Provisions of Competition Act 2002.

Competition Act 2002: Provisions for Mergers and Acquisitions

The Competition Act, 2002, represents a paradigm shift in India's approach to regulating market competition. Moving away from the restrictive focus of the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act), the Competition Act aims to promote and sustain competition in the Indian market. A key component of this Act is its regulation of mergers and acquisitions (M&A).

Background and Objectives

India's economic liberalization and globalization necessitated a modern competition framework. The Competition Act, 2002, addresses this need by prohibiting anti-competitive practices and establishing the Competition Commission of India (CCI) to enforce the Act and advocate for competition. The Act's M&A provisions are designed to ensure that combinations (mergers, acquisitions, and amalgamations) do not lead to an appreciable adverse effect on competition (AAEC) in the relevant market in India.

Key Provisions Related to M&A

The Competition Act, 2002, has four main parts, with the regulation of acquisitions and mergers being a critical aspect. Section 5 specifically deals with the control of combinations.

1. Definition of "Combination"

The Act defines "combination" broadly to include mergers, acquisitions, and amalgamations. It covers situations where:

• Two or more enterprises merge: Combining their assets and operations into a single entity.
• One or more enterprises acquire: Acquiring control over another enterprise or its assets.
• An amalgamation takes place: Blending two or more enterprises into a new entity.

2. Thresholds for CCI Scrutiny

The CCI's jurisdiction over a combination is triggered when certain thresholds related to assets or turnover are met. These thresholds are designed to capture combinations that have the potential to significantly impact competition. The thresholds are different for:

• Enterprises operating in India:
  • Combined assets exceeding ₹1,000 crore in India or
  • Combined turnover exceeding ₹3,000 crore in India.
• Enterprises operating worldwide:
  • Combined worldwide assets exceeding US$500 million (including at least ₹1,000 crore in India) or
  • Combined worldwide turnover exceeding US$1.5 billion (including at least ₹3,000 crore in India).
• Groups of enterprises:
  • Combined assets of the group exceeding ₹4,000 crore in India or
  • Combined turnover of the group exceeding ₹12,000 crore in India.
• Groups of enterprises operating worldwide:
  • Combined worldwide assets of the group exceeding US$2 billion (including at least ₹4,000 crore in India) or
  • Combined worldwide turnover of the group exceeding US$6 billion (including at least ₹12,000 crore in India).

3. Appreciable Adverse Effect on Competition (AAEC)

The CCI's primary concern is whether a combination causes or is likely to cause an AAEC in the relevant market in India. The Act outlines factors that the CCI considers when assessing AAEC, including:

• Market shares of the combining entities.
• Resources of the combining entities.
• Degree of concentration in the market.
• Extent of barriers to entry.
• Countervailing buyer power.
• Threat of substitute products or services.
• Possibility of the failing business.
• Nature and extent of vertical integration.
• Efficiencies accruing to the combination.

4. CCI Powers and Remedies

The CCI has the power to investigate combinations that meet the specified thresholds. It can:

• Approve a combination.
• Approve a combination with modifications (remedies) to address competition concerns.
• Block a combination if it is likely to cause an AAEC.

Remedies can include:

• Structural remedies (e.g., divestiture of assets).
• Behavioral remedies (e.g., restrictions on pricing or conduct).

5. Procedure and Timelines

The Act lays down a detailed procedure for notifying the CCI of a combination and for the CCI's review process. There are specific timelines for each stage of the process.

Significance of the Competition Act for M&A

The Competition Act has significantly impacted M&A activity in India. It has introduced a formal regulatory review process, requiring businesses to consider the competitive implications of their transactions. The focus on AAEC ensures that combinations that harm competition are either prevented or modified to mitigate their negative effects. The CCI's role is crucial in maintaining a competitive marketplace and protecting consumer interests.

Prohibition of Abuse of Dominant Position under the Competition Act, 2002

The Competition Act, 2002, recognizes that while dominance in a relevant market is not inherently illegal, the abuse of that dominance is anti-competitive and must be prohibited. This document explains the provisions related to abuse of dominant position under the Act.

Dominant Position vs. Abuse of Dominance

The Act allows enterprises to enjoy the benefits of their dominant position, both domestically and internationally. Dominance, in itself, is not prohibited. It refers to a position of strength in a relevant market that enables an enterprise to operate independently of competitive forces and influence consumers, competitors, or the market itself. However, Section 4 of the Act specifically prohibits the abuse of this dominant position.

What Constitutes Abuse of Dominance?

An enterprise is considered to have abused its dominant position if it:

• Imposes unfair or discriminatory conditions or prices: This includes predatory pricing, where prices are set below cost to drive out competitors.
• Limits or restricts production, supply, or market access: This can stifle competition and harm consumers.
• Denies market access to competitors: Preventing other businesses from entering or competing effectively in the market.
• Enters into unrelated tie-in agreements: Requiring parties to accept unrelated obligations as a condition of a contract.
• Uses its dominant position in one market to gain an unfair advantage in another market: Leveraging dominance in one area to unfairly compete in a different, related market.

Investigating Abuse of Dominance

The Competition Commission of India (CCI) can investigate potential abuses of dominance either on its own initiative or upon receiving a complaint or reference. Section 19 of the Act outlines the factors the CCI considers when determining if an enterprise enjoys a dominant position. These factors include:

• Market share of the enterprise: A high market share can be an indicator of dominance, though not conclusive proof.
• Size and resources of the enterprise: Financial strength and other resources can contribute to market power.
• Size and importance of competitors: The strength and presence of competitors are crucial in assessing dominance.
• Economic power of the enterprise: The ability to outperform competitors in the market.
• Vertical integration of the enterprise: Control over various stages of the supply chain can enhance market power.
• Dependence of consumers on the enterprise: If consumers have limited alternatives, the enterprise may have significant market power.

CCI's Powers and Remedies

If the CCI finds an enterprise to have abused its dominant position, it has the power to:

• Direct the enterprise to cease and desist from the abusive conduct.
• Award compensation to parties harmed by the abusive conduct.
• Impose penalties of up to 10% of the enterprise's average turnover for the preceding three fiscal years.
• Recommend to the Central Government the division of the dominant enterprise to prevent abuse of dominance.

Regulation of Combinations under the Competition Act, 2002: Analysis and Recommendations

This document analyzes the regulation of combinations (mergers, acquisitions, and amalgamations) under the Competition Act, 2002, highlighting certain limitations and offering recommendations for improvement.

Current Framework: Size-Based Thresholds

Currently, the Competition Act focuses primarily on size as the determining factor for whether a combination requires scrutiny. Section 5 defines "combination" and sets thresholds based on assets and turnover. Only combinations exceeding these thresholds are subject to regulation.

Limitations of the Current Approach

The current size-based approach has several limitations:

• Exclusion of other relevant criteria: Factors like market share and market size are not explicitly considered. A merger that doesn't meet the size thresholds but significantly impacts a small, niche market might escape scrutiny. Similarly, a merger in a highly concentrated market could raise serious competition concerns even if the individual entities are not large.
• Potential for anti-competitive mergers below thresholds: Mergers that do not qualify as "combinations" under Section 5 might still have an appreciable adverse effect on competition (AAEC). The Act lacks provisions to address such scenarios.
• Disproportionate impact on large international corporations: As noted by the Association of Chambers of Commerce in India, the thresholds in Section 5 are easily met by large multinational corporations investing in India, irrespective of the investment's actual impact on the market. This can lead to unnecessary scrutiny of relatively benign transactions.
• Potential for overlooking smaller but impactful mergers: Conversely, smaller mergers involving companies with significant market share within a specific sector may not meet the threshold requirements and thus avoid scrutiny, even if such mergers significantly reduce competition in that specific market.

Recommendations for Improvement

To address these limitations, the following recommendations are proposed:

1. Multiple Criteria for Triggering Investigation: Instead of relying solely on size, multiple criteria should be considered, including:

   • Market share: A significant increase in market share post-merger should trigger investigation, regardless of asset/turnover thresholds.
   • Market size/concentration: Mergers in highly concentrated markets should be subject to closer scrutiny.
   • Combined assets/turnover: The existing size-based thresholds can be retained as one of the criteria.

   A violation of any of these criteria could trigger an investigation. This multifaceted approach would provide a more nuanced and effective assessment of potential competition concerns.

2. Mandatory Pre-notification: Currently, notification to the CCI is voluntary. Mandatory pre-notification for all combinations exceeding specified thresholds (using the multiple criteria approach) should be implemented. This would prevent companies from implementing mergers before the CCI has had a chance to assess their competitive impact. This would also provide greater certainty to businesses.

3. Clearer Articulation of Pro-Competition Objective: While the Competition Act aims to foster a merger-friendly environment, this objective should be more explicitly stated within the Act itself. This would provide greater clarity and guidance to the CCI and businesses.

4. Timely Decision-Making by CCI: The CCI should adhere to the stipulated timelines for decision-making (e.g., the 90-day period mentioned in Section 31(11)). This is crucial for providing businesses with certainty and preventing unnecessary delays. Delays can lead to significant losses for companies, especially if a merger is ultimately deemed anti-competitive after substantial investments have been made.

Conclusion

By implementing these recommendations, the Competition Act can be strengthened to more effectively regulate combinations and prevent anti-competitive mergers. A more nuanced approach, considering multiple criteria and mandating pre-notification, will ensure that both large and small mergers with the potential to harm competition are appropriately reviewed. This will contribute to a more competitive and dynamic marketplace in India.