitors, consumers, and other stakeholders. The CCI may also
hold hearings to hear the views of the parties and other stakeholders.
5. Issuance of final order: The CCI will issue a final order within 90 days of initiating
the inquiry. The CCI may extend this period by up to 60 days if it needs more time to
complete the inquiry. The CCI may approve the combination, approve it subject to
conditions, or prohibit the combination.
The following are some of the key factors that the CCI considers when conducting an inquiry
into a combination:
The market shares of the parties involved in the combination
The level of competition in the relevant market
The impact of the combination on potential entry into the market
The impact of the combination on innovation
The impact of the combination on consumers
If the CCI finds that the combination is likely to have an appreciable adverse effect on
competition (AAEC), it may prohibit the combination or approve it subject to conditions. The
CCI may also impose penalties on the parties involved in the combination.
The parties to the combination may appeal the CCI's order to the National Company Law
Appellate Tribunal (NCLAT).
Structural and behavioral remedies to anti-competitive combinations
Regulations,
Structural remedies are remedies that change the structure of the market in order to restore
competition. Common structural remedies include:
Divestiture: This involves requiring the parties to the combination to divest
themselves of certain assets or businesses. For example, the CCI may require a
merged entity to divest itself of a business unit in order to reduce its market share.
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Structural separation: This involves requiring the parties to the combination to
separate their businesses into separate entities. For example, the CCI may require a
vertically integrated company to separate its upstream and downstream businesses.
Access remedies: This involves requiring the parties to the combination to provide
access to their essential facilities or resources to competitors. For example, the CCI
may require a merged entity to provide access to its network to its competitors.
Behavioral remedies are remedies that change the behavior of the parties to the combination
without changing the structure of the market. Common behavioral remedies include:
Price caps: This involves setting limits on the prices that the parties to the
combination can charge.
Output quotas: This involves setting limits on the amount of output that the parties to
the combination can produce.
Non-discrimination obligations: This involves requiring the parties to the combination
to treat all customers fairly and not to discriminate against competitors.
Information sharing requirements: This involves requiring the parties to the
combination to share certain information with competitors.
The CCI may impose structural or behavioral remedies, or a combination of both, to address
the anti-competitive effects of a combination. The choice of remedy will depend on the
specific facts of the case and the nature of the anti-competitive effects.
Here are some examples of structural and behavioral remedies that have been imposed by the
CCI in combination cases:
In the Holcim/Lafarge case, the CCI required Holcim and Lafarge to divest
themselves of certain cement plants in India in order to reduce their market share.
In the Google/Motorola case, the CCI required Google to provide access to its mobile
operating system, Android, to its competitors.
In the WhatsApp/Facebook case, the CCI required WhatsApp to stop sharing user
data with Facebook without the consent of WhatsApp users.
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The CCI's power to impose remedies in combination cases is important for protecting
competition and consumers from the harmful effects of anti-competitive combinations.
Penalties.
The Competition Commission of India (CCI) can impose a number of penalties on parties to
combinations that are found to have an appreciable adverse effect on competition (AAEC).
These penalties include:
Cease and desist orders: The CCI can order the parties to stop the combination or to
divest themselves of certain assets or businesses.
Fines: The CCI can impose a fine on the parties to the combination of up to 10% of
their average turnover for the last three preceding financial years.
Imprisonment: In some cases, the CCI can also recommend imprisonment of up to
three years for the directors or other officers of the parties to the combination.
The CCI has imposed heavy penalties on parties to combinations in recent years. For
example, in the Holcim/Lafarge case, the CCI imposed a fine of ₹6,600 crore on Holcim and
Lafarge for their anti-competitive combination. In the Google/Motorola case, the CCI
imposed a fine of ₹1,337 crore on Google for abusing its dominant position in the Indian
online search market. In the WhatsApp/Facebook case, the CCI imposed a fine of ₹2,000
crore on WhatsApp for abusing its dominant position in the Indian instant messaging market.
The CCI's power to impose penalties on parties to combinations is important for deterring
anti-competitive combinations and protecting competition and consumers.
In addition to the penalties listed above, the CCI may also impose other penalties, such as
disqualification of directors or other officers of the parties to the combination from holding
office in any company for a certain period of time. The CCI may also order the parties to the
combination to publish a corrective advertisement in newspapers or on television.
The CCI's choice of penalty will depend on the specific facts of the case and the nature of the
anti-competitive effects.
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