Section 5 of the Competition Act, 2002 (hereinafter, ‘the Act’) defines the term combination as the acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises under certain conditions listed therein.The Act specifically prohibits combinations that have adverse effects on the competition in the relevant market.
A merger has several advantages for companies involved in or having interests in the same line of business to expand business activities and equip the business with the opportunity to enter new markets and grow, diversify without building from the scratch. However, several merger agreements between businesses are not in consonance with the spirit of the Act as they drive out competition instead of promoting healthy competition.This post seeks to briefly discuss the conceptualization of merger control under the Act and the changes introduced recently.
The need to regulate a merger arises when it has an adverse impact on the competition in the market. Its negative impact on competition harms consumer welfare and hampers free entry and exit into the market by other players. It may create a dominant enterprise in the market, which may then abuse its dominant position and hamper competition in the market. For instance, if Amazon India and Flipkart merge, the merged entity would emerge as a dominant enterprise in the e-commerce market, acquiring at least 60% of the relevant market. This merged entity can abuse its dominant position and disrupt the market forces leading to an adverse effect on the market. Such concentration of market power is anti-competitive and prohibited by the Act. Hence, despite the commercial advantages and inevitable nature of a merger, combinations are regulated under the Act.
Combinations are regulated in several ways by defining threshold limits. The Supreme Court in Excel Crop Care Limited v. the Competition Commission of India, laid down that in multi-product companies only the relevant turnover must be taken into consideration. Other threshold limits, inter alia, include net sales, market share, the share of voting rights of the entities involved. Further, the Act empowers the Competition Commission to deal with combinations to regulate them in consonance with the object and spirit of the Act. The business entities involved in the combination are required to meet certain procedural requirements, for instance,a mandatory notice to notify the commission, waiting period after the order of the commission for the merger to take place and determination of the relevant market. In case of non-compliance, the commission had the authority to levy fines. However, sometimes these provisions have been craftily abused. Owing to the discretion that rests with the commission for assessment of notices, sometimes, it has been abused to gain some extra time by invalidating notices without hearing the parties. Further, the commission does not engage much with the parties on divestment, and hence, sometimes they do not bring about the expected results.
Although attempts are being made, merger control laws in India are still not in alignment with international best practices. The elimination of the artificial timing pressures on filing within 30 days from the relevant trigger event is in consonance with the recommendations of the International Competition Network. This eliminates debates on the relevant trigger documents. Though penalties are still applicable to gun-jumping, it aids in facilitating multi-jurisdictional mergers. Changes have also been introduced in the interpretation of the target based exemption for five years and to the merger review process. The de minimis threshold in the merger regime has been streamlined and made applicable to asset acquisitions. However, several modifications still need to be made to the existing regime to establish standards to guide the industry. For instance, publication of queries on its internet portal, invite views from stakeholders, like SEBI, would ensure consistency and transparency. Further, it must be ensured the investigation in combination cases must be handled by Director Generals, who have expertise as it requires technical determinations of the relevant market and assessment of the adverse impact on the market. Despite the provision, it has not been complied with. If enforced properly, these measures would contribute to the ease of doing business in India in line with the governments ‘Make in India’ initiative.
This post has been authored by Himani Shah, 3rd year student and Shantanu Awasthi, 1st year student at the West Bengal National University of Juridical Sciences.
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