Merger & Acquisition And Its Impact On The Competitive Market In India
Author: LawSphereX
Category: Corporate & Insolvency
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MERGER & ACQUISITION AND ITS IMPACT ON THE
COMPETITIVE MARKET IN INDIA
Shreya, LL.M (Corporate Law), Vivekanand Institute of Law and Legal Studies, Delhi.
ABSTRACT
Merger and amalgamation are the vastly used process for formulating a combination and strengthening business or enterprise. It provides various advantages to the formulating combination. The resulting enterprise even has the capacity to dominate a relevant market. If two major businesses having effective impact on the market after joining together, as it can dominate through their market shares and consumer preferences. In India, the market competition is protected by the Competition commission of India (CCI) which is established under the competition act 2002. The competition act 2002, provides wide power to the competition commission of India (CCI) to regulate the competition market. Competition commission has power to inquire, investigate and even adjudicate and impose penalty according to the rules of competition act.
The paper explores, the power of competition commission of India to regulate the impact of the formulation of combination with significant cases. The paper also includes recent development made by the Competition (Amendment) Act 2023 and CCI (Combinations) Regulations, 2024 to advance the power of competition commission to regulate the startups and digital companies, which were not regulated earlier under competition act 2002. Keywords: Merger and Amalgamation, Competition Act 2002, Competition Commission of India, Competition (Amendment) Act 2023, CCI (Combinations) Regulations, 2024.
1. INTRODUCTION
With the growth of Business market in India Merger has become a commonly used strategy for enhancing growth. In simple terms, Merger and Acquisition are described as, the combination of two or more businesses into one to form a single entity. There is a basic difference between merger and acquisition. Merger is a process in which two companies combine to form a single entity. However, in acquisition one company wholly acquire shares or assets of another company. As a result of acquisition, the acquired company shall no longer exist. Merger and acquisition have various advantages such it is used for establishment of a bigger market share and to save financially weaker company by making combination with financially stable companies profit.
However, merger and acquisition also have negative impact on competitive market by creation of dominance in the market as combination can result in elimination of competition. Therefore, the combination formed in the business market should be kept in check by competition regulation authority. The competition law in India is currently governed by the Competition Act, 2002, which was introduced to protect competitive market from any abuse of dominance to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade. All the combination formed in this country is regulated with the aim to avoid any adverse effect to the competitive market.
The Competition (Amendment) Act 2023 and CCI (Combinations) Regulations, 2024 is the recent development on the issue of merger and acquisition for strengthening the regulatory framework of competition in this country. Therefore, this research paper consists of analysis on the impact of combination (Merger & Acquisition) in the competitive market and the lawful measures provided in the Indian framework to inquire and penalise on such combination.
2. Legislation related to Merger and Acquisition in India
2.1 The Monopolistic and Restrictive Trade Practices Act,1969
The first legislation in India which deals with trade practices that effect competitive market was Monopolistic and Restrictive Trade Practices Act,1969 (hereinafter referred as MRTP Act 1969). The MRTP Act was established in India with the objective to prohibit restrictive and monopolistic unfair trade practices. Section 23 & 24 of MRTP Act used to deal with merger, Amalgamation and takeover of a company. However, these provisions were omitted by 1991 amendment.
2.2 The Companies Act 1956
By MRTP Amendment act 1991, Section 108A to Section108 F was included in Companies Act 1956. These sections specifically dealt with restriction on acquisition and transfer of shares. Under these provisions government approval was required for examination of proposal for transfer of share and acquisition of shares. Approval is required by the public company and private company which are subsidiary to public company. Under section108G it was provided that section108a to section108F apply to the parties to the acquisition or transfer of share was a dominant undertaking, within the meaning of MRTP Act.
2.3 The SEBI (Substantial Acquisition of Share and Takeovers) Regulations 1997
The SEBI (Substantial Acquisition of Share and Takeovers) Regulations 1997 was amended in the year 2005. By this amendment, the examination of proposal and assent from government is not required for the purpose of transfer or acquisition of share. As per regulation11, there is an obligation on those who are going to acquire shares, voting rights of the target company to make a public announcement about the acquiring of share instead of taking assent from government.
2.4 The Companies Act 2013
The introduction of Companies Act 2013 replaces Companies Act 1956. The introduced act includes various provision related to merger & acquisition (Under s 230-240). The s 232 explicitly deals with the formulation of merger and acquisition with the power of National company law tribunal to provide sanction for the reconstruction scheme. It also includes provisions for fast- track merger and merger with foreign company by RBI approval.
2.5 The Competition Act 2002
The Competition Act 2002 replaced the Monopolistic and Restrictive Trade Practices Act,1969. As MRTP Act was not adequate for the new challenges and growth of economy. One of the main objectives of competition act is to form a commission to regulate competition in this country. The competition act under section 7 of competition act, provides for established Competition commission of India (CCI) which acts as a competition regulatory authority in India. CCI in case of Merger and acquisition analyse previously and post the formation of combination, whether it affect or likely to affect the competitive market. The recent
development on such issues is made by the Competition (amendment) act 2023 and CCI (Combinations) Regulations, 2024 which came into effect on 10 September, 2023. These developments are required for keeping in balance with the recent business market.
3. Types of combination
3.1. Horizontal Combination
A Horizontal combination is a combination between enterprises at the same level of production
or distribution of goods or services in the same relevant market. Section 2(r) of the Competition Act, 2002 defines a relevant market as the market that the Competition Commission determines to be relevant. The Commission can determine the relevant market with reference to the relevant product market, the relevant geographic market, or both1. The Raghavan Committee suggested that horizontal combination is the primary focus of attention of any regulatory authority2. As it reduces competition from market by formation of a combination at the same level and it has a higher risk of creating a dominant. Example of horizontal combination - Disney merged with Hotstar as Disney+ Hotstar, an online streaming platform. Vodafone and idea (Vi) as top merger in India.
3.2. Vertical Combination
Vertical combination is a non-horizontal combination, wherein the firms are in different levels of supply and distribution of a product. The formation of vertical combinations leads to a procompetitive environment in the market which further results in process control, more market share and establishing a better supply chain. A vertical combination can result in foreclosure access hampering competition such as, Input foreclosure in which after consummation the combined entity will be likely to restrict access to an input, that would otherwise supplied absent to the combination. Customer Foreclosure when upstream supplier combines with dominant customer in downstream market. It may foreclosure access to such other sufficient customer.
3. 3. Conglomerate Merger
Conglomerate combinations involve firms or enterprises in unrelated business fields. Such
1 Competition Act 2002
2 Abir Roy and Jayant Kumar, Competition Law in India 370 (Eastern Law House, Second Edition)
combination happens when two companies that provide different services and goods or are integrated into varying sectors of business merge together. This sort of merger happens when the companies achieve a stronger stand in the market both in products and services and profit management unlike when they are individual enterprises. These combinations between complementary products or unrelated products. Types of conglomerate combination-
1. Pure conglomerate combination is where the merging entities have no functional link.
2. Market extension combination is when merged companies desire to go in new market.
4. Regulation of Combination under Competition Act 2002
Competition act came into effect on 1 sept 2009. However, section 5 & 6 which specifically deals with regulation of combination came into effect on June 2011. The provisions & regulatory framework of competition is provided under sections:
4.1 Pre-Merger Framework:
4.1.1. Provides for a threshold limit for formation of combination (Section 5)
Section 5 of Competition Act 2002, provides a threshold limit for the resultant enterprise or the group resultant. The term group is defined under this section, the group of company-
1. holding 26% of voting rights
2. Appointed more than 51 % Of member of boards in other enterprise
3. Control and management or affairs of other enterprise
The threshold provided under the section is as per the turnover or asset of the resultant enterprises or group enterprises, if it exceeds the threshold limit then a notice to be given to CCI for formation of combination under Section 6 of this act. Current threshold limit provided by CCI: Enterprise in India asset not more than 2500 crore or turnover Not more than 7500 crores.
For enterprises in India or outside India not more than USD 1. 25 Billion out of which 1250 crore must be in India. For Group enterprise asset not more than 10000 crore and turnover of not more than 30000 crores. And for group enterprises India or outside India asset not more than USD 5 Billion at least 1250 crores in India and turnover of not more than 15 billion out of which INR 3750 crore in India. 3 By the Competition (Amendment) Act 2023 – Deal Value threshold is to be included within section 5. Which provides that even if the company has no turnover or asset but has deal value of 2000 crore or more and the entity has will be considered to have "substantial business operations" it shall require approval of CCI. Example- Tech Startup company Merger and acquisition of Digital companies The CCI (Combinations) Regulations, 2024 which came into effect on 10 September, 2023.
Includes regulation for Mergers and acquisitions involving digital companies that account for at least one-tenth of their global user base, gross merchandise value (GMV) from the previous year, or annual revenue in India will now require approval from the Competition Commission of India (CCI). These rules applied to transactions that have already been signed but are not yet officially combined. 4
4.2.2. Regulation of combination exceeding threshold limit (Section 6)
Section 6 of the competition act deals with regulation of combination exceeding threshold limit provided under Section 5. As per this section, the enterprise proposes to enter into combination shall give notice to CCI regarding formation of combination within 30 days from approval of proposal relating to merger or amalgamation by Board of directors of such enterprise. If such enterprise fails to give information within such period, then penalty shall be imposed on such enterprise. Under Section 43A, the penalty may extend to 1% of the total turnover or asset whichever is higher.
3 Competition commission of India, available at https://www.cci.gov.in/faqs.
4 CCI tightens oversight on digital mergers, mandates clearance for big deals, available at: https://www.businessstandard.com/industry/news/cci-tightens-oversight-on-digital-mergers-mandates-clearance-for-big-deals- 124091100149_1.html.
After giving notice to CCI, it will either: i. Approve or disapprove ii. Conditionally approve Section 31(3) also provide that certain modification can be made to such combination for avoidance of such combination to cause appreciable adverse effect in the competitive market. Such modification to be carried out within specified period of time provided by CCI. The Conditional approval was applied first time by CCI in merger of Sun Pharma and Ranboxy Laboratories with condition that the merged entity shall divest seven drug formulation that could result in monopoly. The Commission also directed that the proposed merger shall not take effect before the parties have carried out the divestiture of the products so specified as per the order of the Commission. 5 iii. Deemed approval If 210 days elapse & CCI did not pass an order then it is deemed to be an approval.
By Competition amendment act 2023 the timeline of 210 days reduced to 150 days. 6 The competition amendment act on the issue of combination was about to came into effect from September 10, 2024.
4.2.3 Exception to the threshold limit and from taking CCI assent is given to-
1. Bank or venture capital fund, Public Financial institution, foreign institutional investor-
Acquire control due to acquisition of share in pursuant to condition of loan agreement. It has a requirement of providing information to CCI within 7 days of acquisition as per the condition of loan agreement.
5 Press Information bureau, Government of India, Ministry of Corporate Affairs, available at
https://pib.gov.in/newsite/PrintRelease.aspx?relid=112854#:~:text=The%20Competition%20Commission%20of %20India,seven%20relevant%20markets%20for%20formulations.
6 The Competition (Amendment) Act, 2023: A Game Changer for Mergers and Acquisitions, available at
https://www.scconline.com/blog/post/2023/06/05/the-competition-amendment-act-2023-a-game-changer-formergers-and-acquisitions/
2. De minimus exception – Ministry of Home affairs, from notification dated March 27,2017
exempted –Targeted company going for merger/acquisition with Asset upto 350 crore or turnover upto 1000 crore7. The recent Competition amendment act 2023, provide for De minimums exception limit with asset upto 450 crore or turnover upto 1250 crore.
4.2.4 Appreciable adverse effect on competition (AAEC)
Section 6(1) of competition act, provides that “no person shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition (AAEC) within the relevant market in India and such a combination shall be void”. 8 It is also provided under section 31 (2) of competition act, that if CCI is of opinion that that the combination has or is likely to cause appreciable adverse effect on competition then the competition should not be formed. The relevant market needs to be identified either as relevant geographical market or relevant product market. The burden of proof is on the person claiming to establish that whether the assailed combination cause an appreciable adverse effect on competitive market. And thereafter, the burden of proof is on the resultant combination that they do not cause or likely to cause AAEC in the market.
The term Appreciable adverse effect on competition is not defined under competition act. Therefore, the appreciable adverse effect on competition depends upon the facts of the case. Section 19 (3): provides the factor to be taken in consideration by the CCI while determining Appreciable Adverse Effect on Competition in India: (a) creating barriers for the new participants into the market (b) removing of existing competitors out of the market (c) foreclose competition by obstructing entry into the market (d) increase of benefits to consumers (e) enhancements in production or distribution of goods or provision of services
7 Competition commission of India, available at:
https://www.cci.gov.in/combination/legal-framwork/notifications/details/9/0
8 The Competition act, 2002
(f) elevation of scientific, technical and economic growth by means of distribution or production of goods or provision of services
4.2 Post Combination Regulation
4.2.1. Procedure for inquiry and investigation of combination
Section 20 of competition act, provide for inquiry on combination by commission. CCI may on its own knowledge or information relating to combination inquire into combination whether it cause or likely to cause Appreciable adverse effect. Section 29 deals with the procedure of investigation of combination. Two phases of investigation process are provided under this section. I.
Phase I investigation process- As per this section and regulation 19 of the Combination Regulations, CCI shall form a prima facie opinion as to whether a combination is likely to have Appreciable adverse effect in a relevant market within thirty working days from the date of filing of a complete and valid notice of combination. During Phase I investigation, CCI can seek additional information or accept modification, if offered by the parties to the combination that is being examined. II.
Phase II investigation process If the prima facie opinion of CCI is that a combination is likely to cause an Appreciable adverse effect in then it shall issue a show cause notice under section 29, requiring the parties to the proposed combination, to explain within thirty days of the receipt of the notice as to how the combination would not adversely affect the market in defence of such notice. CCI may also call for a report from the Director General within such time as it may direct. Within seven days from the receipt of the response of the parties or the receipt of the report from the Director General, whichever is later, CCI shall direct the parties to publish details of the combination within 10 working days. CCI may also invite any person who is affected or is likely to be affected by the combination, to file written
objections within fifteen working days from the date on which the details of the said combination were published. CCI may, within fifteen working days of receiving written objections from affected parties, seek further information from parties to the combination. Such additional information shall be furnished by the parties within fifteen days.9
4.2.2. Decision: Under section 31 the order to be given by the CCI after the completion of
investigation procedure of combination under section 29, CCI shall proceed with any of the following according to the investigation: a. approve the combination b. block the combination c. approve the combination subject to certain conditions for modification of combination
4.2.3. Appeals and Penal Provisions
By The Finance Act, 2017, the power conferred to competition appellate tribunal is conferred to the National Company Law Appellate Tribunal (NCLAT). An appeal to the NCLAT must be filed within 60 days from receipt of the CCI’s order by the party. Further an appeal may be filed against the order of the Appellate Tribunal before the Supreme Court.
5. Penalty for contravention of CCI order
Section 42 provides that if any person has contravened or failed to comply with order or direction of CCI, without any reasonable cause to justify the same, he shall be punished with fine which may extend up to Rs. 1 lakh for each day during which such non-compliance occurs, subject to a maximum fine of Rs. 10 crores. And he shall also be liable to fine for contravention of order or non-payment of fine with imprisonment up to 3 years, or with fine up to Rs. 25 crores, or with both, as the Chief Metropolitan Magistrate, Delhi may deem fit. 9 Merger Aspects under Competition Law in India, available at https://articles.manupatra.com/articledetails/Merger-Aspects-under-Competition-Law-in-India.
5. Case Study of merger and acquisition in India
5.1. Holcim Ltd./Lafarge SA18 (Conditional approval)
The Competition Commission of India (CCI) has cleared the proposed merger of French cement maker Lafarge and Holcim, which supposed to create the world's largest cement company in terms of manufacturing capacity and sales. The CCI approval, however, came with a condition that both the firms are required to divest two cement plants to address monopoly concerns. CCI has decided that a divestiture of Lafarge's plant from Chhattisgarh and Jharkhand. However, the company was unable to sell those plants in pursuance of the Mines and Minerals (Development and Regulation) (Amendment) Act,1957 which was amended in
2015. Which barred transfer of rights of limestone mines attach to the cement plants. Then a
fresh proposal was presented by the combination to divest its shares are approved by CCI.10
5.2. Vodafone & Idea (Company named Vi)
The CCI has taken into consideration that the BSNL & MTNL which are the two PSU as the service providers & Bharti Airtel was leading the market. Vodafone was having a niche share in the market with less than 1.2% pre-merger and Idea was not in this business line. It was evident that the merger will not cause any negative impact on competition in this market. Vodafone was providing Mobile Wallet Services through M-Pesa & Idea providing service through Idea Money, however it did not have any demand in the market like Paytm, Airtel money. Therefore, CCI approved the merger on these grounds considering that the merger would not cause any effect on the competitive market.11
5. 3. Walmart and Flipkart
In 2018 CCI approved Walmart India Private limited, which is a part of Walmart group and Flipkart Prvt Limited. Walmart India is engaged in wholesale and carry of good (B2B Business. Flipkart is also present in B2B business but unlike Walmart it operates as an e-commerce platform. (B2C Sale). The combined market share of both the companies was very less. Flipkart offered online marketplace platform to facilitate B2C Sales, Walmart was not engaged in any 10 Merger Aspects under Competition Law in India, available at https://articles.manupatra.com/articledetails/Merger-Aspects-under-Competition-Law-in-India 11 Why Merger of Vodafone & Idea is not Anti-Competitive, available at https://taxguru.in/finance/mergervodafone-idea-not-anti-competitive.html
such services. Accordingly, no vertical overlap existed. It was observed that the proposed combination unrelated to regulated by Section 5 & 6 of competition Act rather than examined under section 3(4) and section 4. The order of CCI further challenged before NCLAT. However, NCLAT dismissed the appeal. 12
5. 4. Zomato-UberEATS
The Zomato-UberEATS deal in the year 2020 avoided scrutiny however, by way of ‘de minimis’ threshold exemption. However, under Section 20(1) of the Act, the CCI has been conferred with powers to review after one year from such a combination. Herein, the CCI, Suo moto can investigate the combination and its effect. Furthermore, under Section 31 of the Act, the CCI has the power to determine whether such a combination will or likely to have AAEC in the market. By virtue of probing the deal under Section 43-A, there are major allegations of “Gun-jumping” which have been put forth by the CCI. The term Gun -Jumping, simply refers to a situation whereby the parties execute a combination without seeking mandatory approval under the Act. This calls for a penalty. In SCM Solitifert Ltd. And Anr. v.
CCI 13the Supreme Court introduced the concept of Gun-Jumping stating that under Section 6 of the Competition Act, it is mandatory for every combination to notify the CCI before entering into one. The intention is to ensure no “Appreciable Adverse Effect” exist or likely to exist on the market. As per gun jumping only those company comes in scrutiny who is likely to cause appreciable effect. The CCI claims that the merger between Zomato and UberEats do not fall under threshold limit therefore by its show-cause notice to Zomato has asked for an explanation regarding nonnotification of merger to CCI is violation of Section 43A of the Act, for not providing the information of combination. CCI has also placed its reliance on the Draft Bill of 2020, which is yet to be approved, in order to scrutinize a non-notifiable transaction.
This bill consists of several provisions that directly address the issues pertaining to the Zomato-UberEats deal. The matter was still pending since July 2021, if the acquisition is not completely approved then the
12 CCI Approves Walmart’s Acquisition of the Outstanding Shares of Flipkart, available at
https://www.azbpartners.com/bank/cci-approves-walmarts-acquisition-of-the-outstanding-shares-of-flipkart/
13 Civil Appeal No. 10678 of 2016
acquisition shall not be considered appropriate.14
CONCLUSION
The purpose of mergers and acquisitions is to develop economic growth and improve the trade practices that can help customers and benefit them in various ways. But if it creates a dominant at certain point, it can be a threat for the competitive market. As it can result in causing Appreciable adverse effect in a competitive market. Therefore, for regulating the issues of competition in India, the Competition commission of India (CCI) is established which will look after formation of such combination which is or likely to cause Appreciable adverse effect (AAEC) in the relevant market. CCI either by an application from a third party or suo moto, investigate on the question of Appreciable adverse effect (AAEC). Further, National Company Law Appellate Tribunal (NCLAT) is also provided with the power to appeal against the decision of CCI.
The competition amendment act 2023 is recently passed and came into effect in parts. It consists of several new provision to be included for the regulation of Merger and Acquisition. Such as inclusion of Deal Value threshold by which a new threshold limit is provided for a company which has no asset or liability. CCI (Combinations) Regulations, 2023, which came into effect on September 10, 2024. It requires approval for mergers and acquisitions of companies involving digital data on basis of certain criteria provided under the amendment. Therefore, with the growing need of time the regulation framework for merger and acquisition is becoming stringent in this country. As digital companies formation and cross border merger & acquisition is common now a days. For the protection of consumer interest and competitive market these provisions are required to be dealt with in this country.
And the competition commission of India successfully regulating the competition market of the country without any compromise. 14 The tussle between Zomato and CCI, available at https://blog. ipleaders. in/tussle-zomato-cci/ (last visited 24 oct 2024)