2015 saw a slew of mergers and acquisitions (M&A) worldwide. Corporates announced deals worth $4.86 trillion globally. While healthcare ($708.7 billion) and technology ($697.4 billion) sectors dominated this global trend, major small-scale takeovers cemented 2015’s place as a record year for M&A. While, Asia Pacific contributed a record 24% share ($1.16 trillion) to this global hike, India’s M&A dipped to $25.65 billion from $26.90 billion an year ago. Reasons such as fall in deal value, lesser number of domestic deals, stretched corporate balance sheets, costlier foreign assets and depreciating rupee were primarily attributed to this fall. Furthermore, with the apprehension of a sudden tax demand and the uncertainties involved in availability of tax treaty benefits surmounting every transaction, companies have been much more cautious, which has further led to the reduction in the M&A activity in the country.
India enacted the Competition Act, 2002 (the Act) “….to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets, in India”. Even though M&A are seen as a legitimate means to grow economies, unregulated M&A can use business strategies to eliminate competition and may further have an adverse impact, or anti-competitive effect, or be detrimental to already existing competition in a particular market. Therefore, before an M&A transaction can be completed, it is important to ascertain its compliance with the Competition Law of any jurisdiction.
Through this article, we shall discuss the M&A, its types, its effects on competition and how competition law regulates M&A in India while understanding the implementation of these regulations by CCI through case study.
Explanation (i) to Section 232 of the Companies Act, 2013 explains the concept of mergers by stating that:
“(i) in a scheme involving a merger, where under the scheme the undertaking, property and liabilities of one or more companies, including the company in respect of which the compromise or arrangement is proposed, are to be transferred to another existing company, it is a merger by absorption, or where the undertaking, property and liabilities of two or more companies, including the company in respect of which the compromise or arrangement is proposed, are to be transferred to a new company, whether or not a public company, it is a merger by formation of a new company”
Furthermore, Section 2(1)(B) of the Income Tax Act, 1961 defines the term ‘amalgamation’ corresponding to Mergers as:
“(1B) "amalgamation", in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that—
(i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation ;
(ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation ;
(iii) shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation,
otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company;”
Through mergers two companies consolidate into a single company. A consolidation however, differs from a merger to the extent that consolidated companies may or may not result in a new entity, whereas in a merger one company absorbs the other, while remaining in existence. Further, consolidation also confines to “M&A of smaller companies into larger companies”. Mergers extinguish the merged corporation and forwards all the rights, duties, privileges and liabilities to the surviving merged corporation.While, mergers and acquisitions are both, “methods by which corporations legally unify ownership of assets formerly subject to separate controls”, and are often uttered in the same breath, an acquisition may or may not lead to a Merger. In layman terms, when a company does not want to be purchased, it is regarded as an acquisition. An acquisition implies takeover of one entity by another. Since a takeover has a negative connotation affixed to it, entities involved in acquisition usually like to refer to it as a merger. M&A facilitate access to new markets and established customer bases, technology access and sharing, brand equity and diversification, acquisition of suppliers, synergy and economies of scale. Different organizations employ different types of M&A depending on their requirements. We shall now discuss these types.
TYPES OF M&A
Horizontal mergers occur when two or more competitors in the same industry, engaged in same kind of manufacturing and sales process merge with each other. Such mergers enable reduction in market competition and seek to acquire more market share through a larger organization. Joint venture agreements may be an exception to horizontal agreements provided they “increase efficiency in production, supply, distribution, storage acquisition or control of goods or provisions of services.” Horizontal mergers when given effect to create problems for the markets such as, eliminating competition, absorbing economic power, bring the merged entity closer to a monopoly and effect price rise. This is the prime reason why Competition Commission of India (CCI) is comprehensively vigilant of such mergers.
Prime Examples: Brook Bond with Lipton India, Bank of Mathura with ICICI Bank, Bombay Suburban Electric Supply Ltd. with Orissa Power Supply Company, Tata Motors and Jaguar Land Rover and Associated Cement Companies with Damodar Cement.
2. Vertical Merger
Vertical mergers represent a ‘combination of firms’ at different stages of the same industry that merge operations, to increase efficiency by reducing production and transaction costs. In such a merger, an organization either buys customers (forward supply) or the suppliers (backward supply) of another organization.
Prime Examples: Tata Motors Ltd and Trilix Suri, Reliance and FLAG Telecom Group etc.
3. Conglomerate Mergers
Conglomerate mergers are given effect to between unrelated companies, who have no related products or markets. The rationale behind such mergers is diversification of risk and operations.Such mergers constitute:
(a) Pure conglomerate merger: involves mergers where two completely unrelated businesses get together, and
(b) Mixed conglomerate merger: mergers to facilitate wider market access, increased client base and enlarged range of products and services.
Prime Examples: Philip Morris and Miller Brewing Company, ITT, Avis Rent–a-Car, Sheraton Hotels and Continental Banking, GE and Honeywell, Larsen & Toubro Limited and Voltas Limited etc.
4. Reverse Mergers
In a reverse merger, a private company acquires the majority shares in a public company, and is then converted into a public company. Prime reason for undertaking such merger is to fathom the benefits of a public company while avoiding the costs of listing themselves in the stock exchanges. It facilitates greater liquidity and additional capital and stock and is a less time and money consuming alternative to conventional IPO. However, managers need to be experienced in the regulatory and compliance requirements of a public company.
Prime Examples: ICICI by ICICI Bank, New York Stock exchange by Achipelago Holdings to form NYSE group, etc.
An acquisition may be by way of ‘share acquisition’ (buyer buys the shares of the target company) or by ‘asset purchase’ (buyer buys the assets of an organization).
Prime Examples: Tata group acquires Corus, Bharti Airtel acquiring Zain Africa, Hindalco Industries acquiring Novelis etc.
In terms of Section 5 of the Act, combination means acquisition of control, shares, voting rights or assets, acquisition of control by a person over an enterprise engaged in competing businesses, and mergers and amalgamations between or amongst enterprises when the combining parties exceed the thresholds set in the Act.
These thresholds are enumerated herein below through a chart:
(A) Any acquistion where:
(B) Acquiring control by a person over an enterprise when such person has already direct or indirect control over another enterprise engaged in production, distribution or trading of a similar identical or substantial goods or provision of a similar or identical or substitutable service, if:
(C) Any merger or amalgamation in which:
EFFECTS OF M&A ON COMPETITION
As regards to competition, it is highly likely that M&A may lead to lesser competition in the market. For understanding the impact of M&A on competition, it is important to understand the relation between concentration and competition in a market. The bigger the merger or acquisition, the greater monopoly would the existing or new entity, as the case may be, is likely to have upon the market competition. This is because a merger or an acquisition takes over the business of the merged or acquired entity too and as such acquires the customers simultaneously. Yes, M&A have different impact as far as market competitions are concerned but this does not sideline the fact that a greater market share employs greater concentration. The most common impacts of M&A on competition are enumerated in two broad categories:
Unilateral Effects: Unilateral effects occurs when the merged enterprise/group is able to gain considerable market power sufficient enough for it to act independent of market forces and profitably reduce value for money, choice for innovation through its own acts without the need for a co-operative response from competitors.
Coordinated Effects: Coordinated effects transpire from a collusive behavior either due to cartels or tacit coordination. A merger in a concentrated market makes coordination effect easier because it may significantly hamper effective competition, through creation or strengthening of a collective dominant position, because it increases the likelihood of organizations able to coordinate their behavior and raise prices even without entering into an agreement.
Therefore, M&A require a system of stringent and constant scrutiny based upon a system of proper checks and balances. However, assessment of M&A impact on competition is a complex procedure. This is because such evaluation involves complete scrutiny of the economic implications of every M&A at every stage. Moreover, different industries have different levels of competition. Therefore, regulatory measures require evidence, as they cannot be enforced on mere speculations. Sufficient jurisprudence is available in the developed jurisdictions on the same and India is not far behind. Let us take a look at how the Act regulates M&A in India.
The objective of any competition law is to ensure that persons or enterprises obtaining the independence through merger or acquisition do not damage the structure of competition. This therefore fuels the demand for employing effective competition laws to regulate such a setup. The Act seeks to regulate M&A by addressing its fundamental effects on competition. These include:
Section 3 (1) of the Act prohibits any agreements (entered into by enterprise, or its association, person or association of persons) with regard to (production, supply, distribution, storage, acquisition or control of goods or provision of services) which causes or is likely to cause an ‘appreciable adverse effect on competition’ within India.
Section 19(3) of the Act classifies the factors to be considered while determining whether an agreement has an appreciable adverse effect on competition under Section 3:
Creation of barriers to new entrants in the market;
Driving existing competitors out of the market;
Foreclosure of competition by hindering entry into the market;
Accrual of benefits to consumers;
Improvements in production or distribution of goods or provision of services;
Promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.
Section 3(3) of the Act lists out certain agreements that shall be presumed to have an AAE on competition [entered into between enterprises or associations of enterprises or persons or associations of persons or between any person and enterprise or practice carried on or decision taken by any association of enterprises or association of persons, including cartels (an association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition)], engaged in identical or similar trade of goods or provision of services, which:
Directly or indirectly determines purchase or sale prices;
Limits or controls production, supply, markets, technical development, investment or provision of services;
Share of market or source of production or provision of services by way of geographical area allocations, type of goods or services, or customers or any other similar way;
Directly or indirectly results in bid rigging (i.e. agreements that may adversely affect or manipulate the process of bidding) or collusive bidding (agreements to cooperate to defeat the competitive bidding process in order to inflate prices to artificially high levels.)
Provisions of Section 3(3) of the Act are not to apply to joint ventures if such agreement increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services.
In furtherance to the above any agreement amongst enterprises or persons at different stages or levels of the production chain in different markets, in respect of different stages of product distribution including:
Exclusive supply agreement;
Exclusive distribution agreement;
Refusal of deal;
Resale price maintenance,
The aforesaid provisions of Section 3 of the Act shall not restrict a persons right to refrain any infringement, which may be conferred upon him in terms of the Intellectual property laws in India or the rights of any person to export goods from India to the extent agreement relates exclusively to the goods distribution stage or provisions of services.
The Act codifies remedies in case an Act is found Anti-competitive in terms of Section 3 of the Act such as:
Any agreement entered into in contravention of provisions of Section 3(1) of the Act shall be void [Section 3(2)];
Directing discontinuance and prohibiting from re-entrance into such agreements, or abuse of dominant position, as the case may be[Section 27(a)];
Penalties [Section 27(b)]–
Not more than 10% of the average of the turnover for the last three preceding financial years upon all parties to such agreements or abuse, as the case may be;
In case of cartel – A penalty on each party involved in such a cartel to the extent of three times of its profit for each year of the continuance of such agreement or 10% of its turnover for each year of the continuance of such agreement, whichever is higher;
Modification of the agreement to the extent specified by the Commission [Section 27(d)];
Direct the enterprises concerned to abide by such other orders, directions including payment of costs as the Commission may pass, if any, [Section 27(e)];
Pass such other order or issue such directions as it may deem fit. [Section 27(g)]
From the aforesaid it is evident that anti-competitive agreements are categorized as civil offences in India. However, the Act has not been able to provide any clarity with respect to standard of proof. This task has been assigned to the Competition Commission of India (CCI), who states that the standard of proof would depend upon the facts and circumstances of each case. While Section 3 of the Act has enumerated the law, CCI determines its scope on a case-to-case basis. In ‘Re: All India Tyre Dealers’ Federation v. Tyre Manufacturers’ MRTP Case: RTPE No. 20 of 2008 dated 30.10.2012 the CCI observed:
“297. As is seen from the construct of the aforesaid provisions, there is no need for an explicit agreement for existence of an ‘agreement’ within the meaning of the Act. The same can be inferred from the intention or conduct of the parties. In the cases of conspiracy or existence of any anti-competitive agreement, proof of formal agreement may not be available and the same may be established by circumstantial evidence alone. The concurrence of parties or the consensus amongst them can, therefore, be gathered from their common motive and concerted conduct.”
Furthermore, in ‘Builders Association of India v. Cement Manufacturers’ Association and Ors.’, Case No.29/2010 dated 20.06.2012, the CCI further observed:
“6.12 The act of the Opposite Parties in limiting and controlling supplies in the market and determining prices through an anticompetitive agreement is not only detrimental to the cause of the consumers but also to the whole economy since cement is a crucial input in construction and infrastructure industry vital for economic development of the country.”
While the Act seeks to regulate the practices that may have an adverse effect on competition in the markets in India, CCI is extending the provisions of this Act to all market sectors. As India integrates with the global economy, this vibrant approach adopted by the CCI ensures stringent mechanisms are in place to tackle any fast paced challenges that may include M&A that have an AAE on competition in India.
Abuse of Dominance
Section 4 of the Act describes a dominant position as a position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to either operate independently of competitive forces prevailing in the relevant market, or affect its competitors or consumers or the relevant market in its favour. It further states that a dominant position shall be abused if, an enterprise or a group directly or indirectly:
Imposes unfair or discriminatory condition in purchase of sale of goods or service; or
Imposes unfair or discriminatory price in purchase or sale (including predatory price) of goods or service;
Limits or restricts production of goods or provision of services or market there for;
Technical or scientific development relating to goods or services to the prejudice of consumers;
Indulges in practice or practices resulting in denial of market access in any manner;
Makes conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by their nature according to commercial usage, have no connection with the subject of such contracts; or
Uses its dominant position in one relevant market to enter into, or protect, or other relevant market.
However, such discrimination shall not include condition or price, which may be adopted to meet the competition. In an inquiry under Section 19 of the Act the commission shall have due regard to all or any of the following factors:
Market share of the enterprise;
Size and resources of the enterprise;
Size and importance of the competitors;
Economic power of the enterprise including commercial advantages over competitors;
Vertical integration of the enterprises or sale or service network of such enterprises;
Dependence of consumers on the enterprise;
Monopoly or dominant position whether acquired as a result of any statute or by virtue of being a Government company or a public sector undertaking or otherwise;
Entry barriers including barriers such as regulatory barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or service for consumers;
Countervailing buying power;
Market structure and size of market;
Social obligations and social costs;
Relative advantage, by way of the contribution to the economic development, by the enterprise enjoying a dominant position having or likely to have an AAC on competition; and
Any other factor which the Commission may consider relevant for the inquiry.
Penalties with regard to abuse in terms of Section 4 of the Act shall be the same as discussed enumerated under Section 3 of the Act, enumerated under Section 27 of the Act. In addition, in terms of Section 28 of the Act, the Commission may order a division of an enterprise enjoying dominant position to ensure that such enterprises do not abuse their position.
Being a dominant player in a market is by itself not anti-competitive, however, an organization that has acquired a dominant position in the market faces special restrictions preventing it from abuse of that position. To determine whether an organization has a dominant position in the market, it is important to ascertain whether the said organization accounts for a significant share of the market for which the demand and supply considerations are to be taken into account. Stringent legislations ensure proper adjudication of disputes. However, the scope of such legislations is determined on a case-to-case basis. In ‘The National Stock Exchange of India Ltd. v. Competition Commission of India and Ors.’ Appeal No. 15/2011 05.08.2014, the Competition Appellate Tribunal (CAT) upheld the decision given by CCI holding the NSE guilty of abusing its dominant position in the market for currency derivatives and further imposed a penalty Rs.55 crores. The CAT was further of the opinion that even if a separate relevant market is found, it has been found on the basis of mergers and joint ventures. The CAT further observed that the merger analysis is an ex-ante review of the proposed merger and it seeks to examine whether the proposed merger will significantly alter the structure of the market and impact the participants in the market in the futures. In ‘Mr.Ramakant Kini v. Dr.L.H. Hiranandani Hospital, Powai, Mumbai’ case no. 39 of 2012 dated 05.02.2014, the Commission further clarified that market shares of an entity is only one of the factors that decides whether an enterprise is dominant or not, but that factor alone cannot be considered as the proof of dominance. Advancements in technology and complex M&A deals may make competition assessments much more difficult in the future. From the aforesaid it is clear that vide strictly construing the provisions of the Act, the Commission seeks to further extend and clarify the scope of Section 4 of the Act to include every dominant player in order to ensure a level-playing field for all the competitors.
Regulation of Combinations
In terms of Section 6 of the Act, no person or an enterprise shall enter into a combination, which causes or is likely to cause an AAE on competition within the relevant market in India. Such a combination shall be void. Combination regulations have been amended from time to time to make the merger control filing requirements simpler, more forward looking and aligned with some of the best practices in other jurisdictions. As already discussed, there exist certain jurisdictional thresholds that a combination must cross (based on assets and turnover) to be ascertained as one and it must be pre-notified to the CCI. All combinations are subject to merger control review by the CCI and they cannot be concluded until merger clearance has been obtained in terms of Section 31 or a period of 210 days has passed from the day on which the notice seeking entrance into the combination was given to the commission, whichever is earlier. An individual or an enterprise, which does not give a notice within 30 days of a proposed combination in terms of Section 6(2) of the Act, the Commission shall impose a penalty of 1% of the total turnover or the assets of the combination, whichever is higher. In terms of Section 20 of the Act, certain factors are to be considered by the commission for determining the AAE of combination on competition in the relevant market, which include:
Actual and potential level of competition through imports in market;
Extent of barriers to entry into the market;
Level of combination in the market;
Degree of countervailing power in the market;
Likelihood that the combination would result in the parties to the combination being able to significantly and sustainably increase prices or profit margins;
Extent of effective competition likely to sustain in a market;
Extent to which substitutes are available or arc likely to be available in the market;
Market share, in the relevant market, of the persons or enterprise in a combination, individually and as a combination;
Likelihood that the combination would result in the removal of a vigorous and effective competitor or competitors in the market;