Regulating mergers is an urgent matter

The Financial Express, May 02, 2010

By Pradeep S Mehta

The indigenous pharma industry has been sounding alarm bells against foreign companies acquiring domestic players. Now the department of pharmaceuticals wants a review of the FDI rules that allow foreigners to enter into India. In the recent past, six such takeovers have happened, beginning with Daichi from Japan taking over Ranbaxy in India in June, 2008. It is not predation, but the fact that the pharma industry needs deeper pockets to be able to survive in an increasingly competitive global market. The downside is that such takeovers may adversely affect our exports, and also lead to a rise in domestic prices through abusive behaviour and thus affecting consumer welfare adversely.

One way to regulate such takeovers is through the Competition Act, 2002, under its merger regulations. Alas, the same are not yet in place due to the misguided lobbying by some businesses. This would mean the throttling of Indian enterprises to be able to grow big in a global market.

The opposing businesses also feel that the power of the CCI in regulating international mergers under its extra jurisdictional power may hamper Indian firms from taking over firms outside India. Such concerns are generally misplaced, given that the motive in such mergers is to be competitive in the international (export) market, rather than the national market. Such outward mergers have little or no impact on competition within the Indian market and it is very unlikely that CCI would stop them, even if it decides to examine them.

However, it is in the interest of both business and consumers at large to advocate for the notification of the M&A provisions now rather than later. Since 1991, the Indian economy has been operating without any checks on anti-competitive issues arising from M&As following the dilution of the MRTP Act in 1991 and associated reforms. M&As, including those involving huge MNCs from all over the world, flooded the Indian economy. While the MRTP Act did try to regulate abuse of dominance and cartelisation, little attention was made to the link between these two anti-competitive practices and M&As. That was the reason that the new Competition Act was adopted in 2002.

Despite the law, regulating the behaviour of big MNCs that get into a dominant position due to mergers would be difficult. Hence business should be worried when MNCs enter the Indian economy by acquiring as many firms, such as the pharma case, as they want without any competition analysis.

A few examples might help explain this. An increase in foreign shareholding in the Indian cement companies occurred in India during the post-1991 period, including the taking over of Tisco’s cement plants by French major Lafarge during 1997-99. Swiss cement company Holcim bought a stake in Gujarat Ambuja Cement, before the two companies took up a 50% stake in Associated Cement Companies (ACC). Indian cement companies were also not to be outdone, and they too participated in the acquisition spree, with A V Birla Group consolidating its cement business under Grasim, which acquired Shree Digvijay Cements and Dharani Cements, and Larsen & Toubro acquired Narmada Cements from Chowgules.

While consumers could have been happy that international players are entering the market to give more competition and hopefully price reductions, the opposite happened. In March 2008, the media was awash with news that cement companies ACC, Lafarge Cement, Grasim and four other top cement producers were found guilty of cartelisation by the MRTP Commission, having acted in concert to raise prices. The link between M&As and cartels is quite apparent in this sector.

The Indian tyre industry has also seen remarkable involvement of multinational companies over the previous years. JK Tyres, for example, has a technical tie-up with Continental AG of Germany. In 1993, Goodyear formed a 50-50 joint venture with South Asian Tyres Ltd (SATL) and in 1998 SATL became a fully-owned Goodyear Company. Apollo Tyres bought South Africa registered Dunlop Tyres International in 2006, which it later renamed Apollo Tyres SA. Consumers would expect to fully benefit through stable prices as a result of competition and economies of scale given that the associated foreign firms are big. Alas, in May 2008, we heard from media reports that the MRTP Commission had issued notices to half-a-dozen leading tyre makers, including JK Tyres, Ceat Tyres, Goodyear India, MRF Tyres and Apollo Tyres, accusing them of indulging in price fixing.

Anti-competitive practices by the cement and tyre industry affect both consumers and businesses which use them.

Business firms have also approached the MRTPC for abuse of dominance against firms that got dominant through mergers, some of them involving foreign firms. Examples include Hindustan Lever Ltd, a subsidiary of Anglo-Dutch multinational company, Unilever, which has appeared at the MRTPC to answer allegation of abuse of dominance, which it got through many acquisitions in the Indian market, the most significant being its takeover of Tata Oils Mills Company. There are several such examples in other consumer goods sectors. Prevention is better than cure. It is, therefore, surprising that business appears to be willing to tackle the symptom by complaining against abuse of dominance, while ignoring the likely cause, which is M&A. The sooner the M&A provisions are notified, the better for everyone, including business.

The author is the Secretary General of CUTS International.

This article can also be viewed at: