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CCI must show its effectiveness

CCI must show its effectiveness
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First Published: Thu, May 05 2011. 01 15 AM IST
Updated: Sat, Jul 02 2011. 04 34 PM IST
The ministry of corporate affairs has previously said its new merger control provisions would become operational on 1 June. A notification to the effect was announced on 4 March by the ministry, and the Competition Commission of India (CCI) has the responsibility under the terms of the Competition Act (the Act) to draft a comprehensive Merger Control Regulation.
CCI did put out a draft of the same 1 March 2011 but the final version has yet to be published. The delay is due to the fact that CCI decided to consult stakeholders and take their inputs. This is a well-intentioned move but it has its own pitfalls.
Regulations relating to mergers and acquisitions are significant in terms of their impact on economic activity, and more so in the case of a country like India which is experiencing rapid economic growth. Many developed countries have taken years to come up with Merger Control Regulations after implementing merger control provisions under their respective competition legislation. The lag was because they allowed the intent of the law to evolve first; and then based on practical experience, articulated their regulations. CCI, on the contrary, decided to firm up its Merger Regulations first and then implement the law based on such regulations.
It has, therefore, become evident that the industry at large (including law firms that deal with competition issues), is concerned about the import of the draft regulations. There is concern relating to jurisdictional conflicts or whether other regulatory agencies have ultimate power over some of the transactions the merger control regulations seek to regulate, and the practicality of some of the provisions —for example, the notification of transactions involving entities that meet the jurisdictional thresholds (for the purpose of the merger control regulations) where a single share of stock is bought in the open market.
While CCI has said that it is listening to the concerns of the industry and has assured companies that it will not impose an undue burden on them, the issue at hand is a serious one. The future success and credibility of CCI depends on its ability to instil confidence among stakeholders by clearly articulating its intent and signifying that it has hands-on experience in dealing with a complex economic-legal matter having a far-reaching effect on businesses.
While the experience in other advanced nations suggests that it is difficult to get these regulations right the first time, it is imperative that the regulations are at least on the right track to start with.
Here is what economics has to say about the importance of setting the right expectations.
“Economic agents”—households and businesses— make decisions in an environment of uncertainty. They expend resources to gather information, decipher signals put out by other agents in the marketplace including the government, and assign probabilities to the occurrence of each possible scenario before making their decisions. The extent to which uncertainty approaches certitude, the better off the agents are. But the government or a regulator can impose costs on the economy by creating uncertainty through their policymaking.
Economists have debated the efficiency of rules versus discretion in policymaking. In taking decisions, “rational” economic agents factor in their expectations of future policies and business environment. It is, therefore, economically efficient if the policymaker commits to a future policy rule . Knowing the policy maker’s decision making rule reduces uncertainty for the economic agents. The policymaker can signal the decision making rule either by including it in a legislation or do so informally.
This is extremely relevant in the case of CCI as it is yet to establish its record and, therefore, has an opportunity to set the tone by signalling how it plans to enforce competition law in the country. In this context of the CCI, the provisions in the regulations do take the form of legislated rules. However, the behaviour of CCI and the rationale for such behaviour constitutes the informal signalling of decision rules.
Let’s look at this in the context of the merger control regulations. First, CCI should clearly signal through the regulations its tolerance levels when it comes to scrutinizing mergers and acquisitions. In other words, what are its threshold limits for Type I errors (disallowing a merger or acquisition when it would not have an adverse effect on competition) and Type II errors—allowing a merger or acquisition to go through when in reality it would have an adverse effect on competition.
For instance, do the provisions that require notification of purchase of shares of stock or stock-in-trade by entities that meet the threshold requirements set by merger control regulation indicate that it has very low tolerance for Type II errors? In the face of criticisms relating to these provisions CCI has indicated that the industry should not read much into such provisions, thereby causing more uncertainty about its intent than removing them.
Second, it is important for CCI to resolve jurisdictional issues. If rulings by CCI are overthrown by other regulatory agencies which claim jurisdiction over such issues this would hurt the credibility of the body. This again would be a cause for more uncertainty.
Third, CCI has to exhibit that it has adequate resources to conduct merger analysis. This ties into the agency’s level of tolerance with respect to allowing mergers and acquisitions. If CCI has low tolerance for Type II errors then it should ensure it has the requisite staff and infrastructure to handle the large number of notifications that may need to be scrutinized.
The issue then is about the staff’s ability to acquire the expertise required to conduct what could be fairly complex and data intensive analysis in a timely manner.
Last, but not the least, the mandate under the Act stipulates that CCI may prescribe Forms and indicate quantum of Filing Fee by way of a regulation as such it could have framed a lighter regulations at this nascent stage of evolution and gradually up-scaled it with the evolution of the law and experience.
The effectiveness of CCI will, therefore, depend on whether it can signal its intent clearly and establish its credibility quickly.
Ram Tamara is director Nathan Economic Consulting India Pvt. Ltd, a wholly owned subsidiary of Nathan Associates Inc. Competition law and economics is a key practice area at the firm and Manas Kumar Chaudhuri is a partner at Khaitan and Co. a full service law firm with a practice in competition law.
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First Published: Thu, May 05 2011. 01 15 AM IST