Competition regulator to screen big JVs too

Written by Ronojoy Banerjee | Ronojoy Banerjee | KG Narendranath | New Delhi | Updated: Dec 19 2011, 08:21am hrs
The corporate affairs ministry is considering two key changes in the Competition Act, 2002: One to give the Competition Competition of India (CCI) regulatory powers over big joint ventures (JVs) and another to include deal size as a criterion for mergers and acquisitions (M&As) to come under the commissions purview.

According to official sources, the move to bring JVs above certain size under the CCIs scrutiny is in recognition of the fact that they can, like M&As, be a method to create concentration of market power, potentially harming competition within the relevant markets. The ministry also takes a cue from the anti-trust jurisdictions of the US and EU where JVs above certain sizes require prior regulatory approval for reasons of competition.

JVs are usually formed either as association of companies or special purpose vehicles (SPVs) where partners typically agree on a 50:50 equity sharing.

As per Sections 5 and 6 of the Act (which came into force on June 1, 2011), M&As above specified thresholds (defined in terms of assets and turnover of the combined entity/group) require the CCI's prior approval, in view of the appreciable adverse effect they could have on competition.

However, the government reckons that the parties concerned can circumvent the provision by entering into JVs. Also, there are companies (especially those in knowledge-based industries like IT and pharma) that get valuations that are many multiples of their turnover/asset and hence the proposal to make deal size another yardstick to gauge the potential of an acquisition to harm competition, the sources said.

If Parliament approves the amendment the ministry is set to propose, parties to JVs above certain sizes could be required to clearly spell out the purpose of such tie-ups and their likely impact on competition, if any.

The proposal to include JVs and SPVs within the purview of the Competition Act and the CCI was mooted by the government panel headed by former CCI chairman Dhanendra Kumar. The issue had first come to light earlier this year when CCI initiated a probe into Media Pro Enterprises a JV between the Zee Group and Star TV India. This was the first time a JV had attracted CCI scrutiny. The investigation, currently under way, was ordered under Section 3 of the Act (which deals with anti-competitive agreements) since the M&A-related provisions in the Act don't allow the competition regulator to invoke Sections 5 and 6 in case of JVs.

In the case of Section 3 and Section 4 (that deal with abuse of dominant position), CCI can take only ex ante action, while action under Sections 5 and 6 are preemptive.

There are gaps in the Competition Act that need to be addressed. M&A regulations are very new and they need to be fine-tuned adequately, an MCA source told FE. A CCI official on condition of anonymity said that the Dhanendra Kumar committee proposal had found favour with the commission.

He said that the change needed to be included since every major competition regulator in the world is bestowed with adequate powers to investigate every kind of business combination including JVs and SPVs if the combined entity breaches a certain threshold limit. As per the Competition Act, M&As would require CCI approval if they are above certain thresholds. One key criterion is if the combined entity has assets of Rs 1,000 crore or more or turnover of Rs 3,000 crore or more in India.

JVs must come under CCI scrutiny. The central issue is the same whether the JV breaches competition (rules) or not. This should be clearly spelt out at the time of forging the JV, former CCI member PN Parashar said. Head (competition law) at Vaish Associates, MM Sharma said that the government must clearly state the kind of JVs that would be investigated under the Competition Act.