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 regulatory norms.

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 ramifications.

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 competition.

Possible Amendments to Indian Legislation for Evaluating Non-Notifiable/Exempt Mergers
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 pharmaceutical sectors.

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 Closing
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.