Strengthening Competition Oversight: Empowering Regulatory Review For Non-Notifiable Mergers In India
Mergers and acquisitions that do not surpass a specific threshold are not
obligated to be disclosed to the Competition Commission of India (CCI) for prior
clearance under the provisions of the Competition Act, 2002. This exemption,
sanctioned by the Indian Ministry of Corporate Affairs (MCA), is grounded in
certain de-minimis thresholds enshrined in Sections 5 and 6 of the Act.
Transactions wherein the assets of the target company are valued at less than
INR 350 crore or the target's turnover is below INR 1,000 crore (referred to as
the "Small Target Exemption") are exempt from the requirement of CCI approval.
Initially introduced on March 27, 2017, the MCA extended the applicability of
the Small Target Exemption for an additional five-year period, until March 27,
2027, as indicated in a notice dated March 16, 2022.
Recently, PVR Limited (PVR) and INOX Leisure Limited (INOX) made public their
intention to merge. Following the merger (referred to as the "PVR-INOX Merger"),
INOX shareholders will receive PVR shares based on an approved share swap
agreement resulting from the transaction. While the existing PVR and INOX
screens will maintain their current branding, new cinemas established after the
merger will bear the name "PVR-INOX Ltd." With a collective network comprising
over 1,500 screens, nearly half of the nation's total screens, the PVR-INOX
Merger is designed to unite two of India's foremost multiplex companies.
Ordinarily, a merger of this nature would necessitate prior authorization from
the CCI. However, this merger unfolds at a pivotal juncture, given that the
multiplex industry in the country has been adversely affected by the impact of
COVID-19 and the intense competition posed by over-the-top (OTT) media
platforms. According to financial reports for the fiscal year ending in 2020-21,
PVR's revenue amounted to INR 280 crore, while INOX's revenue stood at INR 106
crore. Nevertheless, the PVR-INOX Merger is exempt from mandatory CCI approval
due to its post-merger turnover falling below the Small Target Exemption
requirement (i.e., less than INR 1,000 crore).
In light of this context, this article undertakes an analysis of the potential
adverse outcomes stemming from the CCI's inability to scrutinize non-notifiable
mergers that ostensibly display anticompetitive traits. The article further
delves into established international legal precedents concerning the review of
non-notifiable mergers. The authors also acknowledge the divergent objectives
and legal frameworks across different jurisdictions, culminating in a final
recommendation for adjustments to India's competition law framework.
A Scenario of Anticompetitive Consequences Post-Merger and Implications of
CCI's Incapacity to Review Horizontal Mergers
The incapacity of the CCI to review the PVR-INOX Merger could engender serious
repercussions for fostering and sustaining competition in India's multiplex
market, as underscored in the primary objectives of the Competition Act.
This arises due to the CCI's lack of authority to review transactions that fall
under exemptions. Given that the proposed merger is projected to command a
combined market share of 42%, there exists a significant likelihood of
establishing a dominant market position within the multiplex sector.
While possessing a dominant position in the market is not inherently unlawful
under the Act, the misuse of such dominance is stringently governed by Section 4
of the Act. Furthermore, all anticompetitive agreements, irrespective of the
presence or absence of abuse of dominant position, fall under the purview of
regulation according to Section 3 of the Act.
The applicability of Sections 3 and 4 of the Act exclusively transpires in the
post-merger phase. One noteworthy challenge associated with post-merger
regulation pertains to the expenses incurred by the parties involved in the
transaction. A merger necessitates an alteration in organizational structure. In
the current context, both PVR and INOX may have invested significant resources
in ensuring the legal and financial facets of the PVR-INOX Merger align with
Additionally, horizontal mergers such as the PVR-INOX Merger eliminate a
significant competitor from the market, consequently diminishing competitive
pressures that would otherwise compel a reduction in service pricing among both
the merging entities and non-participating firms. Consequently, this could lead
to either a unilateral or coordinated increase in prices within the market. In
both scenarios, customers bear the brunt through escalated prices and a reduced
number of substitutes available.
These scenarios of anticompetitive post-merger implications might be mitigated
if the CCI, following the lead of the European Union (EU), the United States
(US), or the United Kingdom (UK), possessed the authority to scrutinize and
oversee non-notifiable mergers that raise concerns.
While Indian law indeed contains provisions to regulate anticompetitive
practices arising post-merger, the belated regulation of false-negative mergers
comes with substantial costs. These costs cast a detrimental impact on the
merged entities, their clientele, the economic market structure, and the ensuing
The Resurgent Article 22 of the European Union Merger Regulation (EUMR): A
Source of Inspiration
Article 22 of the EUMR has experienced a resurgence through novel guidelines
issued by the European Commission (EC) (EUMR Guidance). These guidelines empower
the EC to review mergers falling below the national merger threshold via
referrals initiated by member states.
The precondition for a referral by a European Union member state is that the
concentration must "impact trade between the Member States" and "pose a
significant threat to competition within the territory of the Member State or
States making the request." The EUMR Guidance aims to encourage member states to
approach the EC for reviewing mergers that prima facie exhibit anticompetitive
attributes. This was prompted by a rise in "killer acquisitions."
A "killer acquisition" refers to the acquisition of a fledgling, small company
by a prominent established entity. This type of acquisition has the potential to
impede effective competition by reducing the number of competitors and
bolstering the acquiring entity's market share. The guidelines were devised to
address this enforcement gap, particularly concerning small entities falling
below prescribed national thresholds.
In a similar vein, Section 7 of the Clayton Antitrust Act of 1914 in the United
States authorizes the Federal Trade Commission (FTC) or the Department of
Justice (DOJ) to prohibit mergers that substantially curtail competition. It's
noteworthy that both the FTC and DOJ are endowed with the authority, not barred
from it, to review and evaluate mergers falling below the "size-of-transaction"
or "size-of-person" threshold, as outlined in the Hart-Scott-Rodino Antitrust
Improvements Act of 1976.
Moreover, in the United Kingdom, under Section 23 of the UK Enterprise Act, the
Competition and Markets Authority possesses the capability to autonomously
review mergers if a non-notifiable merger raises concerns regarding effective
Possible Amendments to Indian Legislation for Evaluating Non-Notifiable/Exempt
Considering the aforementioned perspectives, the Indian competition framework
could draw inspiration from the practices in the EU, US, and UK to assess
mergers that fall below the threshold limits of the Small Target Exemption.
However, it's important to note that the EUMR Guidance was introduced with a
distinct objective�to regulate "killer acquisitions" within the digital and
Nevertheless, given that the new guidelines encompass the review of non-notifiable
mergers by competition authorities, analogous provisions could be incorporated
into the Competition Act. The purpose would be to regulate transactions falling
under the Small Target Exemption.
Firstly, if a merger seemingly poses a threat to market competition, it should
be subject to scrutiny regardless of its asset or turnover threshold. To
determine whether a merger poses a competitive threat, the market share of the
merging entities should be considered in conjunction with their assets and
turnover, as outlined in the criteria for small target exemptions. A higher
market share of the merged entity could potentially lead to a dominant market
position that might be abused.
Secondly, a recommended amendment concerns Paragraph 2 of the 2017 MCA
notification. Paragraph 2 currently stipulates that the value of assets or
turnover should be derived from the annual report of the target enterprise for
the preceding financial year in which the transaction transpires, or from the
auditor's report if financial statements are unavailable.
In the current scenario, the ongoing deal evades scrutiny by the CCI due to the
combined turnover of both PVR and INOX being under INR 1,000 crore. However, the
combined assets of PVR and INOX surpass the asset-based threshold of INR 350
crore. Consequently, the current deal should not be exempted from CCI scrutiny
based solely on its low turnover. Instead, it's advisable to compute the value
of assets or turnover by considering an average of these values over the
preceding three financial years, rather than just the previous year.
In summary, the CCI could be endowed with supplementary authority to assess
prima facie anticompetitive non-notifiable mergers falling under the Small
Target Exemptions in exceptional circumstances. This authority could be
conferred by accounting for the market share of merging entities or by
considering the value of assets or turnover over the preceding three financial
years. This approach would ensure that mergers with the potential to hinder
market competition, similar to the current case, do not escape scrutiny.
Law Article in India
You May Like
Legal Question & Answers