October 25, 2018
The Indian Economy has been witnessing a transitional phase owing to liberalization, innovation and corporate restructuring. Corporate restructuring in the form of Merger and Acquisition (M&A) has in the recent times emerged as an intriguing area of law and the regulatory provisions governing M&A has assumed a vital place in the Indian Jurisprudence.
The Law of M&A and Competition Law are intrinsically bound with each other, as every M&A has to undergo the process of Competition Assessment under the relevant provisions of the Competition Act, 2002 and the allied Regulations.
To have a better understanding of the theme, it would be relevant to shed some light on the basic tenets of Competition Law which are to be analysed while assessing the impact of combination.
What is Combination?
Section 5 of the Act defines the term “Combination” as acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprise shall be combination of such enterprise. The statutory provisions as enumerated under Sections 5 and 6 of the Act primarily envisages that any merger or acquisition (M&A) taking place within the Indian Sub-continent has to be examined on the touchstone of the Competition Act, 2002 by the Competition watchdog i.e. Competition Commission of India (Commission).
M&A and Competition Law
The law of M&A and Competition Law are intrinsically bound with each other as any combination including merger and acquisition has to undergo the regulatory stratagem as enumerated under the Competition Act, 2002.
Why is it Necessary to Regulate Combination?
One of the intrinsic requirements of regulatory controls on combination is to analyze the impact on the level of competition within a relevant market. The said concern assumes importance particularly where M&A would give the new company the ability to alter or fix prices in a particular sector.
There is a fear that the new company which emerges pursuant to merger or acquisition will eliminate competition and would utilize its market power to set prices in the relevant market.
Competition related Issues
The primary concern of the Competition Commission of India while examining a combination is that the proposed combination does not cause the following anti-competitive effects in the relevant market:
AAEC (Appreciable Adverse Effect on Competition)
The Act under Section 3(1) prevents any enterprise or association from entering into any agreement which causes or is likely to cause an appreciable adverse effect on competition (AAEC) within India. The Act clearly envisages that an agreement which is contravention of Section 3(1) shall be void.
How is AAEC determined?
The Act provides that any agreement including cartels, which-
- Directly or indirectly determines purchase or sale prices;
- Limits production, supply, technical development or provision of services in market;
- Results in bid rigging or collusive bidding
shall be presumed to have an AAEC in India.
Abuse of Dominant Position
Read this for in-depth understanding of Abuse of Dominant Position– What is Abuse of Dominant Position under Competition Act?
What is relevant market?
‘Relevant market’ is one of the primary concerns while determining dominant position as well as abuse of dominant position by an enterprise.
Section 2(r) of the Act renders an exclusive definition for the term ‘relevant market’. It states that it means the market which may be determined by the Commission with reference to the relevant product market or the relevant geographic market or with reference to both markets.
Relevant product market is defined as a market comprising all those products or services which are regarded as interchangeable or substitutable by the consumer, by reason of characteristics of the products or services, their prices and intended use.
Relevant geographic market refers to a market comprising the area in which the conditions of competition for supply of goods or provision of services or demand of goods or services are distinctly homogenous and can be distinguished from the conditions prevailing in the neighboring areas.
Merger & Acquisition
Commonly referred to as M&A, Mergers and Acquisition are regarded as one of the most common form of corporate restructuring and has emerged as one of the most sought after methods of company consolidation process. The term “merger” and “acquisition” are often used interchangeably. However, merger and acquisition demonstrate two diverse modes of corporate restructuring and the main difference lies in the manner in which the combination of two companies in these two processes are brought about. On one hand, merger refers to the process of amalgamation or merging of two accompanies to form a new company whereas on the other hand acquisition takes place when one company is taken over by another company. Acquisition can be either friendly or hostile.
The SVS Raghavan Committee recognizes Mergers as a legitimate means by which firms can grow and are generally as much part of the natural process of industrial evolution and restructuring as new entry, growth and exit.
Types of Mergers
Mergers are classified into the following types:
- Horizontal Mergers
- Vertical Mergers
- Conglomerate mergers
Horizontal mergers are recognized as a form of corporate restructuring having the potential to curtail competition in the market. Horizontal merger or combination refers to merger of two companies at the same level of production or distribution in the relevant market.
Impact of Horizontal Merger on Competition
From the point of view of Competition Policy, it is horizontal mergers that are generally the focus of attention. For instance, the Commission in the case of acquisition of Monsanto by Bayer recognized that both the parties to the proposed combination were active in the downstream market for commercialization of Bt. Cotton Seeds in India, thereby resulting in horizontal overlap. Thus, the Commission assessed that the horizontal overlap in the proposed combination could result in portfolio effects in the form of exclusion of competitors.
Vertical agreements is an arrangement between enterprises at different stages or levels of the production chain and, therefore, in different markets. A vertical merger joins together a firm that produces an input (and competes in an input market) with a firm that uses that input to produce output (and competes in an output market).
Impact of Vertical Mergers on Competition
According to the SVS Raghavan Committee generally, vertical agreements are treated more leniently than horizontal agreements as, prima facie, a horizontal agreement is more likely to reduce competition than an agreement between firms in a buyer-seller relationship.
A merger which is neither vertical nor horizontal, is a conglomerate merger. Conglomerate merger is a merger between businesses that operate in different product markets. Thus, the term conglomerate can be applied to any acquisition between companies that are sufficiently diversified i.e. merger between two firms which are non-competitive with respect to the same market, and further, who stand in no direct relation to one another at different levels of economic organization and product flow.
Conglomerate mergers are further classified into pure and mixed mergers. In pure conglomerate there are no discernable economic relationships between the businesses of combining parties and mixed conglomerate acquisition of a firm producing same product as the acquirer but selling in a different geographic market.
Impact of Conglomerate Merger on Competition?
It is considered that there is a remote possibility that a conglomerate merger may lead to antitrust issues. SVS Raghavan Committee in this context remarks that there is sufficient evidence to suggest that conglomerate mergers do not pose any threat to competition.
Competition Assessment and Analysis of Combination
From the aforesaid discussion it is abundantly clear that corporate restructuring in the form of M&A might lead to anti-competitive issues and hence a regulatory mechanism to control this regime is instrumental in this age of intensive competition.
Object of Merger Control
The purpose of merger control is to enable competition authorities to regulate changes in market structure by deciding whether two or more commercial companies may merge, combine or consolidate their business into one. A merger leads to a “bad” outcome only if it creates a dominant enterprise that subsequently abuses its dominance. Concern with mergers is ultimately a concern with market power and possible abuse of the market power by the merged entity. Thus, the general principle, in keeping with the overall goal, is that mergers should be challenged only if they reduce or harm competition and adversely affect welfare.
Regulatory Framework for Merger Control
The Regulatory framework for merger control is provided under the Competition Act, 2002 and under the Competition Commission of India (Procedure in regard to transactions of business relating to Combinations) Regulations, 2011.
The Competition Act, 2002
Threshold Limits for Combination
Threshold limit constitutes a vital aspect of combination under the Competition Act. Under the Act if the specified threshold limits are crossed then the parties to the combination have to notify about the combination to the Commission. The threshold limits under Section 5 of the Competition Act are revised by the Central Government through the Ministry of Corporate Affairs (MCA).
The MCA on March 04, 2016 issued notification enhancing the value of assets and value of turnover by 100% for the purposes of Section 5 of the Act.
The threshold limits are presented in tabular form hereunder:
Increase in Thresholds of De Minimis Exemption
Notice for proposed combination
Section 6 of the Competition Act mandates that any enterprise which proposes to enter into a combination and satisfies the threshold limits as enumerated above shall send a Notice to the Commission in the prescribed form and along with the prescribed fee. The notice shall disclose the details of the combination.
Investigation of Combination
Where the Commission is prima facie of the opinion that the proposed combination is likely to cause appreciable adverse effect of competition (AAEC) in the relevant market, then the Commission shall issue a show cause notice to parties to show as to why investigation with respect to such combination shall not be conducted.
DG’s Report- On receipt of response of parties, the Director General (DG) is called upon to prepare a report on the proposed combination.
Invite Objections from Public to the Combination- Thereafter, the Commission within seven days from the date of response of parties or report of the DG whichever is later shall direct the parties to publish the details of the combination for bringing the combination within the knowledge of the public or the person affected or likely to be affected by the proposed combination.
Additional Information- If Commission feels the necessity, then under Section 29(4) of the Competition Act, the Commission can call upon the parties for such additional information.
Thereafter, on receipt of all required information, the Commission shall deal with the combination in the manner enumerated under Section 31 of the Competition Act.
Duration of Competition Assessment- Section 6(2A) of the Competition Act provides that a combination shall not come into effect until 210 days have passed from the date on which notice of combination was given to the Commission or the Commission passed orders under Section 31 of the Act (whichever is earlier).
Order of the Commission on Combination
Section 31 of the Act provides for the orders of the Commission on certain combinations. The orders under this statutory provision can broadly classified as under:
- Where the Commission is of the opinion that the combination is not likely to have an AAEC then it shall by order approve the combination.
- Where Commission is of opinion that combination is likely to have an AAEC then it shall order that combination shall not take place.
- Where Commission is of the opinion that combination is likely to have an AAEC but such adverse effect can be eliminated by modification to such combination then the Commission may propose modification to the combination to the parties.
Commission’s Power to Inquire into a Combination
Section 20 of the Competition Act empowers the Commission to inquire into a combination either suo motu or on receipt of information relating to acquisition whether such combination has caused or is likely to cause an AAEC in the relevant market in India.
Exemption from Notification
Section 54 of the Competition Act empowers the Central Government to notify exemption of certain enterprises from the application of the Act for a limited period.
With the advent of technology and formulation of favorable regulations, mergers and acquisitions have assumed a substantial position in the Indian Economy. However, as already discussed above, mergers and acquisitions may give rise to certain antitrust issues which if addressed appropriately would inculcate healthy competition and ultimately lead to welfare of the economy and consumers.
 Professor Alexander Roberts, Dr. William Wallace and Dr. Peter Moles, “Mergers and Acquisition”, Edinburgh Business School, Heriot-Watt University
 High Level Committee of Competition Law, SVS Raghavan Committee
 Combination Registration No. C-2017/08/523 dated June 14, 2018 (CCI)
 Steven C. Salop, Daniel P. Culley, “Potential Competitive Effects of Vertical Merger”, Georgetown University Law Center
 Jeffrey Robert Church teaches at University of Calgary, Department of Economics
 Vertical Mergers, Issues in Competition Law and Policy, ABA Section of Antitrust Law, 2008 (Vol.2, p. 1455)
 Lawrence G. Goldberg, “The Effect of Conglomerate Mergers on Competition”, The Journal of Law & Economics, [Vol. 16, No. 1(Apr., 1973)]
 Richard C. Clark, “Conglomerate Mergers and Section 7 of the Clayton Act”, Notre Dame Lawyer, Quarterly Law Review. Section 7 of the Clayton Act provides that No corporation engaged in commerce shall acquire, directly or indirectly, the whole or any part of the stock or other share capital and no corporation subject to the jurisdiction of the Federal Trade Commission shall acquire the whole or any part of the assets of another corporation engaged also in commerce, where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.
 Abhir Roy and Jayant Kumar, Competition Law in India, 2nd Edition
 High Level Committee of Competition Law, SVS Raghavan Committee
 Competition Act 2002, s 5 provides for the threshold limits. The threshold limits are revised by the Central Government from time to time.
 Notification No. S.O. 675(E) dated March 04, 2016
Source: Competition Commission of India- Revised Thresholds
 Threshold limit notified by MCA vide Notification No. S.O. 674(E) dated March 04, 2016. Under this acquisitions where enterprises whose control, shares, voting rights or assets of not more than Rs. 350 Crore in India or turnover of not more than Rs. 1000 crore in India are exempt from application of Section 5 of the Competition Act for a period of 5 years.
 Competition Act 2002, s 29 provides for procedure for investigation of combinations
 Competition Act 2002, s 6(2A) was inserted by the Amendment Act of 2007
 Under this provision, the Commission shall not initiate any inquiry unless one year has expired from the date on which such combination has taken effect.