Competition Act amendment may be a deterrent for M&As

Competition Act amendment may be a deterrent for M&As

The Competition Commission of Indiawas established in October 2003 under the Competition Act, 2002. It was, however, mired in litigation as the provisions governing its functions were challenged in a writ petition before the Supreme Court.

The apex court in January 2005 addressed the writ petition with certain directions to the government. Consequent to this, the Competition (Amendment) Bill, 2006 was introduced in March 2006, and was referred for examination to the parliamentary standing committee. Following the recommendations of the committee, the Competition (Amendment) Bill, 2007 was introduced and passed in August 2007.

The backdrop

The focus of this article is the recent amendments dealing with two aspects of the third situation, which merit special attention—a change in threshold limits to meet the criteria for intimating the Competition Commission, and making such reporting mandatory.

Domestic nexus

An acquisition or merger or amalgamation would be governed under the third situation, if it constitutes a ‘combination’ by exceeding certain prescribed threshold limits. The limits determine the trigger for reporting the proposed combination to the commission.

The amendment focuses on the provision of a domestic nexus (a nexus with assets and operations in India) in connection with the limits applicable to acquisitions in which a foreign entity and an Indian entity are involved. This would narrow down the scope for an acquisition being covered under ‘combinations’ to be regulated by the commission. Thus, if the acquirer is a foreign company without any Indian presence, the Competition Act trigger will not apply due to the provision of the India nexus.

Incidentally, the original limits continue to apply under the Competition Act to acquisitions of enterprises dealing in similar goods, and to mergers and amalgamations.

A corresponding amendment in the limits has not been made for those cases. The rationale for this is not very clear because it would have been better to restrict the applicability to all cases of combinations.

Intimation mandatory

A very crucial aspect of the original provisions was that it was voluntary for an enterprise proposing to enter into a combination to intimate the Competition Commission.

Now, once the new law comes into force, such intimation of the combination to the commission would be mandatory and, in fact, such a coupling shall not take effect until 210 days from the date of notification or approval from the commission, whichever is earlier. This is likely to result in a long gestation period of about seven to eight months from the date of approval of the proposal.

This has some critical dimensions to be considered. Any uncertainty in a merger/ acquisition could have a serious and destabilizing impact on the businesses of the parties involved. In most cases, unlike an acquisition, a merger is dependent on the high court’s approval (or, in the case of certain specified industries, any other regulatory body, such as the Reserve Bank of India in the case of banks).

The introduction of this new dimension of keeping the merger/acquisition pending until the approval of the commission will also (albeit for a different purpose) add a significant element of uncertainty, and can be a serious drag on ‘big-ticket’ M&A activities in India.

The uncertainty has several implications, including the following:

• Perception among customers

• Uncertainty as regards the ‘identity’ of the enterprise could create reluctance among customers, who could choose to shift to a more ‘stable’ competitor.

• Inability to make strategic and operational decisions: Strategic and operational business issues could remain in ‘limbo’.

• Human resources: In any acquisition or merger, the human resources element is crucial. This has dimensions relating to alignment of titles, roles and responsibilities. A long period of uncertainty could seriously dent morale and heighten attrition.

• Enterprise value(s): As a result of the uncertainty, including the above factors, the market value of both enterprises could be severely dented due to the long period of uncertainty.

Interestingly, while such reference to a regulatory body is mandatory in a number of countries, the time limit prescribed by most of them is much shorter, ranging from 25-35 days for an initial investigation.

When the initial investigation results in serious doubts regarding its effect on competition, the next level investigation triggers the time limit, which is generally 90-180 days. For example, in the US and the European Union, the time limit for initial investigation is 30 days and 25 days, and for detailed investigation, an additional 30 days and 90 days, respectively.

Summing up

While the objective of the Competition Act, 2002, as stated in its preamble, is undoubtedly laudable, the timing issue needs to be addressed. In addition, it is very important to have detailed guidelines and a framework within which the approval would be given by the Competition Commission. This could help mitigate the likely element of uncertainty by an upfront evaluation of the parameters contained in the guidelines in connection with the planned combination. One hopes the government will take such issues seriously and take steps to address them.

Ketan Dalal is executive director of PricewaterhouseCoopers. Your comments and feedback are welcome at