I. Merger Regulation under the Competition Act
On January 31, 2007, the steel goliath Tata Steel Limited concluded one of the biggest Indian cross-border merger deals by acquiring the Anglo-Dutch steel company, Corus Group Plc. for $13.70 billion. The merged enterprise, Tata-Corus, employs 84,000 people across 45 countries. It has the capacity to produce 27 million tons of steel per annum, making it the fifth largest steel producer in the world. The merger also gave Tata Steel access to Corus’ strong distribution networks in Europe.
The aforesaid illustration is a glimpse of the growing trend of merger activities undertaken by Indian companies across Indian borders on a scale that is unprecedented. This scenario is a reflection of the aspiration of every enterprise in a free market economy to capture substantial market power. Most mergers bring about benefits to the merging enterprises by inter alia diversification of activities, achievement of economies of scale, improved profitability and greater access to the supply chain. Certain mergers, however, may potentially lead to reduction in competition in the market that could adversely impact consumers and the economy as a whole. This might happen if the merger creates a monopolistic enterprise which abuses its position by putting barriers to entry in the market, imposing discriminatory pricing and causing reduction of output. These adverse effects could outweigh the perceived benefits of a merger.
For this precise reason, competition laws across the world provide for merger control provisions. The regulatory framework dealing with mergers in India is primarily governed by the Companies Act, 1956. However, as it stands today, it does not deal with the effects of merger on competition. To this end, the Indian Parliament in 2002 enacted the Competition Act (“the Act”). The Act apart from prohibiting anti-competitive agreements and abuse of dominant position by enterprises also regulates mergers.
B. Regulation of Combinations The Competition Act intends to establish merger review and control procedures designed to prevent anti-competitive combinations. The Act uses the word “combinations” to cover acquisition of control, shares, voting rights and assets, and mergers and amalgamations. The Act does not prohibit all mergers per se but regulates only those combinations which cause or are likely to cause an appreciable adverse effect on competition within the “relevant market” in India. It takes a threshold of assets and turnover as the judging criterion for a combination to be covered under the prohibition of the Act. After the 2007 amendment to the Competition Act, a mandatory obligation has been cast on the merging enterprise to notify a proposed transaction to the Competition Commission of India (“CCI”) when it exceeds the prescribed thresholds. Thus, in order to proceed with a combination, prior approval of the CCI is required. Notice of intent to enter into a combination shall be given to the CCI within 30 days of:
• The approval of the proposal relating to merger and amalgamation by the board of directors of the enterprises concerned; or
• The execution of any agreement or other document for acquisition or acquiring control.
After receipt of the aforesaid notice, the CCI has investigative powers in relation to combinations under sections 20, 29, 30 and 31 of the Act. Various factors are provided for determining whether a combination is likely to have an appreciable adverse effect on competition in India, and penalties are provided for such violations. The Commission is not empowered to initiate any inquiry into any combination after the expiry of one year from the date on which such combination has taken effect.
The 2007 amendment also added an important provision to the Act vis-à-vis cross-border mergers to the effect that no combination shall come into force until two hundred and ten days have passed from the day on which the notice was given to the CCI; or the Commission has passed orders under section 31 approving, rejecting or modifying the terms of the proposed combination. Last but not the least, section 32 of the Act allows the CCI extra-territorial jurisdiction to examine a combination between parties outside India and pass orders against it provided that it has an appreciable adverse effect on competition in India.
The emerging challenges to cross-border mergers posed by the implementation of the Act in its present stage may be evaluated in context of the following aspects.
A. High threshold limits
As already noted before, a cross-border merger transaction to be a combination hit by the Act must satisfy two conditions before section 6 is triggered, namely total assets or turnover value of the combined entity and its territorial nexus with India.
Given the fact that the Act seeks to center the triggering of its applicability on the asset/turnover test, there may be certain situations where such an approach may cause inadvertent consequences. The threshold limits in the Indian law are relatively higher than in most jurisdictions. If the merged enterprise formed after a cross-border merger has assets worth more than $500 million, or turnover more than $1500 million; or the group to which the merged enterprise belongs has assets worth more than $2 billion, or turnover more than $6 billion then such combination will come under the purview of the CCI.
As a consequence of such high threshold limits, many cross-border transactions – especially those in capital-intensive industrial sectors such as petrochemical – which do not affect competition in India per se, will require approval of CCI for the sole reason that one of the parties involved is large enough to exceed the threshold. This may bring even an inconsequential merger transaction under the scrutiny of CCI – thereby causing unnecessary delay in its conclusion which, in turn, impedes the industrial and economic growth.
The rationale behind keeping such high threshold limits is to reduce the workload of the Competition Commission under the mandatory notification regime. However, this leads to another important implication – that of excluding merger transactions falling below the prescribed thresholds but which nonetheless cause an appreciable effect on competition in their particular sector.
Under section 5 it is mandatory for a foreign company with assets of more than $500 million, which has a subsidiary or joint venture in India with a substantial investment above Rs.500 crores, to notify the CCI before acquiring a company outside India. For e.g. a Japanese automobile company such as Suzuki, which has a JV with an Indian company Maruti Udyog Ltd., would have to notify the CCI of any merger or acquisition made by it in Japan, regardless of it having any effect on competition in India. Regulation of combinations on the basis of monetary thresholds will unnecessarily subject a large number of offshore mergers, with little connection to India, under the radar of the CCI. This requirement not only acts as a burden on the CCI by increasing its workload but also has an indirect effect of deterring foreign companies from making investments in India.
B. Conflict of jurisdiction in cross-border mergers
Another pivotal area of concern with respect to cross-border mergers is the potential conflict in competition regimes of various countries. A key problem of multiplicity of jurisdictions is the possibility of inconsistent decisions by two different competition authorities vis-à-vis the same merger transaction. This is because the principles guiding any competition authority to determine the effect of any combination vary from country to country. For instance, the CCI is mandated to have due regard to the factors enunciated in section 20(4) of the Act. There may be instances where the CCI may even permit cross-border combinations affecting competition, when the economic benefits of such a combination outweigh its adverse impact, if any. However, the same transaction may not be allowed by the corresponding competition authority under whose jurisdiction the foreign enterprise falls. What may thus be regarded as anti-competitive in one jurisdiction may not be regarded the same in another jurisdiction.
Another provision of the Competition Act that is likely to create conflict of jurisdiction in cross-border mergers is section 32, which empowers the CCI to inquire and pass orders in cases of transactions taking place outside India but having an effect on competition in India. This is on the basis of “effects doctrine”, according to which states have jurisdiction over conduct having anti-competitive effects in their territory even if it takes place in another state. The Act however, does not throw light on how the said order under section 32 is to be implemented.
It is submitted that the Act should incorporate necessary provisions for conferring power on the CCI to seek cooperation from foreign authorities for implementing its orders with respect to cross-border anti-competitive practices. As it stands now, section 32 is worded broadly and allows the CCI to extend its jurisdiction beyond the Indian shores without any implementation mechanism.
The conflict arising out of the above-mentioned situations has not been adequately addressed by the present Indian competition law. Jurisdictions reviewing the same transaction should engage in such coordination as would, without compromising enforcement of domestic laws, enhance the efficiency and effectiveness of the review process and reduce transaction costs.
One suggestion to resolve this issue is following a “Coordinating Agency Model” wherein the various competition authorities involved in a particular cross-border transaction cede jurisdiction to a supranational agency. This agency will conduct investigation and submit recommendations to the local authorities involved in the transaction. Such a model will not only prevent divergent decisions but will also lay down a harmonizing standard to address the loopholes in various competition laws.
It is also proposed that in order to enforce the Indian competition law effectively in case of cross-border combinations, the CCI should enter into bilateral agreements with other countries pursuant to the power conferred on it under proviso to section 18 of the Act. The object of such agreements is to promote cooperation and exchange of information between concurrently reviewing competition agencies. It will also lessen the possibility of differences between them in the application of their competition laws. The US-EU Merger Working Group- Best Practices on Cooperation in Merger Investigations dated September 23, 1991 is one such example of a bilateral agreement. The major terms of this agreement cover the timing of the investigations by the US and EU anti-trust (competition) agencies, collection and evaluation of evidence, discussing their respective analyses at various stages of investigation etc.
C. Merger review: Ex-ante exercise
Unlike regular cases of abuse of dominance or anti-competitive agreements which require an ex-post analysis, merger review is an ex-ante exercise. This essentially means that the CCI has to use the “rule of reason” approach to predict whether a combination of cross-border merging parties will ultimately result in the creation of a monopoly in India. Foreseeing such a prospective state of affairs in the future makes the inquiry quite uncertain.
D. Increased Costs
In order to proceed with a combination, prior approval of the CCI is required within 30 days of the execution of any agreement or other document for acquisition or acquiring control. The terms “agreement” and “other document” in section 6 are not defined in the Act. The ambiguity in its meaning may stretch its ambit to also include a Memorandum of Understanding or a Letter of Intent. Such an interpretation will be detrimental as it will increase the compliance costs at a premature stage of negotiations when it is uncertain whether the transaction will proceed.
E. Duration of inquiry by Competition Commission
The Competition Act prescribes a waiting period of two hundred and ten days for any sort of combination to come into force. This review period available to the CCI is longer than in other foreign jurisdictions, for e.g. in Japan and Germany the same is one hundred and twenty days. It is submitted that the time frame of two hundred and ten days should be cut short.
It is important to keep in mind that India is a growing economy which is advancing at a rapid pace. It is, therefore, the need of the hour to have legislations which act as catalyst to such phenomenal growth rates rather than prove to be a disincentive for foreign companies interested in cross-border merger with an Indian counterpart. Such a long waiting period of 7 months for the CCI to grant its approval to a proposed combination could mean important business decisions of the merging enterprises would be required to be kept on hold. Foreign investors who are more familiar with the shorter review period in their respective countries may perceive this as a hindrance in their business plans and seek other destinations for investment.
F. No inquiry after one year
It is noteworthy that the Act limits the powers of the CCI to look into the combinations after the expiry of one year from the date on which such combination has taken effect. However, a merged entity may, under certain circumstances, have a detrimental effect on competition in the long run. In such cases it will be ultra vires the power of the CCI to regulate the merged entity after the one year period ends. Adequate changes should be made to the Act so that merged enterprise does not adversely affect competition throughout its life.
Cross-border merger is the sign of a vibrant economy. Its importance can be gauged from the fact that they constitute approximately 70% of the total number of mergers worldwide. A buoyant Indian economy coupled with progressive government policies and newly found dynamism in Indian businessmen have contributed to the growing trend of inorganic expansion, by way of mergers and acquisitions, amongst Indian corporates.
However, even in this era of globalization; the emergence of multinational corporations, interdependence of economies and the role of private enterprises in economic development is emerging as a watershed in the “regulatory and reform” thinking. The Indian Competition Act, 2002 is one such form of regulatory mechanism. A macro-level overview of the Act shows that it was drafted with the noble intention of curbing anti-competitive combinations in the Indian economy. This intention alone does not lend perfection to the Act as there exist various loopholes that need to be rectified.
The need is to prohibit mergers and acquisitions which are anti-competitive and to permit at the earliest such mergers and acquisitions which are beneficial. Consequently, the achievement of balance between prohibition and permission is of utmost necessity. The 2007 Amendment to the Competition Act, 2002, sought to remove certain flaws from the Act and has succeeded reaching only halfway, with a lot of other conflicts yet to be resolved. For India to be a global player in the field of merger and acquisitions, the implications of these conflicts on cross-border mergers under the Competition Act have to be carefully studied by the legislators and quickly resolved.
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