INDIAN UPDATE – International Merger Control Regimes – It’s Time to Re-examine the Merger Control Regimes of India and other Emerging Economies
- Mr. Vasani argues that competition regulators around the globe should re-examine the pre-merger clearance process currently being practiced. He argues that competition regulators worldwide need to have solid empirical evidence to suggest that the existing review process really ensures healthy market competition and even if it does, whether it yields results to the consumers in real terms.
- It is submitted that it is pointless and rather counterproductive to mindlessly adopt the American anti-trust regime, and that many countries that have done so ought to instead frame a regulatory policy suitable to their specific needs.
- The paper analyzes the need for merger control and its desirable model in emerging economies in three segments, taking India as a case study: (i) the purpose and policy goals of merger control, (ii) the cost of implementation and the externalities (e.g. the institutional and socio-economic factors) that have a bearing on the effective and efficient implementation of merger control, and (iii) the existing model and the one that ought to be.
- The paper concludes, among other things, that for a developing economy like India a voluntary regime – where merging parties have the option, but not an obligation, to get their transaction vetted by the Competition authorities – is more suitable. Mr. Vasani argues that in India, where most sectors are fragmented, monopolies and oligopolies may have to be accommodated in that such structures may be more efficient, and it may be more prudent to shift the focus to remedies for certain conduct, rather than restricting ‘size’ per se.
The advent of globalization, and adoption of a liberalized free market economy model brings with it the need for regulation; the idea being that an appropriate regulatory framework must be put in place otherwise governmental barriers to trade will simply be replaced by private barriers, preventing the achievement of the very objectives of liberalization. While this is a very sound proposition, getting the right mix of regulatory framework is always a challenge as it has to maintain the fine balance between sub serving the public interest or the policy goals on one hand and efficiency and market freedom on the other hand. Indeed, it is this balancing act that a national government professing to foster free market economy has to constantly grapple with – the global financial crisis and the debate over the advisability of greater regulation being a case in point. Again, the degree of regulatory needs would vary in developed economies and newly industrialized countries.
Merger control is undoubtedly one of the important components of the regulatory mix. The real question, however, is what should be the approach to its enforcement. As a thumb rule, one can say that ‘one size fits all’ approach to its adoption and implementation would be inappropriate. The need for the law has to be justified on the basis of a clearly defined legislative purpose, which may not be – and cannot be – the same for all countries. Unfortunately however, most countries have adopted the American model of merger control regime without examining its suitability to local economic and market conditions.
The global economic crisis of 2008 has forced the world leaders to re-look at some of the fundamental economic policies, which are being practiced for centuries and which have not borne desired results. It is a good time, therefore, to also relook at the global merger control regime that is being followed and question its underlying assumptions. This becomes all the more critical for emerging countries which have adopted the Anglo-Saxon model of Competition Law, and indeed this is the theme which I would humbly put before this august gathering today. The question that we need to ponder over is: Is it the case that the present model of merger control being followed in the developed world can be imported and implemented in the developing economies? If yes, whether it is suitable and sustainable?
While there has been an exponential growth in the number of countries that have adopted competition law – and merger control – as part of market reform, this alone, in my opinion, cannot be a sufficiently compelling argument to justify the implementation of a merger control regime adopted from the developed world. In fact, there is a case, in my opinion, for even the developed countries to rethink their approach to merger control and whether the present regulatory model – on a cost-benefit analysis – has worked well.
The basic theme of my presentation is to persuade various competition regulators around the globe and national governments to have a serious re-look at the suspensory pre-merger clearance process currently being practiced. The Competition regulators worldwide need to have solid empirical evidence to suggest that the extant review process really ensures healthy market competition and even if it does, whether it yields results to the consumers in real terms. It is submitted that it is pointless and rather counterproductive to mindlessly adopt the American anti-trust regime and many countries that have done so ought to remedy the same and frame a regulatory policy suitable to their specific needs.
I would like to anyalyse the need for merger control and its desirable model in emerging economies on broadly three counts, taking India as a case study: (i) the purpose and policy goals of merger control, (ii) the cost of implementation and the externalities (e.g. the institutional and socio-economic factors) that have a bearing on the effective and efficient implementation of merger control, and (iii) the existing model and the one that ought to be. I shall end with some thoughts on the need for streamlining the multi-jurisdictional merger review.
I. The utility of merger control: purpose and policy goals
As I mentioned earlier, the need for a law or regulation has to be justified on the basis of a clearly defined legislative purpose, which may not be – and cannot be – the same for all countries. The need for implementation of merger control, therefore, has to be supported by a sound and convincing legislative purpose.
There are enough justifications for the two limbs of competition law – prohibition of anticompetitive agreements and abuse of dominance. These are prohibited conducts and hence, need to be regulated It is the third limb, “Merger Control”, is the one that merits debate. Admittedly, Mergers are not bad per se (in fact, mergers, joint ventures, and strategic alliances, unlike naked price-fixing arrangements, involve the integration of resources; hence, they have the ability to generate real efficiencies); they need to be regulated to prevent the two prohibited conducts – the argument being, when two firms merge they may attain dominance and thereafter abuse their dominance. The core purpose of merger policy is to prevent the prospective anti-competitive effects of such mergers through appropriate remedies, including prohibition if necessary. Therefore, merger control is more in the nature of a preventive measure. The utility of this preventive measure has to be then necessarily seen in light of the mischief it seeks to address, and the resulting harm that absence of this preventive measure will lead to. Particularly, for emerging economies, the justification for adopting merger control needs a candid assessment.
The Indian Scenario:
In my humble opinion, India– one of the latest entrants into the list of countries that have enacted competition law – can be studied as a classic example of unsuitable merger control policy being thrust upon it threatening to stall the economic progress made in recent years. Given India’s current stage of economic development, it would be most inappropriate to transplant the Anglo-Saxon model of merger control regime of the Western world in the Indian system.
India did not have merger control regulations until 2002 when the Indian Parliament enacted the Competition Act (“Indian Competition Act”) providing for a mandatory pre-merger notification regime. India did have an antiquated merger control regime prior to 1991 under the (now repealed) Monopolies and Restrictive Trade Practices Act, 1969 (“MRTP Act”) – a law enacted during India’s long and economically fatal tryst with socialism. The MRTP Act was, in its letter and spirit, based on the flawed principle of “Big is bad” and sought to restrict – which would later have disastrous results – size of the enterprises notwithstanding the efficiency which the ‘size’ could generate. These provisions were enforced in such a manner that the M&A activity in India was virtually non-existent during the period (1969-1991) when they were in force. Therefore, when Indian economy was liberalized in the year 1991, the obsolete merger control provisions under the MRTP Act were abolished. For the past 20 years, there has been no merger control law in force in India and unsurprisingly, no need for the same has actually been felt in the market place. The empirical evidence suggests that competition has in fact substantially increased in every sector of the economy as compared to 1991 when the old merger control regime was abolished.
The utility of merger control in India needs to be appreciated in the larger context – the current stage of India’s economic growth.
India followed socialistic economic policies for more than 40 years after gaining independence where the Government of India regulated the size of the manufacturing facility, technology to be used, and the capital to be raised with total inflexibility in the labour market and reservation of more than 800 products for the manufacture in the small scale sector. This has resulted in India setting up several manufacturing capacities of uneconomic sizes. With the opening up of Indian economy and freeing of imports and significant reduction in import tariff, Indian industry is finding it difficult to compete with global economic giants who have an advantage of economies of scale. The size and scale of the Indian industry, compared to its global counterparts, not only in the developed world but even amongst the developing economies like China, is quite small. India Inc., therefore, needs to consolidate in many sectors and the M&A activity needs to be encouraged so that healthy efficient units can take over small unviable units.
As regards those sectors where there is concentration of ownership and control over resources, the market monopoly is either in the hands of public sector enterprises or where the dominance is in the hands of private enterprises, the sectors are already regulated by sectoral regulators who regulate different aspects of business conduct, including competition and consolidation. For example, while The Telecom Regulatory Authority of India (TRAI) and the Department of Telecommunications regulate the conduct of telecom players in the market, including mergers, the Insurance Regulator regulates enterprises engaged in the insurance business. Similarly, the Central bank – the Reserve Bank of India regulates, among other things, business combinations in the banking and financial sector.
Furthermore, the past Indian experience with scrutiny of M&A transactions was counterproductive. It did not result in any increase in the competition in the market place. On the contrary, it made many M&A transactions unviable due to delays in getting Governmental clearances.
Although the stated objectives of the new Indian Competition Act- “to promote and sustain competition in markets and to ensure freedom of trade”- are laudable, it has provoked serious criticism primarily with respect to its merger control provisions. The past legacy combined with inefficient enforcement of the erstwhile MRTP Act has given rise to doubts on whether India has the appetite and the resources to implement a truly effective merger control regime. The industry fears that the mandatory notification requirement would impede the pace of M&A activities in the country and thereby adversely impact our economic growth. The mandatory pre-merger scrutiny may be justifiable in a mature economy but not in a developing economies where enterprises need to achieve scale of economies to compete effectively in a global market.
It may be pertinent to quote in extensor a paragraph from the dissent note of renowned Indian economist Sudhir Mulji forming part of the Expert Committee Report on which India’s new Competition Act is based. Writing against the need for merger control at India’s current economic development, Mulji wote with notable candour:
“…Finally my conclusion is therefore that the law and policy that must emerge from the proposals of this [Expert Committee] are wholly inappropriate for India at this present juncture of her development. What we should be promoting is freedom of the markets and we should even tolerate excesses. The release of what economists call animal spirits among Indian businessman is the first and the most difficult task of policy makers. It is for me sad that after two hundred years of colonial rule, we have been emasculated from thinking about issues on first principles and continue to imitate the ideas of others.”
The policy approach to merger control in countries like India also has to be in sync with a fundamental change in the Indian economic environment. The abolition of industrial licensing, significant liberalization of FDI, lowering of customs tariff barriers, liberalization of import controls, reduction in the list of items reserved for small scale industry, freedom to large companies to seek growth in any market has fuelled the pace of competition in the Indian economy to an extent never witnessed in the post-independent era of India. It is changes such as these in the overall business environment that need to be further strengthened rather than putting curbs/slowing down combinations which are likely to make industry more competitive and fuel growth both in employment and in the economy.
II. The cost of implementing merger control and the externalities
Competition law and merger control cannot operate in isolation as there are several factors that have a bearing on effectiveness and efficiency of the process employed to regulate mergers.
The cost factor
While the merits of pre-merge notification cannot be dismissed – and indeed, pre-merger appraisal of transactions may be essential in certain cases – the merits must be weighed against the increasing burdens the system is placing on business and regulators.
Studies conducted in June 2003 by PriceWaterhouse Coopers (PwC) suggest that the financial cost of undertaking multi-jurisdictional merger review in a large cross border M&A spanning several countries can be as high as 42% of the transaction cost if detailed investigations are ordered. Even otherwise, in a routine transaction, which is cleared on a prima facie scrutiny, the cost of such review is around 20% of the total transaction cost. This is in fact a tax on M&A activity and does not serve any useful purpose as there is enough empirical evidence to suggest that 95% of the M&A transactions do not undergo any modification post such a review. Significant and unnecessary transaction costs are imposed on proposed transactions through the notification and review procedures of merger control regulation. The cost gets compounded by the proliferation of merger control provisions and the requirement to file multiple merger notifications.
The world, especially the developing world, therefore needs to have a complete re-look at this traditional model of merger review and decide on a more appropriate policy frame work. If the tangible benefit – which is projected to be achieved by the proponents of merger control – is disproportionate to the enforcement cost for the regulator and transaction cost for the parties, then there is really no justification to hastily and mindlessly implement such law.
Apart from cost, there are other externalities which need to be looked at:
The Time-Factor: cost of delays
Apart from the real filing cost, the cost of delays due to regulatory review – in multiple jurisdictions – is another major area of concern, and must be taken into account before adopting the mandatory pre-merger scrutiny model of merger control. A paper presented at EC Merger Control 10th Anniversary Conference in 2000 estimates that without considering the cost of delays due to regulatory review, the cost to the global economy would be at least US$180 million a year just to complete merger filings in the EU and the US in 250 non-problematic transactions. The opportunity costs due to delay are potentially even more significant. For every day that non-problematic mergers are delayed, the merging parties – and ultimately consumers – lose the benefit of synergies and efficiencies that accrue from most mergers.
Seen in this context, the delay cost due to the merger control could be alarming in a country like India. The Indian Competition Act gives the Competition Commission 210 days to reach a decision; much longer than most, if not all, other jurisdictions worldwide. The Act follows a suspensory system wherein pending clearance, the parties cannot close their deal. M&A transactions, in the present-day global context do not admit of a 210 days’ waiting period as envisaged by this new Act. There are multiple suitors for every worthwhile target and target undertakings/companies will be extremely reluctant to wait for 210 days and will much rather prefer to go with someone else who can complete the transaction faster, albeit, at a lower value. This is because global business environment could undergo dramatic shifts in a long period of seven months and targets may not be willing to risk significant diminution in value while hoping to optimize on realization. In such transactions which are mostly driven by strategic considerations, speed and certainty are at a premium and absolute price/consideration becomes a somewhat secondary criterion. Given that ‘time’ is of the essence in M&A transactions, a long waiting period, for many deals, could be fatal.
Furthermore, the right of third parties to appeal and file objections may be misused. For instance, even if a merger proposal is cleared by the Commission at prima facie review stage, it may be appealed against by ‘any person aggrieved’. This coupled with the appellate jurisdiction of Competition Appellate Tribunal, without a mandatory timeline for disposal of appeals, with a further appeal to the Supreme Court may elude finality of M&A transactions.
The provisions are also not aligned with other laws; for example the 210 days waiting period may result in anomalous situation under the SEBI Takeover Code. Also, while the Act repeals the MRTP Act, it does not repeal the provisions under sections 108A-I of the Companies Act – thus retaining a parallel merger control law.
The legislative flaws
Assuming that there are enough justifications for implementation of merger control, it is imperative that the drafting of the law is as per the best practices, as substantive flaws n the law would create a legislation that could be at war with itself and significantly impede the very objective it is intended to foster and achieve.
In India, the merger control provisions of the Indian Competition Act have some serious flaws:
- The Act lays down asset or turnover based threshold. The ‘asset’ based criteria may not be objective in case of industries such as telecom, power, petrochemicals, etc. Also, the thresholds are to be computed on a combined basis and no specific thresholds have been prescribed for the ‘target.’ This is exacerbated by the faulty definition of ‘group’ based on 26 % shareholding. The definition does not take into account ‘commonality/ identity of products or services’ which the members of the group are engaged in.
- No ‘size of transaction test’ has been laid down which will result in a number of technical filings in respect of a large number of global transactions that have little or no relevance to India.
- Equally perplexing is the absence of a convincing ‘effects test’ even though the Act makes provision for its extraterritorial application. This will imply that even foreign transaction with no substantial India impact would be subject to mandatory pre-merger filing requirement. This clearly is inconsistent with the International Competition Network’s Recommended Practices that merger control regulations should incorporate appropriate standards of materiality as to the level of ‘local nexus’ required for merger notification.
The institutional and socio-cultural factors
Another important factor that is worth considering is that the estimated and projected gains from merger control may be offset by the inadequate institutional infrastructure and poor governance. The bigger problem in emerging economies which may make it difficult to realize similar benefits as in the western world is poor governance, widespread corruption, poor management of public finances and inadequate judicial and oversight institutions. Thus, it is possible that merger control may become another tool for misuse by vested interests and itself become a barrier to trade and commerce.
India, for instance, presently does not have the required administrative resources and technological infrastructure in place which developed countries have evolved over the years. Even the best of laws cannot be applied without adequate human resources i.e. staff of sufficient size with adequate technical competence. This further requires adequate financial resources as they are a necessary complement to human resources. The inevitable disparities between private and public sector salaries create problems of professional staff retention. The importance and relevance of administrative mechanism cannot be ignored in the effective and efficient implementation of competition law, which is still in its nascent stage in India. The immediate fallout of the Act would be overburdening of the CCI by the likely volume of filings that the mandatory notification requirement would necessitate. The “gatekeeper” provision would lead to inordinate procedural delays and shift focus of the CCI from real substantive issues to routine and irrelevant tasks of scrutinizing technical filings. In a country like India, the regulators are likely to take a very long time to evolve as most of them do not have firsthand experience of dealing with Competition Law issues.
Moreover, given the Indian socio-cultural realities, extraneous considerations will definitely play a big role in sanctions / refusals of the proposals by the CCI. Corruption is a known menace and the problem is compounded by the fact that most of the officers are grossly underpaid, having lesser motivation to successfully implement Competition Law and particularly the provisions relating to M&As, which due to their subjective nature (no objective criteria being defined in the Act) can be easily tweaked.
Another aspect of global M&A dynamics that the India bureaucracy is not prepared for is the need to maintain confidentiality in sensitive transactions. In India, the minute a file reaches a governmental body, the same is for all practical purposes in public domain. Due to the flawed criteria in the Act for determining combinations, many transactions which may have no India impact will definitely have Indian ‘publicity’ once the mandatory pre-merger notification regime is brought into effect.
III. The existing model and the one that ought to be
Voluntary v. Mandatory Regime
Even the proponents of merger control will have to admit that the new Competition Act is not against dominance, it is against abuse of dominance. In other words, ‘Size’ per se is not bad. The justification for merger control is that if two firms are allowed to merge without scrutiny, they may attain a size which can later be abused in the market to the detriment of the consumers. While this is a valid concern, this does not justify a mandatory merger control regime, at least for a developing economy like India; instead a voluntary regime – where merging parties have the option, but not an obligation, to get their transaction vetted by the Competition authorities – would have been suited more to the Indian scenario. This system has, after all, worked well in countries like UK and Australia. The fear of ‘unscrambling the egg’ is rather overstated.
In the Indian context it is pertinent to note that the Competition Act, as originally enacted in 2002, provided for voluntary notification but without coming into force for a single day, the merger control provisions were drastically amended in 2006 to provide for the mandatory process.
The introduction of mandatory notification requirement seems to stem from the Standing Committee’s concern that were India to adopt a voluntary notification regime, the Commission may miss out on transactions that are likely to cause an adverse effect on competition in India. This is, however, misconceived. Firstly, the Commission is empowered under the Act to independently investigate a combination irrespective of the fact that it is notified. Therefore, even though a transaction is not notified by the parties, the Commission can, on its own, take notice of the transaction, decide upon its implication on competition in the market, and take necessary actions. Secondly, the chances of any significant combination going unnoticed are minimal because even where parties themselves do not approach the Commission, it is likely to be informed of such transaction by the parties’ competitors, customers and the media.
In practice, problematic transactions having implication on competition do come to the attention of competition authorities even in voluntary regime. Parties to a transaction, which they consider may impact competition, will themselves notify to the Commission to avoid any potential regulatory uncertainty over the transaction post-completion. However, making the notification requirement a mandatory legal procedure will force the parties to notify all transactions even though they are insignificant in terms of their scale and impact in the market. This would result in unnecessary delays and consequently, increased transaction cost for the parties.
Given that mandatory pre-merger review is the law now, one option, considering the overall repercussions, could be to defer the enforcement of mandatory notification provisions in the Act. The Act could be implemented in phases i.e. to start with only the provisions dealing with anti-competitive agreements and abuse of dominant position (which are already in force), while the merger control provisions can be notified later. This would offer time not only to the Indian industry to attain global size and scale, but would also enable the newly constituted Competition Commission to gain the required experience with requisite administrative & technical infrastructure in order to effectively and efficiently perform their regulatory role. Alternatively, the Government could identify those sectors where concentration is clearly visible and implement merger control in those sectors alone. Sectors which are intensely competitive, sectors in which goods and services could be easily imported, and sectors which are serviced by several market players, do not raise competition law concerns and hence, keeping those sectors out of the merger control process, at least for the time being, would not be out of place. The Commission should conduct an empirical study to identify whether, and if at all, absence of merger control has encouraged proliferation of anti-competitive practices in the market to the detriment of consumers.
It is, therefore, critical that the legislation does not seek to regulate and control and thereby slow down consolidation – both local and international – by Indian Corporates to make a place for themselves in the global economy and compete effectively in the market place. Balance of convenience is clearly in favor of not regulating combinations, and at the first instance, it will be in public interest if the Competition Commission restricts itself to exclusively focus on abuse of dominance. Such an approach will be in national as well as public interest, since it has the potential to present an optimal balance between accelerated growth of domestic economy, while dealing on an exceptional basis for any cases of abuse of dominance.
In fact, in developing economies like India – where most sectors are fragmented in terms of number of players – monopolies and oligopolies may have to be accommodated in that such structures may be more efficient and the focus may have to be on conduct remedies rather than restriction of ‘size’ per se.
Inorganic growth and consolidation actually constitute the most desirable solution in certain sectors to ensure that economic resources of the nation are employed for creating assets and are not swindled away in ruthless competition in the market place, as also to ensure a healthy competition in the long run.
India and China are the growth drivers post the Global financial crisis of 2008-09. India reported a GDP growth of 8.6% in the last quarter. India has a golden opportunity to transform its economic condition from an underdeveloped economy to a global economic giant in the next 20 years. It is therefore of critical importance that the Government of India should not take any legislative steps, which would put unnecessary shackles on the entrepreneurial spirit of Indian businessman or put restrictions or delays the healthy economic activity including M&A transactions. It would be most unwise for India to introduce one more gatekeeper at this stage when it is uniquely poised to take the full advantage of the position in which it is placed vis-a-vis Europe and the US, post the global financial crisis.
While one cannot deny that merger control is an important component of competition law and it is necessary for the Indian government to bring their antitrust policy up to the global standards but at the same time it is also necessary to tailor the law appropriately to suit the needs of India’s developing economy. ‘Just because other countries have it, we should also have’ is not an argument compelling enough to justify enforcement of mandatory pre-merger review and spend huge resources which such enforcement would necessitate. To once again quote from the dissent note of Sudhir Mulji, “..I do not find the argument that eighty nations have passed laws regulating competitive behavior an intellectually compelling one. These eighty countries have simply copied or adapted American legislation. America brought in this [anti-trust regulations] legislation for particular reasons arising out of her own history, which may not be relevant elsewhere.”
Streamlining multi-jurisdictional merger review
Any debate over merger control cannot be isolated from the global context. Therefore, I would like to end with some thoughts on the multi-jurisdictional merger review that currently being employed.
Internationally, there is a need for serious introspection by all the policy makers and the competition regulators of different countries as to whether having such a complex, expensive and time-consuming multi-jurisdictional merger control regime is advisable and does it serve any useful economic purpose. The proliferation of pre-closing reporting regimes presents a serious challenge to the business community. The world therefore needs to have a complete re-look at this traditional model of merger review and decide on a more appropriate policy frame work which ought to be suited and customized to each economy’s peculiar characteristics. Given that national economic boundaries are increasingly getting blurred and corporate mergers are a worldwide phenomenon, it is now more important than ever to ensure that the procedures employed to regulate cross-border mergers are as efficient and consistent as possible.