Wednesday, September 7, 2011

Mergers and Acquisitions (Combinations) under the Competition Act, 2002

Mergers (Combinations) under the Competition Act, 2002

There has been a drastic change and enhancement in this process of globalisation and also liberalisation during the last three decades. In the pursuit of this globalisation, India has responded by opening up its economy, removing controls and resorting to liberalisation in 1991. The result of the globalisation and liberalisation is that the Indian market is facing competition from within and outside. The last 2 years have witnessed significant cross-border mergers and acquisitions activity by Indian companies in India and abroad on a scale that is unprecedented. It is understood that Merger & Acquisition (M&A) deals in India will cross $100 billion this year, which is double last year’s level and quadruple of 2005. Thus, keeping in view the economic developments of the country, to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interest of consumers and to ensure freedom of trade carried on by participants in markets, in India, a new competition Law has been enacted. The companies use merger, a type of combination, as a business strategy to grow and consolidate and to eliminate competition. Though mergers are considered as a legitimate means by which firms may grow and are generally as much part of industrial evolution and restructuring as new entry, growth and exit; mergers and amalgamation also create market power, which may be abused. In order to control the abuse of such mergers and amalgamation the Competition Act, 2002, now provides a regulatory mechanism.

Mergers and Effects

In competition Law Merger is used in broad sense. It covers a proper merger, amalgamations, acquisition of shares, voting rights, assets, or acquisition of control over an enterprise. A Merger is broadly speaking, a transaction that brings about a change in the control of different business entities enabling one business entity effectively to control a significant part of the assets or decision making process of another. Though Merger is a normal activity within the economy and used to expand the business by the companies. However some mergers could   adversely affect the competition. Through Mergers companies trying to achieve the Market Power, which in turn can impact negatively upon competition. Mergers lead to concentration and use of market power because of two reasons: (a) Reduction of number of entities in the market and; (b) Increased market share of the merged entity. As a result the merged entity is able to exercise market power and in turn, this may lead to the prices being raised above the normal level, restricted output, increase in rival cost, increased barrier to the new entities etc.

Competition Act, 2002 and the Regulation of Mergers

Prior to the Competition Act, 2002, the Companies Act, 1956 and the Monopolies and Restrictive Trade Practices Act, 1969 (before the 1991 amendments) are the statutes, which regulate mergers. MRTP Act, 1969 still had powers under provisions relating to restrictive trade practices (RTP) and monopolistic trade practices (MTP) to take action against merger that was anti competitive but due to amendment in 1991 in the MRTP Act for making easy the liberalization process it failed to completely control the unfair mergers.

         On August 28 2009 the Ministry of Corporate Affairs issued a notification pursuant to which the Monopolies and Restrictive Trade Practices Act 1969 was repealed and replaced by the Competition Act 2002 with effect from September 1 2009. The Competition Act attempts to make a shift from curbing monopolies to curbing practices that have adverse effects on competition both within and outside India.

Position on Combinations

Section 3 of the act governs anti-competitive agreements and prohibits:
"Agreements involving production, supply, distribution, storage, acquisition or control of goods or provision of services, which cause or are likely to cause an 'appreciable adverse effect on competition' in India."

Section 4 of the act prohibits the abuse of a dominant position by an enterprise. Under the Monopolies Act, a threshold of 25% constituted a position of strength.

Section 6 of the competition Act states that ‘no person or enterprise will enter into Combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination will be void. A ‘combination’ is either a merger of two enterprises or the acquisition of the control, shares, voting rights or assets of an enterprise or an enterprise that belongs to a group if it meets the jurisdictional requirements set forth below. Although the Act does not expressly so state, the term ‘combination’ include horizontal, vertical and conglomerate mergers.

Criteria under Section 5 (threshold for mergers)

The most important legal issue in merger analysis is jurisdictional, that is, which mergers or amalgamations are important enough to be considered ‘combinations’ which attract regulatory scrutiny. Section 5 of the competition act defines combination by providing threshold limits on assets and turnovers. At present, any acquisition, merger or amalgamation falling within the ambit of the thresholds constitutes a combination. The following transactions will constitute a combination:

Ø  Transactions among Indian companies with combined assets of $250 million; or $750 million in turnover of the merged entity

Ø  Cross-border transactions involving both Indian and foreign companies with combined assets of $500 million or $1.5 billion in turnover; and

Ø  Transactions that have a territorial nexus with India, where the acquirer has $125 million in assets or $375 million in turnover in India.

For acquiring groups, the threshold figures are much higher:

Ø  $1 billion in assets and $3 billion in turnover in India respectively;

Ø  Assets in excess of $2 billion; or

Ø  Turnover of more than $6 billion outside India.

The threshold criterion could create a deadlock because once an entity or group grows to a size of the prescribed limits, all combinations - however small will be covered by the regulations. It is to be noted that the Competition Act, 2002, does not make a distinction between horizontal, vertical and conglomerate mergers and provides the same threshold test for all of them.

Provisions of Competition Act, 2002

  1. Mandatory Notice

According to the present amended act it is mandatory for any company to notify mergers when the combined assets or turnover are beyond the threshold limits provided in section 5 of the Competition Act The act makes it mandatory to give notice to the commission within 30 days of the decision of the parties' boards of directors or of execution of any agreement or other document for effecting the combination. The terms 'agreement' and 'other document' are not defined. The general industry perception is that a memorandum of understanding or a letter of intent will qualify as an 'agreement'.

  1. 210-day waiting period and thresholds

The Competition Act provides for a post-filing review period of 210 days, during which the merger cannot be consummated and within which the Competition Commission is required to pass its order with respect to the notice received. If the commission fails to pass an order within the time limit, the proposed combination will be deemed to be approved. The 210-day period applies in case of cross-border transactions outside India where one of the contracting parties has a substantial presence in India. Regardless of the size of the transaction, notification is required where the combined asset value or turnover in India exceeds a certain value. This means that it is mandatory for a foreign company with assets of more than $500 million that has a subsidiary or joint venture in India with a substantial investment (above $125 million) to notify the Competition Commission before acquiring a company outside India.

  1. Relevant Market

Relevant market 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 the markets’. Relevant geographic market means ‘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 may be distinguished from the conditions prevailing in the neighbouring areas. Relevant product market means ‘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.

For the purposes of determining whether a combination would have the effect of or is likely to have an appreciable adverse effect on competition in the relevant market, the Commission will have due regard to all or any of the following factors, namely:

Ø  actual and potential level of competition through imports in the market;

Ø  extent of barriers to entry into the market;

Ø  level of combination in the market;

Ø  degree of countervailing power in the market;

Ø  likelihood that the combination would result in the parties to the combination being able to significantly and sustainably increase prices or profit margins;

Ø  extent of effective competition likely to sustain in a market;

Ø  extent to which substitutes are available or arc likely to be available in the market;

Ø  market share, in the relevant market, of the persons or enterprise in a combination, individually and as a combination;

Ø  likelihood that the combination would result in the removal of a vigorous and effective competitor or competitors in the market;

Ø  nature and extent of vertical integration in the market;

Ø  possibility of a failing business;

Ø  nature and extent of innovation;

Ø  relative advantage, by way of the contribution to the economic development, by any combination having or likely to have appreciable adverse effect on competition; and

Ø  whether the benefits of the combination outweigh the adverse impact of the combination, if any

Thus, if a merger within the jurisdictional requirement of the enactment and
is having an appreciable adverse effect on competition to be determined on the basis of the aforesaid factors within the relevant market in India, the combination will be void as per the Competition Act, 2002,

  1. Forms Filing and Cost

The Competition Commission has prescribed certain forms under The Competition Commission of India (Combination) Regulations, in which the notice to the Commission shall be given. A fee of approximately $50,000, which may increase to $100,000 in certain cases, shall be paid with the notice. Further, the Competition Commission will issue a show-cause notice if it is of a prima facie opinion that the combination is likely to cause an appreciable adverse effect on competition in India. A fee of $40,000 is to be filed along with the response to the show-cause notice.

  1. Exemptions

The Competition Commission of India (Combination) Regulations, exempts 13 transactions from the preview of combinations but these exempted transactions are also required to notify to the commission. It means these transactions are not exempt from the reporting requirements.

  1. Extra Territorial Jurisdiction

In the Indian Competition Act, 2002 has the extra territorial jurisdiction. Section 32 provides that the commission shall have the power to Competition Commission shall have the power to enquire into an agreement or abuse of dominant position or combination even if the act has taken place outside India or the party or enterprise is outside India provided it has an appreciable adverse effect on competition in India. Further the Commission is allowed under proviso to section 18 to enter in to memorandum or arrangement with the prior approval of the Central Government. Section 32 states that, notwithstanding that any restrictive agreement, any party to such agreement, any enterprise abusing the dominant position, or any combination or party to the combination is outside India, the Competition Commission of India has the power to enquire into if it has an anti competitive effect within the relevant market in India.


The Competition Act, 2002 contains a comprehensive Merger review process. It brings various new concepts under the provision of combinations like relevant market, assets/turnover outside India and the new test of appreciable adverse effect etc. Undoubtedly, the Competition Act will play a significant role in the development of the Indian economy. Indian markets cannot function in isolation; they need to align themselves with their investors in an increasingly flat world.

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