Cross Border Mergers: The Implications Under the Competition Act, 2002

The advent of globalisation and privatisation in India has primarily had a huge effect on the trade between nations and the growing span of the business activities of multinational corporations. India finally began opening itself to foreign trade and investment in 1991 and the new industrial policy sought to prepare India for meeting the challenges that globalization brought with itself. The trade policies in India underwent a sea change, from being extremely restrictive to being more competitive, global and comprehensive.

Before 1991, there was monopoly of the government in certain key areas such as transport, telecommunication and banking. With the industrial sector so clearly divided into public and private sectors, the question of competition never arose. Each sector performed its designated functions without interfering in the business of another, leaving the government to just tackle the menace of unfair or restrictive trade practices of private organizations. However, post 1991, the role of the state has drastically changed. Buoyant Indian Economy, extra cash with Indian Corporate Firms, existing Government policies and newly found dynamism in Indian business have all contributed to this new acquisition trend. Indian companies are now aggressively looking at North American and European markets to spread their wings and become global players in the true sense. Hence, one of the major responsibilities of the Government in the present scenario is to promote and maintain a favourable atmosphere for international trade.

The economic reforms of the ‘90s accelerated international trade, with India witnessing more and more cross border transactions become the order of the day. The Income Tax Act,1961 [Section 2(1B)] defines amalgamation as the merger of one or more companies with another or the merger of two or more companies to form a new company, in such a way that all assets and liabilities of the amalgamating companies become assets and liabilities of the amalgamated company and shareholders not less than 75% in value of the shares in the amalgamating company or companies become shareholders of the amalgamated company.

A cross border merger, simply put, is a merger between organizations in different countries. Such corporate combinations play an important role in the global economy as they facilitate free flow of capital across borders, enhance competition and globalise business.

INSTANCES OF CROSS BORDER CORPORATE COMBINATIONS:

ü Last year, Ford decided to put two iconic British brands, Jaguar and Land Rover, on sale and Tata Motors emerged as the preferred buyer. Tata initially valued the two brands at $2.05bn but the deal got finalized at $2.3bn. The latest acquisition also means that Tata Motors now owns one of the most prestigious brands in the global automobile space and can boast a full range of cars, right from the Rs 1- lakh category to Rs 1 crore. Tata Motors will also finally have access to the global market, despite a ten-year presence in the domestic car market.

ü Tata steel acquired the UK based Corus Group for a reported $12,000 Million.

ü The potential merger of India’s largest GSM mobile telecom service provider Bharti Airtel Ltd and South Africa’s largest telecom company MTN Group Limited, valued at approximately $23 Billion, may prove to be India’s biggest cross border deal till date. The talks between the two corporate giants are presently in progress.

Mergers and acquisitions are regulated under various laws in India, one of them being the Competition Act, 2002.

Competition can be defined as ‘a situation in which firms or sellers independently strive for buyer’s patronage in order to achieve a particular business objective, e.g. profit, sales or market share’.

A competition policy can be defined as a compilation of those government measures that directly affect the behaviour of the enterprise and structure of the industry. Its objective is to promote efficiency and maximize welfare.

PROVISIONS UNDER THE COMPETITION ACT, 2002:

The Competition Act, 2002 embodies the principles laid down under Article 38 and Article 39 of the Constitution of India, which state that the motive behind all economic activities must be to honour the common good, and prevent concentration of wealth. It concentrates upon four major areas, namely:

Ø Anti-competitive Agreements

Ø Abuse of Dominant Position

Ø Regulation of Combinations

Ø Foster Competition

Anti-competitive agreements can either be in vertical or in horizontal combinations. Vertical restraints include cartels, bid-rigging etc. Horizontal restraints can be in the form of tie-in arrangements, refusal to deal and maintenance of resale price.

Section 3 of the act governs anti-competitive agreements and prohibits:

“agreements involving production, supply, distribution, storage, acquisition or control of goods or provision of services, which cause or are likely to cause an ‘appreciable adverse effect on competition’ in India.“

Section 4 of the Act prohibits the abuse of dominant position by an enterprise. Section 5 defines ‘combination’ by providing threshold limits in terms assets and turnover, rendering it a little restrictive in scope. Under Section 6, the Competition Act prohibits enterprises from entering into agreements that cause or are likely to cause an “appreciable adverse effect on competition within the relevant market in India”. Section 7 and Section 8 deal with the establishment and composition of the Competition Commission of India, respectively. Section 20 of the Act specifies the following factors the Commission shall consider while regulating a combination:

• • Actual and potential competition through imports;
  • Extent of entry barriers into the market;
  • Level of combination in the market;
  • Degree of countervailing power in the market;
  • Possibility of the combination to significantly and substantially increase prices or profits;
  • Extent of effective competition likely to sustain in a market;
  • Availability of substitutes before and after the combination;
  • Market share of the parties to the combination individually and as a combination;
  • Possibility of the combination to remove the vigorous and effective competitor or competition in the market;
  • Nature and extent of vertical integration in the market;
  • Nature and extent of innovation;
  • Whether the benefits of the combinations outweigh the adverse impact of the combination.

Section 32 of the Competition Act explicitly allows the Competition Commission to examine a combination already in effect outside India and pass orders against it, provided that it has an ‘appreciable adverse effect’ on competition in India. This power is extremely wide and allows the Competition Commission to extend its jurisdiction beyond the Indian shores and declare any qualifying foreign merger or acquisition as void. An ‘adverse effect’ on competition means anything that reduces or diminishes competition in the market.

Also, the Competition Act, 2002 now mandates a notification within 30 days of the decision of the parties’ boards of directors or of execution of any agreement or other document for effecting the combination. In case of cross border transactions, there is a post-filing review period of 210 days, during which the merger cannot be consummated and within which the Competition Commission is required to pass its order with respect to the notice received. If the Commission is unable to pass any order regarding a particular combination within the prescribed time limit, it is deemed to be approved. Such a notification is must even when one of the contracting parties has a substantial presence in India.

IMPLICATIONS OF THE ACT UPON CROSS BORDER MERGERS:

The above mentioned provisions of the Act have, to a great extent, shaped the entire procedure regarding cross border mergers and acquisitions in India. The review of each relevant provision is as follows:

· The requirement of a mandatory notification to the Competition Commission of India within 30 days of any agreement for effecting a combination is burdensome as it increases the work load of the Commission. Any delay in addressing such a notification would directly influence the ability of the contracting parties to execute such an agreement.

· The 210 day-review period is troublesome, especially in the cases where a combination is prima facie not going to have an adverse effect on competition. It even applies to cross border transactions happening outside India, where one of the contracting parties has a substantial presence in the Indian market. Such a mandate appears slightly restrictive as such a transaction would not have any economic consequence in India. Such a directive can dissuade foreign investors from investing in India, and prompt them to look elsewhere.

· All such rules and regulations are exhaustive and expensive, involving large amount of money as well as time.

CONCLUSION:

The Competition Act, 2002 is mainly brought into existence to regulate the activity of corporate combinations and to prevent any harmful or detrimental agreements that may cause an unfavourable outcome. The main agenda of the Act is to prevent inequity in the Indian market and ensure free and ethical trade. Its role can be likened to that of an umpire in a match, wherein the parties are large conglomerates striving for supremacy and dominance in the industry. The Competition Act, 2002 has been inspired by the UNCITRAL Model Law and the US Anti-Trust Laws.

Keeping in view the mandatory notification process, the question that arises is whether India needs a mandatory merger notification regime after all. The existing legal system in India compels certain corporate combinations to be subjected to review by the Commission even when they have slight or no connection with Indian trade, per se.

The views of financial experts are widely divided as to whether the provisions of the Competition Act, 2002 are progressive or regressive. While the entire purpose of enacting this statute so as to ensure free and fair trade is commendable, the above mentioned provisions tend to cause an impediment in an otherwise smooth process. It is essential and critical for the Competition Commission of India to be sensitive to the needs of the parties concerned and it should ensure that the corporate combinations are regulated in a way that certifies national growth, free of any obstructions. Since the Indian market cannot function in isolation, the provisions of the Act need to be reviewed with special emphasis upon foreign investors.

Cross border mergers do not respect any territorial boundaries and thus, international cooperation is extremely imperative to effectively deal with cross-border competition problems, if any.