REGULATION OF COMBINATION(S)

UNDER THE COMPETITION ACT,2002

ARITRA DAS
22 NILGIRI APARTMENT
ALAKANANDA, NEW DELHI
+919871037757

aritradas@hotmail.com/aritradas1985@gmail.com

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 IMPORTANT DEFINITIONS AND
CONCEPTS

 COMBINATION (SECTION 5)
 Acquisition of control, shares, voting rights or assets.
 Acquisition of control by a person over an enterprise where such
person has control over another enterprise engaged in a competing
business.
 Mergers or amalgamations between or amongst enterprises.

 Combination is a relationship between two or more persons or

enterprises through any agreements or understanding and for the
purpose of sharing the properties or interest in any enterprise.
 Term combination is wider and a composite expression and
includes transactions in addition to a merger.

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 IMPORTANT DEFINITIONS AND
CONCEPTS

 HORIZONTAL MERGERS: Merger between Competitors

which produce or supply similar or identical products.

 VERTICAL MERGERS: Mergers between enterprises at

different levels in the chain of production and distribution.

 CONGLOMERATE MERGERS: Mergers between entities

engaged in unrelated business.

 RELEVANT MARKET: ( Sec 2 (r) ) “ …means the market

which may be determined by the commission with
reference to the relevant product market or relevant
geographic market or both)

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 IMPORTANT DEFINITIONS AND
CONCEPTS CONTD…

 RELEVANT PRODUCT MARKET: ( Sec 2 (t) ) “… means a market

comprising of all those products or services which are regarded as
interchangeable or substitutable by the consumers, by reasons of
their characteristics, prices or intended use..”
 Smallest set of products substitutable, given a small but
significant non transitory increase in price (SSNIP)
 RELEVANT GEOGRAPHIC MARKET: ( ( Sec 2 (s) ) “…means a
market comprising the area in which the conditions of
competition for supply of goods or provisions of services or
demand of goods and services are distinctly homogeneous and can
be distinguished from the conditions prevailing in the neighboring
areas...”
 Geographic area within which substitutes are available at
similar prices

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 IMPORTANT DEFINITIONS AND
CONCEPTS CONTD…

 GROUP ( SEC 5, EXPLANATION (B) )

 Two enterprises belong to a group if one is in the
position to exercise at least 26% voting rights or
 appoint at least 50% of the directors or controls the
management or affairs of the other.

CONTROLS ( SEC 5, EXPLANATION (A) )

 includes controlling the affairs or management by-

 one or more enterprises, either jointly or singly, over
another enterprise.
 one or more groups, either jointly or singly, over
another group or enterprise.

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 IMPORTANT DEFINITIONS AND
CONCEPTS CONTD…

 REGULATION 2 (1) ( C ), SEBI REGULATION 1997.

 Right to appoint majority directors.

 Controlled defined inclusively.
 Control the management or policy decisions
exercisable by a person or group of persons acting
individually or in concert, directly or indirectly,
including by virtue of their shareholding or
management rights or shareholders agreements or
voting agreements or any other manner.

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 IMPORTANT DEFINITIONS AND
CONCEPTS CONTD…

 ASSETS

 Word has not been defined.

 Meaning the same as under the Companies Act, 1956 by virtue of
Sec 2 (z) r/w Schedule VI of the Companies Act 1956.

 SEC 5, EXPLANATION C ( DETERMINING THE VALUE OF ASSETS)

 Determined on book value in the preceding financial year of the

proposed merger.
 Includes brand value and goodwill, value of intellectual property
including permitted use, and commercial rights

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 THRESHOLD FOR MERGER AND
AMALGAMATION
SECTION 5 (C) (i) (A) & (B) AND 5 (C) (ii) (A) & (B)

Sec 5 (c)
Threshold Requirements
For Merger or Amalgamation

Sec 5 ( c ) (i) (A) & (B) Sec 5 ( c ) (i) (A) & (B)
Individuals Groups

( Assets/Turnover in India ) ( Assets/Turnover in India )

OR OR
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( Assets/Turnover Outside India) ( Assets/Turnover Outside India)
 THRESHOLD FOR MERGER AND
AMALGAMATION

 Sec 5 (c )(i) (A) ( Within India)

 Combined assets of the Enterprise value more than 1000
Crores
OR
 Combined turnover more than 3000 Crores.

 Sec 5 (c )(i) (B) ( In case either or both the enterprises have

assets/ turnovers outside India also )
 Combined assets value more than USD 500 Millions,
including at least Rs 500 Crores in India.
OR
 Turnover is more than USD 1500 Millions, including at
least 1500 Crores in India.

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 THRESHOLD FOR MERGER AND
AMALGAMATION

 Sec 5 (c )(ii) (A) ( Combined Assets/Turnover Within India of the Group

to which the acquired enterprise would belong after the Merger)

 Assets of Value of More than Rs 4000 Crores

OR
 Joint turnover of more than 1200 Crores.

 Sec 5 (c )(ii) (B) ( Combined Assets/Turnover Outside India of the Group

to which the acquired enterprise would belong after the Merger)

 Assets of value of more than USD 2 Billion including at least Rs 500

crores in India.
OR
 Turnover of more than 6 Billion, including Rs 1,500Crores in India.

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 THRESHOLD FOR MERGER AND
AMALGAMATION

 Act prescribes sufficient high thresholds in terms of assets/

turnovers for mandatory notification to the commission.
 Only big ticked combinations subject to regulation.
 The threshold are in terms of valus of assets or turnover +
whether operations are in India, India and Outside or the
combining parties belonging to a group.
 The concept of domestic nexus has been incorporated in the
Act by the 2007 amendment.
 Implied Presumption : Small size combinations less likely to
cause an appreciable adverse effect on competition on the
relevant market, within India.

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 REGULATION OF COMBINATIONS
(Section 6)

SECTION 6 : KEY REGULATORY PROVISION.

Sub-clause (1)

Combinations declared VOID which causes or is likely to cause

an “appreciable adverse effect” on competition within the
relevant market in India.

 “Appreciable adverse effect” is a question of fact to be

determined in each case.
 Rule of Reasons approach for assessment.
 Provision aims to control post merger conduct.
 Adverse effect treated “prospective” in nature.

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 EFFECT OF MERGERS ON
COMPETITION

 UNILATEREAL EFFECTS  COORDINATED EFFECTS

When a merged enterprise When a merger facilitates
gains sufficient market power collusive behavior, either due
to enable it to behave to express agreement amongst
independently of market competitors or due to tacit
forces coordination by competitors
that have similar effects.
e.g.
Coordinated effects are
 Competitors inability to relative to the merging firm’s
increase output in response to pre merger relationship in the
a unilateral increase in price. market and the ability of the
firm to use knowledge, know
 Products are not close how etc and distort
substitute of each other. competitive tension.
e.g.
 Cartels

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 EFFECT OF MERGERS ON
COMPETITION

 HORIZONTAL MERGERS ARE THE MAIN FOCUS OF

MERGER CONTROL.

 Tendency to limit the number of players.

 Tendency to create or strengthen a paramount
market position.
 Tendency to eliminate potential competition in a
oligopolistic market by eliminating important
competitive constraints.

 COMPETITION ISSUES LEAST LIKELY IN

CONGLOMERATE MERGERS.

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 COMPARATIVE LAW

 CLAYTON ACT
 Section 7
 Lays emphasis on the effect of acquisition of stocks or
assets on competition “on any line of commerce”
 Provision omits the mere value of assets or turnover of
the enterprises for determining the effect of the
acquisition of stocks or assets on competition.

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 DETERMINATIVE FACTORS FOR
ASSESSING AN ADVERSE EFFECT ON
COMPETITION

 SECTION 20 (4) sets outs the factors that are to be

considered by the commission in determining whether a
combination would have the effect, or is likely to have an
appreciable adverse effect on competition in the relevant
market.
 No factor by itself is conclusive in nature
 Also any benefits that arise from the combination which
outweigh the adverse impact are to be considered.
 The commission to apply the factors under Sec 20 (4)
to assess the combination after the monetary threshold
limits have been crossed under Sec 5 (a) (b) or ( c ), as the
case may be.

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 DETERMINATIVE FACTORS FOR
ASSESSING AN ADVERSE EFFECT ON
COMPETITION CONTD…

 BARRIERS TO ENTRY
 One of the most significant factors in merger
evaluation.
 Numerous reasons including high initial cost of
investment.
 Requisite technology not freely available.
 Governmental restrictions

 MARKET SHARE ( individually as well as combinants)

 High market share definite indicator of
appreciable adverse effect.
 Factor not conclusive in itself.

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  LIKELIHOOD OF REMOVAL OF EFFECTIVE COMPETITOR(S)

 THE LEVEL OF COMBINATION IN THE MARKET

 In a highly concentrated market a combination of those

controlling the market can eliminate competition

 EXTENT OF COMPETITION LIKELY TO SUSTAIN IN THE MARKET

 Core issue in merger assessment.

 The combination should be prohibited if in effect it has the
threshold to substantially reduce competition.

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  AVAILABILTY OF SUBSTITUTES OR THROUGH
IMPORTS
 Neutralizes the anti competitive effects of a
combination effecting those products or services.
 Effect similar if products available through imports.

 DEGREE OF COUNTERVAILING POWER IN THE

MARKET.
 Scope for buyers to obtain substitutes.
 Scope of suppliers to consider supplying substitutes.
 Acts as a constraint to a combination to likely effect
competition

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  POTENTIAL TO INCREASE PRICES OR PROFIT
MARGINS.

 Implicit in the section that only an excessively high

increase of price or profit margins may be
considered

 VERTICAL INTEGRATION

 Where enterprises are in a different stages of the

supply of a product or service.

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  POSSIBILITY OF A FAILING BUSINESS

 Refers to an enterprise that is no longer active and is

not really a competitor.
 The presence of such enterprises indicate that there
may be no competition to be effected by the
combination
 Whether an enterprise cannot be financially restored is
a question of fact to be determined in each case.

 BENEFITS THAT MAY OUTWEIGH ADVERSE IMPACT

 Relative advantage by way of economic development

 Consumer advantage like low price

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 COMPARATIVE LAW (FACTORS IN MERGER
ASSESSMENT)

 UNITED STATES

 Administrative guidelines (The Horizontal Merger Guidelines

1992, as amended on April , 1997)
 The Department Of Justice has also provided guidance on
non horizontal mergers in Sec 4, 1994 Merger Guidelines.

 UNITED KINGDOM

 OFT’s ‘Mergers-Substantive Assessment Guidance ( May 2l

003) published pursuant to Sec 106 (1) of the Enterprise Act
2002
 Substantial lessening of competition is a comparison of
prospects for competition with and without the merger.

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 COMPARATIVE LAW (FACTORS IN MERGER
ASSESSMENT) CONTD…

 European Union
 Competition Policy included in Art. 3 of the Treaty of
Rome.
 Scope of Enquiry : “ effect of competition in consumer
welfare” .
 Australia
 Sec 50 (3) of the Trade Practices Act 1974 (TPA)
Provides a non exhaustive list of matters in assessing
whether a merger would be likely to substantially lessen
competition.
 Other factors: Australian Competition and Consumer
Commission (ACCC) Merger Guidelines.

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 RELEVANT GEOGRAPHIC AND
PRODUCT MARKET

 RELEVANT GEOGRAPHIC AND PRODUCT MARKET

 Starting point for the examination of the

effect on competition, whether adverse or
otherwise.

 Determination of the relevant market is not an

isolated fact.

 The act defines a relevant market, relevant

product market and relevant geographic market.

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 RELEVANT GEOGRAPHIC AND
PRODUCT MARKET CONTD…

 OBJECTIVE OF DEFINING A MARKET IN PRODUCT

AND GEOGRAPHIC DIMENSIONS
BASIC COMPETITIVE CONSTRAINTS

DEMAND SUBSTITUTABILITY

SUPPLY SUBSTITIUTABILITY

POTENTIAL COMPETITION

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 RELEVANT GEOGRAPHIC AND
PRODUCT MARKET CONTD…

 “Basically the exercise of market definition consists in identifying

the effective alternative sources of supply for the customers of the
undertaking involved, both in terms of products/services and
geographic location of suppliers”
… … … … (EC Notice, dated December 9, 1997)

 Summary
 The concept of relevant market is logical and rational
 Identifying actual competitors and competitive pressure.
 Identify and define the boundaries of competition.
 To calculate market shares and market power.
 Identify effective alternative sources for consumers
both in terms of products/services and geographic location of
suppliers

ISSUES MIXED CONSIDERATION OF LAW AND
ECONIMICS

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 RELEVANT PRODUCT MARKET

 “ Those characteristics of the products by virtue of which

they are particularly apt to satisfy an inelastic need and are
only to a limited extent interchangeable with other
products.”( ECJ in the Continental Can Co Inc (1973) case )

 “…singled out by such special features distinguishing it

from other fruits that is only to a limited extent
interchangeable with them and is only exposed to their
competition in a way that is hardly perceptible…”( ECJ in
the United Brand’s (1978) case )

 Sec 19 (7) : Factors to be considered by the commission.

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  Physical Characteristics or end use of goods.
 Price of Goods/Services.
 Consumer Preferences.
 Exclusion of In house production.
 Existence of specialized producers.
 Classification of industrial products.

“… Cross elasticity of demand between products- an element of consideration

is to be made for the responsiveness of the sale of one product to a price
change of the other…”
Brown Shoe vs U.S ( 370 U.S. 294)

“…This interchangeability is largely gauged by the purchase of competing

products for similar use considering the price, characteristic, and
adaptability of the competing commodities…” U.S vs Du Pont & Co. ( 351
US 377 (1956)

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  Demand side substitutability: The extent to which customers
could and would switch amongst substitute products ---- in
response to a --- change in relative price--- quality---availability---
other features.
 Small but significant non transitory increase in price ( SSNIP/
Hypothetical monopolist test)
“...a market is a narrowest set of products for which a hypothetical
monpolist producing all the products in that set would find setting
a 5% to 10 % margin above competitive level as profitable…”
 Supply side substitutability: Examines the extent to which
suppliers of alternative products could and would switch their
existing production fcilities to make alternative products in
response to a change in relative prices, demand or other market
condition…”

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 RELEVANT GEOGRAPHIC MARKET.

 Relevant Geographic Market: ( ( Sec 2 (s) ) “…means a

market comprising the area in which the conditions of
competition for supply of goods or provisions of services or
demand of goods and services are distinctly homogeneous
and can be distinguished from the conditions prevailing in
the neighboring areas...”
 Geographic area within which substitutes are available
at similar prices
 Uniformity in composition has to be
contradistinguished from condition of services.

Section 19 (6) Factors for consideration

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 RELEVANT GEOGRAPHIC MARKET.

(a) Regulatory trade barriers.

(b) Local specifications.
(c) National procurement policies.
(d) Adequate distribution facilities.
(e) Transport cost.
(f) Language.
(g) Consumer preferences.
(h) Rapid after sales services.

Boeing/Mc Donnell Doughlas ( E.C case No. IV/M 87)

Relevant Georaphic market for large commercial jet aircrafts:
World Market.
World Market------Narrow Body Aircrafts + Wide Body Aircrafts.

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 ECONOMIST’S TOOLS

 Price correlation analysis.

 Prices of products that are close substitutes will move in
tandem.
 Need for up to date and accurate data imperative.

 Elasticity.
 Gives an idea about substitutability.

 Close substitutes from the relevant product market.

 Market has to be defined neither too broadly or narrowly.

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 REGULATION OF COMBINATIONS
(PROCEDURAL FRAMEWORK)
SECTIONS 6(2),(3),(4) & (5)

 Merger Notification ( Mandatory Notification Regime)

 Mandatory pre merger notification of combinations that exceed the prescribed
threshold.
 Commission having the option to inquire within one year if a notifiable merger
not notified.
 Commission can order de-merger if enquiry reveals appreciable adverse effect
on competition.
 Commission can also impose fine upto 1% of the total turnover or assets of
the combination, whichever is higher.
 Ex-ante action unlike ex post in case of anti competitive agreements and abuse
of dominance.

 Exemption from mandatory notification

 Share Subscription/ Financing facility/Acquisition By a Public Financial

Institution/ Foreign Institutional Investor/ Bank/ Venture Capital Fund
Pursuant to any covenant of a loan agreement/ Investment agreement,
exempted from notification.
 Concerned Institution to file details within 7 days of such transaction.

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 REGULATION OF COMBINATIONS
(PROCEDURAL FRAMEWORK)

 Time Limit for Notification and Approvals

 Details of the proposed combination has to be notified within

 30 days of its approval by the board of directors.
Or
 From the execution of any agreement or other document.
 Proposed combination cannot take effect until commission passes an
order.
 Commission to arrive at a conclusion within 210 days.
 Deemed approval after expiry of 210 days.
 Draft regulation: Commission to dispose of notifications which have
little or no potential for appreciable adverse effect on competition in
India
 Ministry of Corporate affairs----makes mandatory for the CCI to
clear M&A proposals in 180 days ( Source TOI, July 5th 2010)

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 PROCEDURE FOR INVESTIGATION OF
COMBINATIONS ( Sections 29 & 30 )

 Show Cause Notice in case the commission is of the prima

facie opinion that a combination has caused or likely to
cause adverse effect on competition within the relevant
market.

 Commission may direct publication of details of the

combination inviting objections from the public, affected or
likely to be affected by the combination.

 Similar procedure to be followed in case of notification

under Sec 6 (2).

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 PROCEDURE FOR INVESTIGATION OF
COMBINATIONS

 Most Mergers do not harm competition.

 Some may be pro competition and ultimately befifit consumers.

 Many others are competitively neutral.

 Post merger competition will remain and continue to discipline the
merged entity and other players in the industry

 World wide over 90% cases are allowed unconditionally and 10 %

allowed with modification.

 Combinations to be regulated not prohibited.

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 REMEDIES UNDER THE ACT
 On an assessment of the merger, the commission may
decide to
 Approve the merger.
 Reject the Merger.
 Approve the merger subject to modifications.

 Remedies are both structural and behavioral in nature.

 Competition Appellate Tribunal to hear and dispose of

appeals against any direction issued or decision made or
order passed by the commission.

 Appeals to be preferred within 60 days of receipt of the

order/ direction dicission of the commission.

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 RECOMMENDATIONS OF THE
COMPETITION COMMISSION ON
REGULATION OF COMBINATIONS

 Exemption from notification: No enabling provision

empowering the commission to exempt any class of
transactions from the notification requirement.

 The threshold requirement under Section 5 is biased

against Indian Companies.
e.g.
 An Indian Company with turnover of Rs.3000 Crores,
cannot acquire another Indian Company without prior
notification.
 A Foreign Company with turnover outside India in excess of
Rs 4500 Crores can acquire an Indian Company with sales
short of Rs 1500 Crores without any notification.

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  Single sales/turnover test recommended in Section 5.
e.g.
(a) Combined world turnover of the parties to the
combination in excess of Rs ………;
(b) Each of at least 2 of the parties to the combination must
have a turnover in India in excess of Rs……….;
(c) The combination gives rise to market share in the
relevant market in India in excess of, say, 25 %
(views are of the competition commission)

 Purely conglomerate acquisitions that do not give rise to

any additional market shares, can be assessed and cleared
within 30 days from, notification.

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  Sec 5 will pick up transactions, exempted under the SEBI,
take over code. For e.g Regulation 22(12), and transactions
that constitute an increase in shareholding by a promoter
of a listed public company.

 Reduction of maximum waiting period of 210 days.

Time period prescribed, do not take cognizance of the
compliance under other statutory provisions like the SEBI,
Takeover Code, 1997.

Ministry of Corporate affairs----makes mandatory for the

CCI to clear M&A proposals in 180 days ( Source TOI,
July 5th 2010)

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 COMPETITION COMPLIANCE
PROGRAMME

 Deterrent penalties, heightened detection possibilities,

introduction of leniency programme, growing vigilance,
aggrieved persons right for compensation, no
indemnification of fines, disruptive investigations.

 Benefits include, reduced risk of contravention, early

detection, appropriate action against rivals, ensuring
compliance with orders passed, ensures compliance with
overseas competition law, beside a mitigating factor.

 Tailor made compliance programmes, not possible- it has to

be sector or enterprise specific.

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