This article is written by Preeti Pallavi Jena, from School of Law, KIIT University, Odisha. This article discusses mergers and acquisitions under the competition law.
Table of Contents
Introduction
Competition is a process about self-interest and gaining profits but it also should be beneficial for society. It makes the market system work efficiently and increases economic growth. It is a situation in the marketplace where sellers struggle independently for buyers for achieving an appropriate business objective.
MRTP Act, 1969
The main objective of the MRTP Act (The Monopolies & Restrictive Trade Practices Act) was to prohibit trade practices that are unfair and restrictive in nature. This unfair trade practice consists of acts such as falsely advertising and misrepresenting fraudulently to obtain profits from the business. This act was considered a competition law in India because it dealt with trade practices that have the effects of preventing competition. But with the passage of time, it was realized that the MRTP Act was playing a weaker role on competition law when compared to competition law of other different countries, and hence, the new act came up, known as the Competition Act, 2002 which changed the policies of India from command and control to the globalization of trade.
Competition act, 2002
The Competition Act replaced the old MRTP Act of 1969. Since the MRTP Act was inadequate for providing better challenges for the growth of our economy, a new Act was established. This law was amended on 10th September 2007. This Act is made for promoting competition in markets. It also ensures the freedom of trade by the participants in the marketplace. It tries to prevent practices that cause an adverse effect on competition. This Act also protects the rights and interests of the consumers. The main motive and objective are to provide for the establishment of a commission. This is done for the economic development of the country.
Types of agreements under the Competition Act
The Competition Act, 2002 is concerned with prohibiting 3 types of agreements which are:
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Anti-competitive agreements
Section 3 of the Competition Act restricts entering into any kind of arrangement concerning the product, supply, distribution, provisions of service which causes an adverse effect on competition in India.
Here in the case of Builders Associations of India v. Cement Manufacturers Association, the CCI (Competition Commission of India) said that the anti-competitive agreements can be deducted from the parties with the evidence. In this case, there were no agreements but the circumstance evidence produced the goods and services indicating the parties for purchase and control of production, the supply of goods, and investments.
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Abuse of dominant position
Section 4 of the Competition Act contains provisions concerned with regard to abuse of dominant position. The abuse of a dominant position occurs when a group of people are involved in conduct that eliminates a competitor. The Competition Act while determining the abuse of a dominant position is mostly concerned with the geographical location of the marketplace and also the product value in the market. This is concerned with the development of the sector and also for providing discipline with regards to the Competition Act.
In the case, Shri Shamsher Kataria vs. Honda Siel Cars India Ltd & Ors, the commission got information regarding a violation of Section 3(4) and Section 4 of the Competition Act, 2002. Meaning these agreements were anti-competitive agreements and abuse of dominant position. Here the OEM(Original Equipment Manufacturer) didn’t give technical information regarding the software programs to the individual repairers. Hence an unfair and discriminatory condition arose on the independent repairers and this led to the refusal of market access to them. The DG report stated that there are 3 separate markets in this case:
- Primary market;
- Aftermarkets; and
- After-sale the service of maintenance.
The dispute was whether there was any abuse of dominance in the spare parts market or not. The commission imposed a fine of 2% of the whole turnover on 14 cars and commanded them to submit the report within 180 days’ time limit and OESs were allowed to sell spare parts products in the marketplace.
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Regulation of combinations (mergers and acquisitions)
Section 6 is the provision for the regulation of combinations. In this section, the Act prevents one from entering into any agreement which may cause an adverse effect on competition within a specific market in India. The regulation combination is necessary for the impact on the level of competition within the market. It is concerned with the new company’s ability and strength for altering or fixing prices under a particular sector.
Role of the Competition Commission
The Competition Commission is responsible for the establishment of the Competition Act, 2002. The Competition Commission tries to prevent adverse effects on competition in India. The major duty of the Competition Commission is provided under Section 18 of the Competition Act such as:
- Removing practices that are causing an adverse effect on the competition;
- Encouraging the freedom of trade in the country and removing any restricted entries from the marketplace;
- Maintenance of competition in the market (mostly for the protection of the needs, interests of the consumers by removing each and every practice that leads to affect the consumer’s interest);
- The Competition Commission must create or develop awareness among the public at large.
Power of Competition Commission with regard to combination under the Act
Section 6 deals with the provisions which are concerned with the regulation of combinations. The combination is the merger between any two enterprises or business enterprises. It says that no person can enter into a combination that causes harm or creates any adverse effect on competition in the relevant market in India. If any person enters into any such combination then it shall be treated as void.
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Mandatory notice
A merger is an agreement that makes two companies into a single new company. If the merger is entering into a combination, it has to be made known to the Competition Committee regarding it. This should be notified to the Commission within 30 days.
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210 days waiting period
As per the Competition Act, no combination can come to effect until 210 days have been completed since the date of receiving the notice to combination or date of passing which comes first.
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Relevant market
The relevant market is the market that is determined by the Commission with regard to the relevant market product and the geographic area. This means that the products can substitute the goods. Relevant product market refers to a market that consists of all products that are interchangeable by the customers.
Merger and acquisition
Merger and acquisition are considered the most important form of corporate restructuring and sought methods for company process. A merger is a process of merging 2 accompanies to make a new company. On the other hand, acquisition takes place when a company is taken by another company. An acquisition can be either friendly or unfriendly. A merger can enable competition for regulating chances in the market complex. Mergers should be only challenged if there is any harm or there is a bad outcome or adverse effect.
UK Merger
This tries to control the rules which are applied to a broader class of transitions. A merger may arise where one party has a material ability to influence the policy of a company. If the company which is the target generates UK turnover, then the transaction will be large enough to merit review.
Combination under Competition Act
Section 5 of the Act describes and states the combinations as ‘the acquisition to enterprises by any person, merger or amalgamation of enterprises will be a combination of such enterprises if:
- In an acquisition, if the party gains a good influence over the voting rights, or gains control over the assets of an enterprise and the value of the assets for an amount greater than INR one thousand crores or the overall turnover of the enterprise is greater than INR three thousand crores, or even if the total value of the assets exceeds five hundred million USD.
- The concept of combinations comes into the picture when, any group buys an enterprise, or takes control over its shares, voting rights. Also, the concept comes when the net value of the asset exceeds four thousand crores of the enterprise and has a turnover of twelve thousand crores or more. And even when the total value of the asset, in or out of India, is two billion USD.
- If in a situation, a person gains direct or indirect control over an enterprise and further exercises its power over all other enterprises which are involved in the distribution, manufacturing, or trading of an identical service, then, a combination takes place.
- After a merger, if an enterprise takes control of a group and its valuation results in an amount greater than INR four thousand crores or the total value of the assets exceeds two billion USD.
Mergers under the Competition Act
The merger has been widely used under the Competition Act for including the acquisition of shares and for having control over the voting rights and over the assets of the enterprise. The merger brings a change in the management fields of affairs from one to another enterprise. One enterprise is titled for having control on the relevant part of the assets and it also has the power of decision making. A merger is a normal activity that arises between the business entities for expanding their own businesses. But there are also some mergers which lead to the adverse effect of the competition. Merger’s negative impacts lead to a reduction of competition in the market place which is done by decreasing the entities in the market. Mergers have the power to restrict new people from entering the market and this creates benefits for them because they limit the output. Mergers also increase the price of goods and services which will affect the interests of the consumers. Basically, it can be said that mergers have full control over the market.
Kinds of merger
There are 3 kinds of mergers:
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Horizontal merger
This merger takes place between the enterprises that are involved in trading similar kinds of goods and services. It tries to improve the market share value and to carry out operations on a large scale. It creates or has an adverse effect on the competition of the market.
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Vertical merger
Here, the enterprises are involved in various levels of products in different market fields. It can be for the supply of goods, production, and storage of goods and trade in goods.
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Conglomerate merger
Here two kinds of mergers are involved in different types of business. This merger helps the merging companies enhance their works and try to maintain financial stability by strengthening it. Conglomerate merger is of two types:
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Pure conglomerate merger: This happens between 2 companies doing their own business and related to each other.
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Mixed merger: The main objective of the enterprise here is to extend their business and gain profits through market access and also increase the varieties of products.
Reasons for the increase of mergers and acquisition between enterprises
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Market share
The increase in the shares of the market helps the enterprises for limiting their production and increasing their prices.
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Large economy
The merger scales of business expansion and the operations they carry leads to an increase in the amount of income.
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Diversification
It increases the trust, loyalty of customers for the productions and more earnings for the companies.
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Tax consequences
Companies try to combine to avoid paying tax.
Private equity
Competition law is necessary for potential investment by private equity. The mergers try to control the transitions consisting of the private equity firms. This private equity is quite complex but they still try to establish their industry. They control the investments in specific sectors and also control a large number of companies.
The transactions consisting of the private equity firms are subject to the merger control needs because of the turnover. In this case, it can exceed the relevant thresholds. Private equity acquire individual control on target by acquiring:
- The whole capacity.
- A majority interest.
- A minority shareholding.
Green channel route
The CCI amended the Competition Commission of India (Combination Regulation) for the introduction of a ‘green channel’. The CLRC (Competition Law Review Committee) report was made for improving the combination regulation more efficiently in the year 2019. Green Channel was made for the improvement of the merger rules and regulations. It created a balance between the functions and the enforcement and also promotes the economic growth of the country. The CCI brought the ‘green channel route’ for more speedy approval of clearing the merger and acquisitions. If the filing notification comes with the CCI, immediate approval of the transaction is given. The waiting period gets reduced through this procedure.
Penalty
If there occurs a rejection or failure to notify the CCI, it would amount to punishment under Section 43A of the Act. The CCI has also the power to acquire combinations by suo motu or on the receipt showing whether the combination regulation impacts or causes an adverse effect in the market.
Conclusion
The purpose of mergers and acquisitions is to develop economic growth and improve the trade practices that can help customers and benefit them in various ways. The amendment to the MRTP Act to the Competition Act had a greater impact on society and it brought many changes. Around the year 2007, mergers and acquisitions were made compulsory to the commission in the Competition Act. The Competition Commission enjoys many powers in this act. It is mainly concerned with reducing the adverse effects which are harmful to the consumers.
References
- https://algolegal.in/1818-2/
- https://www.whitecase.com/publications/insight/private-equity-and-merger-control-increasing-buyer-scrutiny
- https://www.lexology.com/library/detail.aspx?g=627ca494-3df6-4641-863b-4536eb08a0d2
- https://www.mondaq.com/india/antitrust-eu-competition-/627802/mergers-acquisitions-under-the-indian-competition-regime
- https://uk.practicallaw.thomsonreuters.com/Cosi/SignOn?redirectId=rt_d87dd32c-e1cd-4c5c-aea5-a0dfb211ff33
- https://www.investopedia.com/terms/m/mergersandacquisitions.asp
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