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Total Number of Subscribers: 451 |
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Date: 26th July 2008 |
Compiled by Mr. M. Sathya Kumar |
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A review of
competition law from an M&A perspective "There are new dynamics at play with
respect to the competition that comes from unforeseen quarters through
technological advancements or ‘killer-apps’.
Access to capital and globalisation has reduced
barriers to entry significantly in most industries." While failures are an integral part of
mergers and acquisitions (M&A), Indian industry has realised in the
recent past that operating in a global environment with globalised
competition requires scaling and ‘skill-ing’ rapidly. Do big M&A deals stifle competition? What should
the competition law promote and avoid? “We believe that while it is
important to ensure competition and prevent monopolisation,
it is critical that in the process of doing so, impediments are not placed to
growth,” feels Mr Harish H. V.,
Partner Specialist Advisory Services, Grant Thornton. He shares his views
(with key inputs from Mr Arun
Kumar M. K., Vice-President, Specialist Advisory Services) on the competition
law from an M&A perspective with Business
Line. The scope for creation of monopolies has
reduced considerably in today’s global environment, he
begins. Over to the interaction done through email… Excerpts from the
interview: Are there new
dynamics at play when it comes to competition? Competition benefits the customers by
encouraging innovation and efficiency which, in turn, drives down prices and
improves quality. Globally, various policies have been implemented to
promote, regulate and protect competition in an industry or market. In India,
the Monopolies and Restrictive Trade Practices (MRTP) Act is giving way to
the new Competition Act. Yes, there are new dynamics at play with
respect to the competition that comes from unforeseen quarters through
technological advancements or ‘killer-apps’. Access to capital and globalisation
has reduced barriers to entry significantly in most industries. The scope for
creation of monopolies has reduced considerably in today’s global environment. This aspect must be kept in mind while
implementing the Act and in the process of determining whether a transaction
may result in significantly reduced competition. Tell us about the
evolution of Indian Competition Act. Historically, competition in India has been
regulated by the MRTP Act, which is in force since 1970. The primary purpose
of the MRTP Act is to curb unfair, restrictive and monopolistic practices
However, to promote competition and to promulgate a modern competition law,
Government constituted a committee in 1999, based on the recommendations of
which, the Competition Act, 2002 was enacted and notified in January 2003,
and the Competition (Amendment) Act, 2007 was enacted in September 2007. Some changes
happened in 2008? In January 2008, draft regulations were
issued inviting comments. The Competition Commission of India (CCI) was
established under the Competition Act by Government notification in October,
2003. Since then the Commission has had one Member and acting Chairman, Mr Vinod Dhall,
along with a small team of officers and staff. Currently, applications have
been sought for appointment of the Chairperson and five other members of the
CCI. The sections of the Competition Act relating to enforcement work, that
is, for undertaking inquiries into anti-competitive agreements and abuse of
dominance, and for regulating combinations have not yet been notified by the
Government. Consequently, the Commission has not commenced the enforcement
work. What does the
Competition Act look at? The Competition Act primarily deals with
three kinds of arrangements, viz. prohibition of certain agreements which are
likely to be detrimental to competition, abuse of dominant position and
regulation of combinations. The Indian Competition Act tries to regulate
combinations in the nature of acquisitions, mergers, amalgamations, acquiring
control. Are there
situations when an acquirer has to alert the CCI? Kind of. Any person who proposes to enter
into a combination shall compulsorily give notice to the Commission if the
following threshold limits are crossed: In India if the acquiring and the acquired
entities jointly have more than Rs 1,000 crore
(assets), or Rs 3,000 crore (turnover) or the group
has more than Rs 4,000 crore (assets), or Rs 12,000
crore (turnover). In India or outside India if the acquiring
and the acquired entities jointly have more than $500 million assets
(including > Rs 500 crore in India) or $1500
million turnover (including >1,500 crore in
India) or the group has more than $2000 million (including > Rs 500 crore in India) (assets) or $6000 million (including >
Rs 1,500 crore in India) (turnover). Those are not very huge numbers.
Anyway, what does CCI do after receiving the notice? The above-mentioned notice should be given
within 30 days of the approval of the proposal relating to the merger by
board of directors of the companies or execution of any agreement/document
for acquisition. No combination shall come in effect unless 210 days have
passed from serving such notice to the CCI or grant of approval by CCI,
whichever is earlier. The Commission may on its own knowledge or
based on information received may inquire into whether such a combination is
likely to cause noticeable adverse effect on competition in India. Much
has been said about the Competition Act. What are the likely benefits? The likely
benefits of the implementation of competition law in India are as follows: The
competition law gives teeth to competition policy and helps in promoting,
regulating and sustaining fair competition in the market. Protect
the interest of consumers against any collusion or unfair trade practices. Creating a
business environment which improves efficiencies in operations and, hence,
leading to cost reduction for the concern. This cost advantage is passed on
to customers in the form of price reduction. Competition
law prohibits agreements that result in cartel formation and restraint of
trade. The law also prevents monopolisation and
attempted monopolisation in an industry. It can
successfully trace anti-competitive mergers and tie in arrangements and
restrain the same. Competition
law can also reduce the chances of any player to adopt price discrimination
strategy to increase profit. Okay.
They are quite a handful. What about deficiencies? Any at all? There are
deficiencies associated with the competition law which can act as an
impediment to the M&A activities in India which may in turn result in a
slower growth of Indian economy. The
waiting period of 210 days for the approval of any combination appears to be
quite long. The trigger for the waiting period is also unclear as the Act
stipulates a time period of 210 days from the date of approval of the
proposal by the board. The trigger could originate at the term sheet stage
itself. However, execution of a term sheet may not always necessarily result
in completion of the combination. Although the CCI Chairman has stated that
he expects to complete the approval process in most of the cases by 30 days,
the fact that the provision exists for time period of 210 days for closure,
combined with the fact that the CCI staffing is likely to be inadequate and
that the number of cases presented to the CCI is expected to be large, one is
not sure whether the approval process will be completed in 30 days. The
Competition Act allows third parties to object to a given combination. This
may result in larger number of complaints made by people with vested
interests and may in turn lead to wastage of time and resources. The
Competition Act appears to emphasise over-reliance
on the thinly staffed CCI. How
would you sum up the deficiencies in two sentences? The Act
rather than adopting a concentration-based approach (as mentioned below),
takes the `size' as the criteria which is very inflexible given the dynamism
involved in current business situations. So,
how can the gap created by the deficiencies be filled? Should size be given
that importance? One of the
conundrums with the law is that it attempts to regulate and govern
combination of foreign entities outside India, if the group has assets of
specific size in India, that is, these foreign entities have to comply with
the notice period requirement even though the said combination has no effect
in India. This is at odds with what the law seeks to achieve, which is, to
regulate only those combinations that are likely to have a noticeable adverse
effect in India. Rather
than looking at entities or group in isolation, their size in relation to
peer group in the industry should be looked at while judging whether the
combination is likely to cause any impact on the competition per se. A
concentration-ratio-based approach as explained above may do better justice
to the competition policies in the country. The United States Department of
Justice in its 1982 Merger guidelines adopted a HHI index which calculates
the level of concentration in a particular industry in a more realistic
manner and whether the said combination is likely to have any adverse effect
on such concentration. Yardsticks on the lines of HHI index can be used in
the Indian scenario too. Also it should be noted that most of the antitrust
policies to large extent look at concentration in a particular industry as
the factor hampering the competition. How
do feel about the conditions laid down for the threshold of assets set for
the merged entity? Do you find them harsh? The Indian
Competition Act takes a threshold of assets and turnover as the judging
criteria for a combination to be covered under the Act. This will be
troublesome in case of capital intensive industries such as oil and gas,
petrochemicals where even an inconsequential merger may get covered by the
Act. The
threshold criteria in the Act could create a deadlock because once an entity
or group grows to a size of the limits prescribed in the Act, all the
combinations (however small it may be), will attract the regulations of the
Competition Act and thus resulting in the duplication of effort on part of
both the said entity and also the Commission. Do
you mean a larger group will attract regulations for no reasons of it all?
Tell us with an illustration, if possible. Okay. Take
the example of Wipro Ltd. If it (whose revenues for
the year 2007 stands at Rs 15,133 crore), acquires
a $5 million company it has to follow the procedure provided in the Act even
if the combination may not have any impact on the competition per se. Certain
transactions have been exempted from the mandatory reference as per the draft
regulations, one example of which is the acquisition of less than 26 per cent
of a company's share done solely as an investment and not leading to the
control of a company. Also,
acquisition of assets not directly pertaining to the business of the acquirer
or acquisition of assets done solely in the nature of investment or acquired in
the ordinary course of business but not leading to the control of the
enterprise whose assets are being acquired would be outside the purview of
the Competition Act. Further an acquisition of shares or voting rights, where
prior to such acquisition, the acquirer held more then 50 per cent of the
shares or voting rights will not be covered under the Act. What
about the time-factor involved, essential in M&A, in getting the CCI's approvals? The CCI
has a view that 90 per cent of combinations will be approved within a
timeframe of 60 days. By re-defining the criteria for referrals the number of
cases that need to be referred could be minimised
and the ones that are referred too could be fast tracked. Is the CCI
prepared to take on a large acquisition, for example, Tata-Corus?
The task
of analysing whether any combination is detrimental
in nature requires high degree of expertise from the people undertaking such
a task. Therefore the CCI would require a large number of trained staff that
can be effectively deployed on to the job to achieve the desired results. It
is important that this fact be recognised and a
multi-skill organisation of legal, economic and
industry experts be recruited so that the required analysis can be done. Source : Interview with Mr.
HARISH H. V., PARTNER SPECIALIST ADVISORY SERVICES, GRANT THORNTON Interview by Mr. D. MURALI & Mr .
KUMAR SHANKAR ROY |
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