M&As a key challenge for CCI

By: | Published: March 18, 2016 12:23 AM

The regulator’s slow approval process, poor appreciation of commercial dynamics of a deal, etc, are clear problems

India was one of the last major economies to introduce a modern competition law; even many smaller countries with market-based economies had been ahead of us. The MRTP Act was an archaic law, with no sound economic underpinning and in its enforcement, it had little impact to show. Over time, it reduced itself to a cog in the “command and control” machine, another bureaucratic hurdle in carrying on or expanding businesses. It also lacked teeth and its orders were quite easily ignored.

Following the economic policy changes of the 1990s, it was realised that market reforms were incomplete without a modern competition regulator. The government decided to scrap the MRTP Act, and replace it with an economics-based competition law, one that was on a par with competition law in mature jurisdictions. The Competition Bill was introduced in Parliament in 2001 and became an Act in January 2003; the Competition Commission of India (CCI) was established in October 2003. But the journey was far from over.

Very soon, a petition was filed in the Madras High Court challenging the vires of the Act. While hearing of this petition was still in process, a similar petition was filed in the Supreme Court; the grounds were mainly around the contention that the Commission was a body with near-judicial powers, and should be manned by the judiciary. The remarks that fell from the bench right in the initial hearings indicated that the new law was in trouble. The government held its ground, contending that the Competition Commission was a market regulator, much like Sebi or Trai, and in almost no major jurisdiction was a competition authority manned by judges. However, the orders of the Commission could be subject to judicial review.

The government made some changes to the law, the chief being that an appellate tribunal will be set up to hear the first appeal from the Commission’s orders. The challenge in the courts abated for the time being with the Supreme Court’s judgment in January 2005. But government meanwhile inexplicably appeared to have shed any enthusiasm for the new law. The amendments needed following the Supreme Court’s judgment happened only in September 2007. Even more strangely, after the amendments got enacted, it took another several months for the government to bring the law into force (in May 2009).

Besides judicial challenges and opposition from a section of the legal fraternity, the new Act was scarcely welcome to the business community. It threatened the cosy existing relationships between competitors and monopoly powers which the MRTPC had failed to rein in. However, businesses had a genuine concern as well; this related mainly to the Commission’s jurisdiction over mergers and acquisitions that would require its approval before any large M&A could be undertaken. They feared that this could hinder or delay M&A activity and the Commission might emerge as yet another bureaucratic hurdle in perfectly normal economic transactions in the country.

Recognising this concern, the Commission included in its regulations a de minimis exemption that would exclude smaller M&As from its remit. Thus any transaction where the target has in India assets less than R250 crore or turnover less than R750 crore would be exempt. But the corporate sector was still apprehensive, and urged the government to amend the Act itself, which they hoped will put off the enforcement for another lengthy period. Mercifully, the government resolved the problem by issuing a notification at its level exempting transactions below these thresholds for 5 years, till March 3, 2016. This exemption has now been renewed for another 5 years till March 2021; simultaneously, the de minimis target thresholds have been increased to R350 crore of assets or R1,000 crore of turnover. In parallel, the government has also increased the already high financial thresholds for the combined enterprise or group post-merger set out in Section 5 of the Act, below which there is no requirement for the Commission’s approval. The country now has one of the highest mergers thresholds in the world ! This is a clear signal to the Commission that the government prefers a liberal mergers regime and a soft touch from the Commission when regulating M&As.

The emerging situation poses no mean challenge to the Commission. There have been concerns among merging entities, investors, private equity players and others about the merger process in the Commission. Parties have been vocal about the time taken in clearing even non-problematic cases, the unnecessarily large volumes of information sought by the Commission, the inability often to appreciate the commercial dynamics of a transaction, a tendency to micro-manage the terms of a merger deal and impose the Commission’s thinking in it, and absence of a truly constructive dialogue between the merging parties and the Commission. Such worries threaten the Commission’s reputation, and the ‘ease of doing business’ drive that the government seems committed to.

To the Commission’s credit, it has striven to dispose of cases within the 30-day deadline self-imposed by it in the regulations, but over time it seems to have slackened its commitment, and eventually amended its regulations to give itself substantially more time for arriving at a decision. Besides, the Commission seems genuinely over-burdened with mergers work, and its mergers division has significantly less staff than visualised in its organisational structure. Be that as it may, the Commission faces the daunting task of preserving its reputation as a state-of-the-art competition authority, streamlining and speeding its processes, viewing M&As as a process to be encouraged not stalled or delayed absent an obvious competition concern which it should be able to identify early in the process.

The author is former chairman, Competition Commission of India, and now executive chairman, Vinod Dhall-TT&A

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