Bill exempting banking M&As from CCI questioned

Business Standard, April 11, 2011

The Competition Commission of India (CCI) is set to come out with second draft of merger and acquisition (M&A) rules in the next 10-15 days, but the proposed norms are not supposed to cover takeovers in the banking space. Experts question this exemption, proposed by the finance ministry, as any such step will trigger similar demands from other ministries and undermine the nascent Competition Act.

The objection also stems from the fact that M&A in banking is sought to be exempted from the purview of the Competition Act through an amendment to banking laws and not the Competition Act.

While the experts have no doubts over the powers of the government to exempt specific sectors from merger or de-merger related scrutiny by the Competition Commission of India (CCI), they are concerned with the manner in which it is being carried out.

“Any exemption from the provisions of the Competition Act can only be done by the central government vide a notification under Section 54 (of the Competition Act). Each administrative department/organ of the state cannot formulate separate laws exempting stakeholders under its supervision from the applicability of the Competition Act. This would clearly be ultra vires unless Section 54 is first amended to permit such exemptions,” said Manoj Kumar, managing partner of corporate law firm Hammurabi & Solomon.

Officials in the corporate affairs ministry, the government arm that administers the Competition Act of 2002, did not comment on the development.

However, senior government officials pointed out that the Banking Laws (Amendment Bill), 2011, introduced in Parliament by Finance Minister Pranab Mukherjee in the Budget session, was the result of the government’s (Cabinet’s) collective decision and hence was unlikely to be questioned by the corporate affairs ministry.

The banking Bill is aimed at inserting a new clause in the Banking Regulation Act of 1949 to exempt banking mergers from the applicability of the provisions of the Competition Act of 2002. However, unlike the exemption clause under the Competition Act, which calls for exemptions from M&A scrutiny for specified periods through specific notifications, the banking Bill provides a blanket exemption for the banking sector.

Experts say the law-making process ignoring the Competition Act would weaken the administration of the Act itself.

“Even if the government wanted to exempt the banking sector, they could have stated that the decision would be taken by Reserve Bank of India after mandatory consultation with Competition Commission,” Pradeep Mehta, secretary general, CUTS International, said.

Kavaljit Singh, director of a civil society organisation Public Interest Research Centre, said the move was part of a larger trend where the government was trying to bypass the established institutional mechanisms to speed up economic reforms.

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