A new merger control philosophy
The ministry of corporate affairs’ notification in March this year on thresholds for mergers and amalgamations is a shift in methodology from the principle of “attributability” to that of “size of business”. The defining principle now for merger control is no longer attributable to the total business of the firms merging or being acquired but to the target business of the deal. This shift in methodology has tremendous implications—not only for firms that come under the purview of the Competition Commission of India (CCI) but also in terms of the perspective on large size and market power. The Competition Act mandates all acquisitions of shares, voting rights, control or assets, mergers and amalgamations by domestic and foreign firms above a certain threshold to seek clearance from the CCI, primarily to ensure that these transactions do not create large firms that can exert market power.
Notifications by the ministry have appropriately focused on thresholds only. The current notification signifies a policy shift that should be viewed as part of the government’s larger thrust towards “ease of doing business” in India. It is a small but significant attempt to capture the changing dynamics of modern business.
The thresholds when first established were in the context of winning the trust of business houses vis-à-vis the newly announced merger control regime. Apprehensions were palpable in all meetings pre-merger control. This reluctance on the part of businesses was understandable. CCI represented yet another layer of bureaucratic control, adding to the prevailing clearance from Securities and Exchange Board of India (Sebi), the capital markets regulator. In their perception, a new and inexperienced CCI could also endanger a merger by its ineptitude. Successful mergers require swift decisions with minimal public attention. Delay or uncertainty can derail a transaction by triggering volatility in share prices, or even provoke the emergence of an unexpected dark horse. However, those apprehensions have been allayed by the track record of 400 merger cases since then.
But the ministry’s current notification seem to point to new apprehensions stemming from the principle of attributability and exemptions provided under de minimis conditions. The principle of attributability created uncertainty due to the scope for interpretation. There were eight categories of thresholds covering assets and revenues, from Rs2,000 crore to Rs24,000 crore, and $1 billion to $12 billion, for mergers and acquisitions to be exempted. Moreover, the implementation of de minimis and resultant exemptions showed a capital markets regulator perspective rather than a regulatory perspective based on market power. This added to the prevailing discomfort.
A quick look back at CCI cases would help explain the unease with existing regulations. One set of mergers involved reshuffling of portfolios by business houses to strategize on their core business—divesting unrelated activities inherited from the license raj framework. Another set saw collaboration of foreign and Indian firms in springs, automobile spare parts, health, pharma, biotechnology, liquor and airlines, strengthening the former’s presence in markets in India. All mergers were cleared under the principle of attributability. Well and good—but so far, there have been no decisions pertaining to high tech markets, or involving patents or FRAND (fair, reasonable and non-discriminatory) licensing. These are truly complex cases when it comes to merger control and anti-trust analysis.
In markets where firms are global and large, as in high tech, or in the case of patents that are licensed, monopolies are the new normal. “Size of business” is more appropriate here. The reference threshold in this case should be with regard to the business that is being acquired, not the entire business of the firm(s). In the same vein, is the antitrust market in a multi-product firm the entire business or the acquired business? Arguments have been made for both approaches. Large firms have a right to expand; they are perhaps required in areas where their strong fundamentals can sustain forays into research and development.
Thus, the wider thresholds under the new dispensation—with emphasis on target business—will ensure that more such mergers will bypass merger control regulations, minimizing the degree of uncertainty. Traditional metrics of market size and share that flow from the principles of attributability and de minimis detract from a robust merger control assessment in the high tech sector, or patent-related ventures, where the criteria for asserting market power has to be seen in the context of innovation cycles and benefits to consumers. The new de minimis condition hopefully will help redefine anti-trust activity from mere size parameters to metrics more appropriate to modern business.
Foreign investors look for legal certainty or predictability to avoid expensive litigation in the future. Clarity and consistency is sought in: (i) the measurement of thresholds; (ii) rationale in exemptions granted; (iii) reasoned effects-based decisions; and (iv) rights of investors regarding their patents and trade-marks. The March 2017 notification should be seen in this light. It is an attempt to balance competitive analysis in a modern context.
Geeta Gouri is a former member of the Competition Commission of India.