Merger Norms – Way to Economic Democracy

Business Standard, April 29, 2011

By Pradeep S Mehta

An effective implementation of the merger regulations will help check anti-competitive practices while promoting industrial growth

Merger regulations under the Competition Act, 2002 have always been controversial. Now that the government in its wisdom has announced June 1, 2011 as the date for operationalising them, Indian business has again voiced concerns over whether these norms would be a boon or a bane. They seem to be leaning towards the latter (“Hobbled by regulation”, Business Standard, April 20). Some concerns are valid while many are not. One of the principal aims of a competition law is to promote economic democracy by regulating anti-competitive practices and concentration, to ensure consumer and business welfare.

One of the concerns seems to be centred on the financial thresholds set by the government for mandatory notification. However, our law was drafted looking at the good practices around the world. Financial thresholds are yardsticks used by such countries as the US and the UK, among other countries. To address the issue of low thresholds, it is important to note that the Draft Merger Regulations that were recently released for consultations have proposed an increase in the threshold limit by as much as 50 per cent. And this has been welcomed by several business groups. This threshold, too, is not cast in stone and can be reviewed as our economy grows. Further, several inane provisions, like acquisition of shares and so on have been dropped in favour of the litmus test of acquisition of an enterprise that has the potential of dominance. Indeed, the proof of the pudding will lie in eating it.

An ice cream is both a snack and a pudding, depending on when one consumes it. A few years ago, the Indian ice cream market underwent radical changes when Hindustan Lever acquired various fractions of the home-grown ice cream major Kwality, when no merger regulation existed in India. Taking this as an example, it has been argued in the Business Standard editorial that market domination in an economy like India might not be a bad thing and may have pro-competitive effects by encouraging competitors to enter. It is pertinent to understand that it is not the evils of market dominance but the abuse of such dominance and situations that is being targeted through such norms and initiatives. We cannot shut the gates after the horses have bolted. Therefore, such a conclusion might not be entirely true as there were no entry barriers at the time of such takeover to cause “appreciable adverse effects on competition” — the litmus test.

A critical point of analysis by Competition Commission of India (CCI) in any merger analysis will be to also scrutinise whether the proposed transaction would create entry barriers for new entrants. The exception to this rule will be in the case of industries with deep pockets, where there is a natural entry barrier due to the huge amount of investments involved that create a practical entry barrier. For example, a merger between two aircraft manufacturers, as happened in the US. The norms in the US to test dominance have been different when Boeing took over McDonnell Douglas, but times have changed. One is sure that the CCI will exercise caution in dealing with such cases. However, let us not forget that trade policy instruments are also available to the government to deal with such situations, by allowing imports at reasonable tariffs to promote competition. Granted that praxis like lobbying from the domestic industry to maintain high tariffs and/or use of trade remedial measures, like antidumping or the standards bogey can thwart the desired competition, but all that is fodder for another article.

In so far as sector regulators being experts in their specific sectors, so that they can deal with mergers in their domains, let us not forget that often they lack the necessary expertise needed for market/economic analysis needed in merger cases. Exceptions can always exist, like the case of telephone companies where the department of telecom has guidelines to ensure that there are at least six players in any circle. Also, sector regulators have the potential to be captured by the regulated sector as they are constantly hobnobbing together. Therefore, a generalist regulator like the CCI will be a better umpire because it has to deal with the whole economy, and it does not hobnob with any particular sector. Further, sector regulators can always consult the CCI that should possess sufficient knowledge regarding the market structure and conduct to enforce the objectives of the Competition Act. No wonder, in the European Union merger cases in regulated sectors are dealt with by the competition agency and the sector regulator jointly as a rule.

The concerns regarding the risks apprehended due to low standards of confidentiality of transactions, which is an unfortunate feature of public institutions due to widespread corruption, are well-founded. Notwithstanding such concerns, a well-implemented merger regime adds to industrial growth and promotes economic democracy. In the backdrop of the recent trend of foreign companies taking over Indian pharmaceutical companies – which has threatened the availability of cheap and affordable generic medicines and made the flexibilities granted under TRIPs redundant – the relevance of a competition law and the role of CCI to deal with such transactions through conditional approvals have been further highlighted.

We disagree that the competition law has been poorly designed. Instead, the true test and focus here should be on its effective implementation. And let us not lose sight of the fact that the CCI is an enforcement agency that has been entrusted with the task of competition regulation of which merger regulation is a part. Interventions by advocacy groups, customers and competitors who can guide the CCI to take care at every step during the course of its functioning will be valuable. Besides this, the CCI and the government have assured that to begin with there will be light-handed regulation. And majority of the mergers will be cleared within a short period rather than the long period provided under the law. Let us wait and see how this intent is translated, otherwise we can go back to the drawing board and make suitable amends.

Pradeep S Mehta Secretary General, CUTS International and Natasha Nayak of CUTS has also contributed to the article

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