19 Regulations of Combinations

Vipul Puri

 

 

epgp books

 

 

Regulation of combinations

 

Introduction

 

1.1 In the first unit, we learnt that mergers are an important part of growth strategy of firms and offers a number of benefits to the merging firms. However, we also took note of the adverse effects that the mergers can have on market structure and competition. What emerged from the discussions in Unit I was the fact that careful regulation of mergers is essential to allow the firms to reap the benefits of inorganic growth strategy while ensuring no appreciable adverse effect on competition. In this unit, we will focus on the procedural aspects of regulation of combinations as contained in the Competition Act’2002 and also discuss some of the basic economic tools used in assessment of combinations.

 

Learning outcome

 

2.1 The unit focuses on the procedural aspects and the assessment methodologies of combination transactions. After the completion of this unit, the participants are expected to understand:

 

3. Regulatory procedure

 

3.1 This section will cover the relevant provisions of the Competition Act and The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations 2011, relating to the procedure of regulating the combinations. The discussions are made in a sequential manner and integrate the relevant provisions of the Act and Regulations.

 

3.2 Triggering of notification requirement:We have already discussed the conditions fulfilling which a merger transaction is held to be notifiable. Once the parties to the merger are sure that the transaction meets the thresholds and is notifiable, the question arises that at what stage should the notice be given to the Commission?

 

Section 6(2) deals with the question of the trigger for filing notification. As per section 6(2),“any person or enterprise, who or which proposes to enter into a combination, [shall] give notice to the Commission, in the form as may be specified, and the fee which may be determined, by regulations, disclosing the details of the proposed combination, within [thirty days] of—

 

(a)   approval of the proposal relating to merger or amalgamation, referred to in clause (c) of section 5, by the board of directors of the enterprises concerned with such merger or amalgamation, as the case may be;

 

(b)   execution of any agreement or other document for acquisition referred to in clause (a) of section 5 or acquiring of control referred to in clause (b) of that section.”

 

3.3 Form of notification: The requirements relating to form of notification are contained in Regulation 5 of The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations 2011. There are two forms for filing a notification namely, Form I and Form II (more detailed). As per sub-regulation 2 of regulation 5,the notice shall ordinarily be filed in Form I. Sub-regulation 3 allows the parties, at their option, to file notice in Form II and also specifies certain conditions fulfilling which, it would be preferable to file notification in Form II.

 

3.4 Amount of fee: The amount of fee to be paid for filing of combination notice is specified in Regulation 11. The fee payable for filings in Form I is Rs.15, 00,000/- and for Form II fillings, the fee payable is Rs.50, 00,000/-.

 

3.5 Procedure to be followed after the receipt of notification: The procedure for investigation to be followed by the Commission after receipt of notice is contained in section 29 of the Act and the Regulations issued.

 

3.5.1 Scrutiny of the notice: This is the first step after receipt of notice by the Commission. As per Regulation 14, where the notice has any defects or is incomplete in any respect, the parties to the combination are asked to remove the defects.

 

3.5.2 Prima facie opinion:The Commission has to form a prima facie opinion under sub-section 1 of section 29 of the Act within thirty days of the receipt of said notice. The procedure related to forming a prima facie view is contained in Regulation 19. As per sub regulation 2of Regulation 19, the Commission may, if considered necessary, require the parties to the combination to file additional information. The time taken by the parties to remove the defects under Regulation 14 and to file additional information under Regulation 19 shall not be considered in the counting of thirty days as specified above. If the Commission is of the prima facie opinion that the transaction is not likely to cause any appreciable adverse effect on competition, the Commission may proceed to issue the Order approving the combination under section 31(1) of the Act. If the Commission is of the prima-facie opinion that the combination may lead to appreciable adverse effect on competition, the Commission may proceed with the procedure contained in section 29 of the Act, detailed as under.

 

3.5.3 Procedure in cases where the Commission is of the prima facie opinion that the combination transaction causes or is likely to cause appreciable adverse effect on competition:

 

Step I: Show Cause Notice

 

The Commission shall issue a notice to show cause to theparties to the combination calling upon them to respond within thirty days of the receipt of the notice, as to why investigation in respect of such combination should not be conducted [Section 29(1)].

 

Step II: Receipt of response from the parties

 

Step III: Option to call a report from the DG

 

The Commission may call for a report from the Director General and such report shall be submitted by the Director General within such time as the Commission may direct [Section 29(1A)].

 

Step IV: Directing parties to publish the details of the Combination

 

The Commission may direct the parties to the said combination to publish details of the combination within ten working days of such direction, in such manner, as it thinks appropriate, for bringing the combination to the knowledge or information of the public and persons affected or likely to be affected by such combination. The time provided for issuing this direction is 7 days from the date of receipt of response from parties if DG report has not been called upon and 7 days from the receipt of DG report in the other case. [Section 29(2)].

 

Step V: Inviting objections from any person or member of public, affected or likely to be affected by the said combination

 

The Commission may invite any person or member of the public, affected or likely to be affected by the said combination, to file his written objections, if any, before the Commission within fifteen working days from the date on which the details of the combination were published [Section 29(3)].

 

Step VI: Going back to the parties for additional information

 

The Commission may, within fifteen working days from the expiry of the period specified in section 29(3), call for such additional or other information as it may deem fit from the parties to the said combination [Section 29(4)]. The additional or other information called for by the Commission shall be furnished by the parties within fifteen days from the expiry of the period specified in section 29(4) [Section 29(5)].

 

Step VII: Proceed for final Order

 

After receipt of all information and within a period of forty-five working days from the expiry of the period specified in sub-section (5), the Commission shall proceed to deal with the case in accordance with the provisions contained in section 31. If the Commission is of the opinion that the transaction is not likely to cause any appreciable adverse effect on competition, the Commission may approve the transaction under section 31(1) of the Act. If the Commission is of the opinion that the combination has or is likely to have, an appreciable adverse effect on competition, it shall direct that the combination shall not take effect [Section 31(2)]. However, there may be cases where the Commission may be of the opinion that such adverse effect can be eliminated by suitable modification, it may propose appropriate modification to the combination, to the parties to the combination [Section 31(3)]. The modification procedure is dealt later.

 

Figure 1: Sequential representation of procedure to be followed in the investigation of combination transactions.

 

3.5.4 Approval of combination transaction with modifications: So far we have gone through the cases of approval of combination cases where there is no prima facie opinion of adverse effect on competition and where there was prima facie opinion that there may be adverse effect but the detailed investigation revealed otherwise. Another category consists of cases, where the transaction is concluded to have adverse effect on competition and is completely blocked. There is yet another category of cases, where there is adverse effect on competition, but the same can be eliminated by some modifications in the transaction. The procedure to be followed in such cases is as under:

 

Step I: The Commission to propose appropriate modification to the parties to the combination [section 31(3)].

 

Step II: The parties to accept modification or submit an amendment: If the parties accept the modification as proposed by the Commission, they shall carry out the modification within the period specified by the Commission [section 31(4)]. Failure on the part of the parties to carry out the accepted modification within the specified period shall lead to the combination being deemed as causing appreciable adverse effect on competition and dealt accordingly [section 31(5)]. If the parties to the combination do not accept the modification, such parties may, within thirty working days of the modification proposed by the Commission, submit amendment to the modification proposed by the Commission under that sub-section [section 31(6)].

 

Step III: The Commission to decide on modification submitted by the parties: If the Commission agrees with the amendment submitted by the parties, it shall, by order, approve the combination [section 31(7)]. If the Commission does not accept the amendment submitted, then, the parties shall be allowed a further period of thirty working days within which such parties shall accept the modification proposed by the Commission under sub-section (3) [section 31(8)]. If the parties fail to accept the modification proposed by the Commission within thirty working days referred to in sub-section (6) or within a further period of thirty working days referred to in sub-section (8), the combination shall be deemed to have an appreciable adverse effect on competition and be dealt accordingly [section 31(9)].

 

 

3.5.5 After having a detailed discussion on various procedures to be followed, we are in a position to summarize the various scenarios of merger filing. A merger filing may be approved at the first stage if there is no prima facie concern of adverse effect on competition. In cases where there is a prima facie concern, a merger filing may be further investigated and thereafter, either approved without modification, approved with modification or completely blocked.

 

4  Assessment of combination transactions

 

4.1The core of the decision to approve/block or approve with modification lies in the competition assessment of a particular transaction. In this section, we would attempt to build the approach for analysing the merger transactions.

 

4.2 Types of merger transactions relevant to competition assessment:The first step inthe assessment of a merger transaction is to understand the nature of a transaction from the view point of competition impact and then to develop the assessment methodology accordingly. From competition assessment point of view, mergers can be classified as horizontal, vertical and conglomerate.

 

4.2.1 Horizontal Mergers: In these types of mergers, the parties to combination are involved in production of similar goods/services, for example, a merger of two cement manufacturers. In such cases, there is a definite lessening of competition. Therefore, what is important is to find out whether there is likelihood of appreciable adverse effect on competition or not. The analysis of such transactions requires detailed consideration of unilateral and coordinated effects, contestability analysis, efficiency gains et al.

 

4.2.2 Vertical Mergers: These mergers involve backward or forward integration. Here, the parties to the combination operate at different stages of production and distribution process. For example, a transaction between broadcaster and a Direct to Home Operator. These mergers offer synergies. However, there is a possibility that the merged firm may resort to exclusionary tactics to the detriment of other players in intermediate space and leads to competition concerns such as foreclosure or margin squeeze.

 

4.2.3 Conglomerate Mergers: In these types of merger transactions, the parties to the combination are involved in diverse unrelated activities, for example, a transaction between a cement manufacturer and a media company. By and large, these do not pose any threat to the competition.

 

4.3Competitive effects of mergers: Unilateral and coordinated effects

 

4.3.1 The adverse effect on competition can be assessed by considering the unilateral and coordinated effects of a merger transaction. Unilateral effects arise when the merged group is able profitably to reduce value for money, choice or innovation through its own acts without the need for a co-operative response from competitors1. In other words, the mergers leads to the concentration of market power with the merged firms and the firm reaches a state where it can harm the process of competition unilaterally. The unilateral effects may arise in both the horizontal and vertical mergers.

 

4.3.2 Coordinated effects arise where, under certain market conditions (e.g., market transparency, product homogeneity etc.), the merger increases the probability that, post-merger, merging parties and their competitors will successfully be able to coordinate their behaviour in an anti-competitive way, for example, by raising prices2. These effects are more relevant for horizontal mergers as the merger between the competitors may alter the market structure (by reduction in thenumber of playersthus increasinglevel of market concentration) in a manner conducive to coordination or illegal co-operation. The risk that a merger will induce adverse coordinated effects may not be susceptible to quantification or detailed proof. Therefore, the Agencies evaluate the risk of coordinated effects using measures of market concentration in conjunction with an assessment of whether a market is vulnerable to coordinated conduct3.

 

4.4 Merger analysis: Factors relevant to competition assessment

 

4.4.1 Section 20(4) of the Competition Act’2002 lists the factors which may be considered in examining the potential effects of a merger, such as, market shares, size and resources of competitors, degree of vertical integration, dependence of consumers , entry barriers etc. The merger assessment in accordance with section 20(4) factors requires the quantitative as well as qualitative evaluation of the case particulars. Some of the important factors are discussed hereunder:

  1. State of market concentration: The market concentration is the prima facie, best indicator of likelihood of unilateral and coordinated effects. The economic theory provides us certain quantitative measures to assess this factor, such as Herfindahl–Hirschman Index (HHI) and Concentration Ratio.
  2. HHI is obtained as the sum of the squares of the market shares of the firms comprising the market. The theoretical maximum value of HHI is 10,000 (a monopoly situation with 100% market share). The HHI figures are used to assess the likely concentration of market post-merger. The US Guidelines on Horizontal Mergers 2010provides safe-harbours to interpret the HHI values to eliminate competition concern. The general classification used by the Guideline is as under:
  3. Unconcentrated Markets: HHI below 1500
  4. Moderately Concentrated Markets: HHI between 1500 and 2500
  5. Highly Concentrated Markets: HHI above 2500
  6. Incremental HHI:When using the HHI, the competition agency in the US considers both the post-merger level of the HHI and the increase in the HHI resulting from the merger. This is relevant to find out the impact of a particular transaction being assessed. The agencyemploy the following general standards for the relevant markets they have defined4:
  7. Small Change in Concentration: Mergers involving an increase in the HHI of less than 100 points are unlikely to have adverse competitive effects and ordinarily require no further analysis.
  8. Unconcentrated Markets: Mergers resulting in unconcentrated markets are unlikely to haveadverse competitive effects and ordinarily require no further analysis.
  9. Moderately Concentrated Markets: Mergers resulting in moderately concentrated markets that involve an increase in the HHI of more than 100 points potentially raise significant competitive concerns and often warrant scrutiny.

 

iv. Highly Concentrated Markets: Mergers resulting in highly concentrated markets that involve an increase in the HHI of between 100 points and 200 points potentially raise significant competitive concerns and warrant scrutiny. Mergers resulting in highly concentrated markets that involve an increase in the HHI of more than 200 points will be presumed to be likely to enhance market power. The presumption may be rebutted by persuasive evidence showing that the merger is unlikely to enhance market power.

 

c. Concentration Ratio:A Concentration Ratio is a measure of the total output produced in an industry by a given number of firms in the industry. The most common concentration ratios are the CR3 and CR4, which means the market share of the top three or four firms. Like HHI, the ranges of concentration ratio can be used to indicate the level of concentration in the market. A concentration ratio of upto 50 percent is commonly interpreted as an industry with low concentration, 50 to 80 percent is interpreted as medium concentration and over 80 percent as high concentration.

 

ii. Degree of competition between the Acquirer and the Target: The competition is most impacted if the parties to the combination are close competitors, i.e. the products of the two firms are viewed as close substitutes for each other by the end consumer. An economic tool, i.e. the Diversion Ratio can help us understand the degree of competition between the merging firms. The ratio calculates the fraction of customers leaving a product consequent to a price rise and moving to another product. If the diversion ratio between products of merging firms is high, it indicates that the consumers considers the products as close substitutes and the merger would eliminate the competitive constraints posed by these goods on each other.

 

iii. Assessment of competitive ability of the other players: The merger analysis has to focus on the size and resources of the competitors post-merger. The analysis is required to examine whether the competitors would be able to constrain the market power of the merged entity or they would be relatively weak and more prone to coordinate their behaviour with the merged firm.

 

iv. Contestability of markets:The analysis focusses on the entry barriers in form of cost and regulatorybarriers etc. When assessing barriers, the guiding factor is likelihood of timely and effective entry. Therefore, the analysis may look at the instances of past entries in in the industry and their impact on market competition to reach a conclusive position.

 

v. Countervailing power of the consumer: Whether the buyer(s) can constrain the merger firm on account of its own size or its importance as a customer to the merged firm provides clue on the level of competition remaining post-merger.

 

Efficiencies: The mergers offer synergies which may be firm specific such as cost savings etc. discussed in Unit 1 of this module. There may also be the efficiencies which may lead to development of newer products, technology or may lead to lower price. The consideration of efficiencies, firm specific or general is very important and is used as a trade off with the adverse effect on competition.

  • Other factors: There are numerous other considerations such as the nature of industry, whether sunset or sunrise, degree of vertical integration, sector specific regulatory framework etc. which need to be factored in competition assessment.
  1. Summary

 

5.1 The regulation of combinations has two broad aspects. First relates to the legal proceduresto be followed by the parties and the Commission, right from the stage of notification till the issuance of final Order. Second is the assessment of a transaction leading to the final Order.The cases notified to the Commission may be approved, approved with modificationor blockedin accordance with the procedure contained in the Act. At the core of any decision of the Commission, lies the competition assessment, particularly for horizontal and vertical mergers. The examination of unilateral and coordinated effects includes in depth qualitative and quantitative analysis specific to the case. There are a number of factors that can be considered in assessing mergers but the overall guiding principle is a trade-off between the pro-competitive effects and anti-competitive effects.

you can view video on Regulations of Combinations

 

Web-links

  • http://www.justice.gov/atr/public/merger-enforcement.html
  • http://europa.eu/legislation_summaries/competition/firms/l26107_en.htm
  • http://www.internationalcompetitionnetwork.org/uploads/merger%20wg/non%20horizontal%20effects%20in%20merger%20control%20teleseminar%20slides.pdf
  • http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2008:265:0006:0025:en:PDF
  • http://globalcompetitionreview.com/reviews/59/sections/204/chapters/2317/southafricaroleeconomics-merger-control/