Sun, Ranbaxy get show-cause notice from CCI

Written by fe Bureau | New Delhi | Updated: Jul 31 2014, 06:57am hrs
Maintaining that Sun Pharmas takeover of Ranbaxy in April in an all-stock transaction valued at over $3.2 billion needs greater scrutiny, the Competition Commission of India (CCI) has issued a show-cause notice to both the companies to provide more details to prove that it would not lead to a monopolistic situation. The companies will have to respond within 30-days, sources said.

However, CCI at this stage has not taken a decision either way to approve or block the deal which would be taken once the companies respond in detail to its notice.

Explaining the Competition Act, a CCI official explained that prima facie where it feels that a transaction needs a greater scrutiny, a show cause notice is issued to the concerned parties. In such cases, the concerned parties need to explain the transaction and its resultant impact in greater detail after which a final decision is taken by the CCI. At the show cause stage, it doesn't mean that we have taken a decision either way, the official said.

CCI has sought more details related to market share of various drug formulation currently spread between Sun Pharma and Ranbaxy in order to get a better clarity on whether the proposed acquisition will comply with the competition laws and not lead to abuse of dominance of the merged entity, sources added.

According to experts, if CCI is not satisfied with the details, it has the powers to order a probe by its director general of investigation. The probe, if ordered, will need to establish whether the proposed deal will have any adverse impact on competition vis-a-vis the market share of various drug categories, experts said.

According to industry estimates, the deal between two large generic drugs makers, who will collectively control 46 drug formulae, will create Indias largest drug manufacturer with an 8.5% market share in India's pharmaceutical marker estimated to be over R76,000 crore.

Subsequent to the acquisition in April, Sun Pharma had approached the CCI for clearance as CCI's approval is required as per the combination regulations when the enterprises value of the entities are more than R1,000 crore or the combined turnover is more than R3,000 crore.

Since presently both large Indian companies are competing with each other, the proposed acquisition is likely to raise competition concerns, that is, Unilateral Effects leading to 'single firm dominance' like situation in certain select drugs formulations, CCI fears. Currently both companies hold 50-90% of market share in many drug segments, explained MM Sharma, head of competition law and policy at Vaish Associates, a leading law firm.

According to Gautam Shahi, senior associate in J Sagar Associates, this may be one of the most exciting cases that CCI has dealt with till date when a combination notice is filed. It will be interesting to see how CCI defines the relevant market in this industry as a demand substitutability analysis will lead to multiple relevant market definitions and then CCI will have to analyse the presence of Sun Pharma and Ranbaxy in each of these relevant markets, Shahi said.

CCIs approval is required as per its combination regulations when the enterprise value of the Indian entities concerned is more than Rs 1,500 crore or the combined turnover is more than Rs 4,500 crore. The Sun Pharma-Ranbaxy deal satisfies this criteria for CCI scrutiny.

According to competition law experts, the Sun-Ranbaxy filings to CCI under the combination regulations were made through what is called a Form-II filing which is the longer version of form requiring greater level of reporting on any proposed M&A deals.