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Mergers and Acquisition vis-à-vis Competition Law: Striking the balance in the light of various amendments

India is a free economy where business entities are engaged in competitive practices which can lead to monopoly through mergers, takeovers or anti-competitive agreements and can negatively impact on the competition. Merger is a combination of two or more separate entities into one with the object of getting access to varied markets and customers and also acquisition of technology.

While on the other hand Acquisition or Takeover is the purchase of substantial assets and liabilities or having a controlling interest in the share capital of the target company. The main purpose of these activities is to expand their business activities and enter into new markets. Both merger as well as acquisition is not defined under the companies act, but sections 230-234 of the act deals with merger provisions and the schemes of arrangement between a company, its shareholders and its creditors. These mergers or acquisitions may lead to concentration of market power.

The Competition Act, 2002 which replaced the MRTP Act, 1969 comes into picture to prevent market power, monopoly and adverse effect in the market by promoting efficiency, innovation and competition which was certainly missing in the previous act. The provisions of the 2002 act are framed to regulate anti-competitive agreements[1] and abuse of dominant position[2] and most importantly combinations[3] among enterprises. Combinations in the competition act basically covers acquisition of control over voting rights and shares or assets as well as merger or amalgamation of enterprises which cross the financial threshold. The financial threshold is linked with the asset value and turnover of the target and the acquiring company as mentioned under section 5.

Control and Regulation of Combinations
Generally, mergers or acquisitions are the means for expanding business activities to enter into new markets and this decreases the risks involved to expand, so because of these advantages these activities are not treated as per the provisions of anti-competitive agreements. Mergers still were required to be regulated as besides these advantages an amalgamation could lead an enterprise to a dominant position which can be bad for a market.

Section 6 of the Competition Act, clearly regulates and prohibits those combinations which create an adverse effect in the market and such combinations are void. Accordingly, the act mandates enterprises to file a notice within 30 days of approval by the BOD in case of merger and execution of the agreement in case of acquisition to the Competition Commission of India.

Consequently, the CCI has power to quash the combination which can likely be a threat to the competition within the country. There are certain factors other than adverse effect on the market which the commission has to consider every time he does an inquiry for combinations[4], those are:
  • Likelihood that the combination can significantly increase the prices in the market due to dominance
  • Extent of barriers on the entry of the market
  • Extent of making an innovation
  • Nature of vertical integration in the market
  • Substitutes available or likely to be available in the market.
Thus, after giving notice to CCI and after considering the assessment factors mentioned above the commission grants approval under Section 31(1) of the act when it is sure that the combination would not be harmful to the market. The system of giving prior notice by combinations to CCI have become mandatory in the current Competition Act which was missing in the previous one.

One thing which has to be kept in mind in case of illegal combinations is not only the immediate effect but also the effect on competition conditions in future. And thus, in order to check whether shall have any effect on competition it is necessary to determine whether the combination has acquired market power and as a result of which, the competition will be adversely affected in that particular market.

In case small transactions where the financial threshold qualifies only by inter-connected transactions or by series of inter-dependent transactions that ultimately result in combination are also notified to CCI, but by only a single notice covering all the transactions. There was an amendment in 2014 in the regulations of Combinations which made such transaction filings simpler and more relaxed by mandating companies to notify to the CCI with the structure and substance of a combination transaction and avoiding notice in respect of the whole or a part of the combination shall be disregarded[5].

Further in order to ease business activities the GOI introduced certain combination amendments in 2019 to provide a green channel route whereby the parties who qualify the given criteria involved in these transactions need not wait for the approval of CCI to commence the notified transaction.

But this green route channel is only applicable to those the group entities, the direct or indirect investees and the combination parties who qualify the following criteria:
  • They should not be involved in producing identical goods or services
  • They should not be involved in any stage or level of the business activity.
  • They should not be engaged in any level of business activities which are complementary.
After qualifying these and receiving the acknowledgement of the form filed under green route channel the transaction is deemed to be approved. In case of acquisition, the acquirer has to make a positive declaration to CCI stating that the combination qualifies the green channel criteria and if such declaration is incorrect then both the form and deemed approval shall be void.

Till now there has been no such merger which has been disapproved or completely blocked by CCI in India. But there are certain worldwide instances like the Lonrho & Gencor merger was blocked by the European Commission because merging the two would have created a dominant position in the platinum industry.

Procedure followed by CCI after receiving a notice of combination
  1. The CCI proceeds towards the inquiry as specified under Section 20 of the act. This inquiry may start upon the commission�s own information or after the receipt of a notice from the person who is about to enter into the Combination.
  2. Section 29 of the act clearly specifies the complete procedure of investigation to be followed by the commission if it feels that the combination could have an adverse effect on the market.
  3. After the receipt of relevant notice for show cause the Commission may decide to call for a report from the Director General.
  4. The commission after all the inquiry may come to the conclusion that either the combination does not harm the market or there can be need of modifications in the combination to eliminate certain provisions which can cause harm to the market. The commission can also agencies to supervise a combination which need modification as mentioned under Regulation 27 of the Competition Commission of India (Procedure in Regard to Transaction of Business Relating to Combinations) Regulations, 2011.
  5. The act empowers the commission to impose penalty to those combinations which are not notified to the CCI.
  6. An appeal against the commission�s order can also be filed within 60 days to the Competition Appellate Tribunal.

Exemptions from regulations
There are certain categories which are exempted from the strict combination provisions under Section 6 of the act while entering into an acquisition or any share subscription or financing facility. Section 6(4) of the act provides such exemptions to banks, venture capital fund or public financial institutions or foreign institutional investor.

Conclusion
Any form of combination is very necessary for a developing country like India as they provide growth, tax benefits, diversification and improved profits and also enable foreign collaborations through cross-border mergers regulated by the act under section 32. On the other hand, some combinations may create adverse effect on the competition which in turn creates a need for regulation on these combination activities which create monopoly and barriers and other anti-competitive agreements.

Although, mergers were regulated by the 1969 MRTP act but the provisions had become out dated in the light of international development which was then replaced by the current competition act which not only started regulating monopoly but also promoted competition in the market. The new act removed ambiguity and problems of harmful mergers by implementing strict competition laws with the help of CCI which analysis each and every activity of the parties involved in mergers or acquisitions.

The commission has the power to inquire into combinations taking place outside India as well provided that such combination creates an adverse effect on the competition in the Indian market. Thus, the Indian Competition law is intending to create and develop an economy as the act is not too rigid nor flexible with the provisions of competition.

References:
  1. Section 3 in the Competition Act, 2002
  2. Section 4 in the Competition Act, 2002
  3. Section 5 in the Competition Act, 2002
  4. Section 20(4) in the Competition Act, 2002
  5. The Competition Commission of India Notification, 2014 https://www.cci.gov.in/sites/default/files/regulation_pdf/march%202014_0.pdf

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