COMBINATIONS AND THEIR REGULATION UNDER INDIAN COMPETITION LAW

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Abstract:

The Competition Act, 2002 was passed by the Parliament of India with the objective of regulating modern trade practices that result in an adverse effect on the competition in the market. Combinations could lead to an appreciable adverse effect on competition in the relevant market in India and hence are required to be regulated. Under the meaning of the Competition Act, 2002 a combination refers to an acquisition, merger or amalgamation that exceed certain thresholds as provided under the Act. Section 5 of the Competition Act deals with the definition of a combination while Section 6 read with Section 29, Section 30 and Section 31 of the Act prescribe the procedure for regulation of combinations. This article describes combinations and delves into the regulation of such combinations by the Competition Commission of India.

Keywords:

Combination; Competition; Competition Act; Enterprise, Relevant Market

  1.  INTRODUCTION:

Healthy competition in the market is an indicator of a vibrant economy. Competition allows enterprises to increase their work efficiency alongside providing consumers numerous choices for a product. A competitive market often leads to the rise in innovation and technology and thereby results in the improvement of quality of the products available in the market. Under its globalized economic policy introduced in 1991, India had opened up its economy to the world and as a result the Indian companies now faced competition from its foreign counterparts as well. Hence, there arose a need for a flexible legislation accommodating modern competitive and trade practises. The Competition Act, 2002 was passed by the Parliament of India with the objective of regulating modern trade practices that result in an adverse effect on the competition in the market. The Competition Act, 2002 had replaced the outdated Monopolies and Restrictive Trade Practices Act, 1969 with the aim of promoting and sustaining competition in the markets, protecting the interests of the consumers and ensuring the freedom of trade carried on by other participants in the market. The Act also contains provisions for the establishment of the Competition Commission of India which ensures the prevention of practices having an appreciable adverse effect on competition. The provisions of the Act that deal with the regulation of combinations have been brought into effect from June 1, 2011.[1]

  1. COMBINATIONS:

Under the meaning of the Competition Act, 2002 a combination refers to the direct or indirect acquisition of the shares, voting rights or assets or the control over management or control over assets of one or more enterprises by one or more persons, or, a merger or amalgamation between enterprises, when the combining enterprises jointly exceed certain thresholds set under Section 5 of the Act. Thus a merger or amalgamation or an acquisition would be categorized as a combination only in case where such merger/amalgamation or acquisition exceeds the financial thresholds contained in Section 5 of the Competition Act, 2002 and such combinations would be subject to regulations provided in Section 6 of the Act. The financial thresholds contained in Section 5 are in terms of the joint value of assets or the turnover of the combining enterprises.

The Government of India regulates combinations to ensure that there exists healthy competition in the market. Any combination that causes an adverse appreciable effect in the relevant market are deemed to be void under the Competition Act, 2002. If such mergers/amalgamations or acquisitions are not kept under check, the large scale enterprises would often take over the small case enterprises and prevent competition in the market. Further if such practices are left unchecked, it shall result in the concentration of wealth in specific sectors of the economy which shall hamper the economic vision of the country in line with the economic policies of the Government of India.

  1. TYPES OF COMBINATIONS:

Combinations can be categorized into three types – Horizontal Combinations, Vertical Combinations and Conglomerate Combinations.

  1. Horizontal Combinations –

Horizontal Combinations refer to combinations where the combining enterprises are competitors having an identical level of production process and produce substitute goods. These are friendly combinations between enterprises dealing with the production of substitute goods. Such combinations are beneficial for the combined enterprise as it reduces the competition in the market, improve the market share of the product manufactured and result in performance growth and business gains. However, horizontal combinations often lead to monopolistic tendencies in the market. The combined businesses tend to increase their cost margins by reducing their personnel leading to large scale unemployment, and the reduced competition in the market often leads to higher pricing of products by the enterprises having dominant position in the market causing problems to the consumers.

  • Vertical Combinations –

Vertical Combinations refer to combinations where the combining enterprises are engaged in different levels of the manufacture and production process and such enterprises unite into an interacting whole. Such combinations improve the efficiency and effectiveness of the production process, increase the combination’s competitiveness in the market and also result in reduction in cost of production of the product as there is restructuring of the production and supply chain of the product.

  • Conglomerate Combinations –

Conglomerate Combinations refers to the combination of enterprises that are engaged in business markets that are completely unrelated to one another. Such combinations take place when two enterprises providing different products in varying sectors of business are integrated together. Conglomerate combinations occur when enterprises seek to gain a stronger position in varying markets and improve their profit margins, which is unlikely to happen if they do not combine. Conglomerate merges can lead to ascend in “market share, synergy and cross selling”.[2] Conglomerate combinations often result in the monopolization of an enterprise in various markets and might result in a loss of quality of the product produced.

  1. THRESHOLDS FOR COMBINATIONS:

The financial thresholds for combinations set by Section 5 of the Competition Act, 2002 are for the purpose of regulating such large scale mergers and acquisitions in the country. The current thresholds as revised by the Government of India are stated below[3]:

  1. In case of acquisitions:

The parties to the acquisition should jointly have –

  • In India, assets of value of more than Rs.2000 crores or turnover of more than Rs.6000 crores, or
  • Worldwide with India leg, assets of aggregate value of more than $1 billion with at least Rs.1000 crores in India or turnover more than $3 billion including at least Rs.3000 crores in India.
  • In case of acquisition by a group:

For the purposes of Section 5 of the Competition Act, 2002, the term “group” means two or more enterprises which, directly or indirectly, in a position to exercise 26% or more of the voting rights in the other enterprise, or, are able to appoint more than 50% of the members of the board of directors in the other enterprise, or, they control the management or affairs of the other enterprise.

Where the enterprise whose control, shares, assets or voting rights are being acquired, would after acquisition belong to a group, it should jointly have –

  • In India, assets of value of more than Rs.8000 crores or turnover of more than Rs.24,000 crores, or
  • Worldwide with India leg, assets of aggregate value of more than $4 billion with at least Rs.1000 crores in India or turnover more than $12 billion including at least Rs.3000 crores in India.
  • In case of acquisition by a person having control over another enterprise:

The term ‘control’ for the purposes of Section 5 of the Competition Act includes – 

  1. controlling the affairs or management of an enterprise by one or more enterprises either jointly or singly of another enterprise or group; or
  2. controlling the affairs or management of an enterprise by one or more groups either jointly or singly of another group or enterprise.

Where a person acquires control over an enterprise while he, directly or indirectly, already exercises control over another enterprise, the two enterprises jointly should have:

  • In India, assets of value of more than Rs.2000 crores or turnover of more than Rs.6000 crores, or
  • Worldwide with India leg, assets of aggregate value of more than $1 billion with at least Rs.1000 crores in India or turnover more than $3 billion including at least Rs.3000 crores in India.

In case of group acquisition by a person, after acquisition the group should have –

  • In India, assets of value of more than Rs.8000 crores or turnover of more than Rs.24,000 crores, or
  • Worldwide with India leg, assets of aggregate value of more than $4 billion with at least Rs.1000 crores in India or turnover more than $12 billion including at least Rs.3000 crores in India.
  • In case of merger or amalgamation:

The enterprise created as a result of a merger or amalgamation should have:

  • In India, assets of value of more than Rs.2000 crores or turnover of more than Rs.6000 crores, or
  • Worldwide with India leg, assets of aggregate value of more than $1 billion with at least Rs.1000 crores in India or turnover more than $3 billion including at least Rs.3000 crores in India.

The group to which the enterprise resulting from the merger or amalgamation would belong, should have:

  • In India, assets of value of more than Rs.8000 crores or turnover of more than Rs.24,000 crores, or
  • Worldwide with India leg, assets of aggregate value of more than $4 billion with at least Rs.1000 crores in India or turnover more than $12 billion including at least Rs.3000 crores in India.

The value of assets has to be determined by taking the book value of the assets as presented in the audited books of account of the enterprise in the financial year which is immediately before the financial year in which the date of the proposed merger falls.  Also, the reduction in value of the assets due to depreciation has to be taken into account. Brand value, value of goodwill, or value of copyright, patent, permitted use, collective mark, registered proprietor, registered trademark, registered user, homonymous geographical indication, geographical indications, design or layout-design or similar commercial rights , if any, referred to in sub-section (5) of Section 3 of the Competition Act, 2002 have to be included in the value of assets.

  • REGULATION OF COMBINATIONS

Once any merger, amalgamation or any merger has been categorized as a combination, it has to follow the regulations provided in Section 6 of the Competition Act, 2002. Section 6(1) prohibits the formation of combinations that are likely to have an appreciable adverse effect on competition in the relevant market in India and further declares that such combinations should be deemed void. Now subject to the prohibition laid down in Section 6(1) of the Competition Act, if any person or enterprise wishes to form a combination, formation of a combination is possible with the approval of the Competition Commission India.  The following procedure is required to be followed before the Competition Commission of India passes an order of approval or rejection with respect to the proposed combination:

  1. Submission of Notice to CCI

As per Section 6(2) of the Competition Act, any person or enterprise who proposes to enter into a combination has to mandatorily provide a notice to the Commission. The notice has to in the format prescribed and it should be accompanied by the prescribed fee and such notice has to disclose all the information of the proposed combination. The notice has to be given to the Commission within thirty days of receiving approval from the board of directors of any enterprise seeking to enter into a merger or amalgamation, or within thirty days of execution of any agreement or other document for the acquisition of any enterprise or for acquiring the control of any enterprise. However, no combination can come into effect unless 210 days have passed from the date on which the Commission had received notice from the enterprise under Section 6(2), or the date on which the Commission has passed any order on the combination under Section 31 of the Competition Act (which deals with orders of the Competition Commission of India on combinations), whichever comes earlier.

  • Disposal of Notice by CCI

Upon receiving the notice under Section 6(2), the Commission will examine the notice and form a prima facie opinion on whether the proposed combination is likely to, or has caused an appreciable adverse effect on competition in the relevant market. It the Commission is of the prima facie opinion that the combination is likely to, or has caused an appreciable adverse effect on competition in the relevant market, it will investigate the combination under the investigation procedures provided in Section 29 of the Competition Act.

  • Passing of order by CCI

The powers to issue orders on combinations have been provided to the Competition Commission of India under Section 31 of the Competition Act. After investigation has taken place, if the Commission is of the opinion that any combination does not, or is not likely to have an appreciable adverse effect on competition, it shall by order approve the combination in respect of which notice was given to the Commission under Section 6(2).

On the other hand, after investigation, if the Commission is of the opinion that the combination has, or is likely to have an appreciable adverse effect on competition in the relevant market, the Commission will direct that the combination shall not come into effect and such combination will be deemed void. However, if the Commission is of the opinion that the combination has, or is likely to have, an appreciable adverse effect on competition but such adverse effect could be removed by making certain modifications to the proposed combination, it might propose appropriate modifications to the combination and to the parties to such combination. The parties to the combination who accept such modifications as proposed by the Commission, have to make such modification within the time specified by the Commission. If the parties to the combination, who have accepted the modification fail to carry out the modification within the specified time, such combination shall be deemed to have an appreciable adverse effect on competition in the relevant market.

In case the parties to the combination refuse to accept the modifications proposed by the Commission such parties can, within thirty working days of the modification proposed by the Commission, submit amendments to the modifications proposed by the Commission. If the Commission is satisfied with the amendments submitted by the parties it will approve the combination by making an order. However, if the Commission does not accept the amendments proposed by the parties to combination, then the parties are allowed a further period of thirty working days within which such parties will have to accept the modifications initially proposed by the Commission If the parties still fail to accept the modification proposed by the Commission, the combination shall be deemed to have an appreciable adverse effect on competition.

 If the Commission has ordered a combination to be void, the acquisition or acquiring of control or merger or amalgamation, will be dealt with by the authorities under any other law for the time being in force as if such acquisition or acquiring of control or merger or amalgamation had not taken place and the parties to the combination shall be dealt with accordingly.

  • EXEMPTIONS TO COMBINATION REGULATION

The regulations on combinations as provided in Section 6 of the Competition Act, 2002 are not applicable to share subscription, or financing facility or any acquisition by a public financial institution, foreign institutional investors, bank, or venture capital fund pursuant to any covenant of a loan agreement or investment agreement. However, these institutions still have to provide certain necessary information to the Commission. Section 6(5) states that the public financial institution, foreign institutional investor, bank or venture capital fund, has to file information with the Commission within 7 days of the date of acquisition and the filing has to done in the prescribed manner. All details of the acquisition have to be provided to the Commission including the details of the control, circumstances for exercise of such control and the consequences of default under the loan or investment agreement.

  • CONCLUSION

In a rapidly growing economy such as India, enterprises show both organic and inorganic growth (mergers, amalgamations, acquisitions). It is impossible to keep a check on all such mergers and acquisitions but it can be assumed that small scale mergers and acquisitions do not have such a significant impact in the market. However, large scale combinations could lead to an appreciable adverse effect on competition in the market and thus need to be regulated. Under the Indian Competition Law, combinations that are likely to cause such adverse appreciable effect on competition in the relevant market are prohibited. The degree of adverse effect can be evaluated by taking into account several factors mentioned in Section 20(4) of the Competition Act including actual and potential level of competition through imports in the market, extent of barriers to entry into the market, level of concentration in the market, extent of effective competition likely to sustain in a market, extent to which substitutes are available or are likely to be available in the market, etc.[4]


[1] Central Government Notification S.O. 479(E) dated 4th March, 2011.

[2] Regulation of Combinations under the Competition Law, available at – https://blog.ipleaders.in/combination-under-the-competition-law/

[3] Central Government Notification S.O. 675(E) dated 4th March, 2016.

[4] PROVISIONS RELATING TO COMPETITION, available at  – https://www.cci.gov.in/sites/default/files/advocacy_booklet_document/combination.pdf

Author: Anubhav Khastagir, Amity University Kolkata.

Editor: Kanishka VaishSenior Editor, LexLife India.

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