More than two years have elapsed since the first draft guidelines on combinations were issued and for quite some time now the Government has promised that the revised regulations would be made public. Finally, now it appears that a fast track pre-merger consultation process will be put in place by the Competition Commission of India for companies to seek the views of the regulator. In the meanwhile, contrastingly, the Ministry of Corporate Affairs vide notification dated 15th of May 2009 has empowered the Competition Commission of India to inquire into Sections 3 and 4 violations (while sections 5 and 6 have been ignored). It, therefore, leaves the CCI incapable of regulating combinations, at least for now. This brings to fore a very interesting issue - the question of regulating mergers before the merger regulation - although it may not be of immense practical importance, but vital from a policy perspective on the role that will be played by the Regulator.
The language employed in the Competition Act, 2002 has significantly derived its inspiration from Europe - most notably sections 3 (anticompetitive agreement) and 4 (Abuse of dominance) closely resemble Articles 81 and 82 of the Treaty Establishing the European Community (or now Articles 101 and 102 of the Treaty respectively of the Functioning of the European Union) – but what is all the more interesting and which has not been examined is how history has struck a chord between Europe and India even with respect to combinations.
For a long time the Competition Commission in Europe did not have the jurisdiction to regulate combinations. Politics and industrial policy in the member countries ensured that control over the industrial structure remained with the individual member states. In the absence of a unanimous Council Regulation, the Commission did not have the power to regulate mergers. This brought forward the question before Courts whether mergers could be scrutinized under Articles 81 and 82 of the Treaty. In the case of Europemballage Corp and Continental Can Co Inc v. Commission [1973] ECR 215, the European Court of Justice (ECJ) while scrutinizing the effect on competition as a result of the acquisition of 80% of the shares of Thomassen and Drijver-Verbliva by Continental Can Co. held that mergers per se could be scrutinized under the abuse of dominance provision. The ECJ held that since the aim of the treaty was to protect competition, mergers that have a detrimental effect on the effective competitive structure in the relevant market should be prohibited. Further it observed that an abuse may occur when an undertaking in a dominant position strengthens its dominance in the market to substantially fetter competition. This was in effect laying down a test based on structure rather than conduct or effect.
The ECJ was also quick to add that an anticompetitive effect in such a case (i.e. one involving a merger) would be rare and shall only be found where practically all competition is eliminated. On the facts of the case the ECJ held that since sufficient competition from substitutable products was not scrutinized, a case for abuse of dominance in the relevant market was not made out.
The ECJ has also held that agreements relating to acquisition of shares would have to stand the scrutiny of Article 81 (anticompetitive agreements). In British American Tobacco and R J Reynolds Industries Inc case [1987] ECR 4487, the ECJ observed that an acquisition (even of a minority shareholding as it was in that case) may serve as an instrument for influencing the commercial conduct of companies to restrict or distort competition on the market in which they carry on business, especially when the agreement provides for commercial cooperation between the companies or creates a structure likely to be used for such co-operation.
This interpretation accorded in Europe assumes special significance in India as only the provisions relating to abuse of dominance and anticompetitive agreements have been brought into force while Sections 5 and 6 of the Competition Act, 2002 relating to mergers are yet to be notified (and nor have the merger / combinations regulations been notified). From a regulatory perspective, it is better if mergers are scrutinized under the proposed Combinations regulation. Most acquisitions / mergers do not create anticompetitive effects, as the data from Europe suggests that out of 3368 notified mergers between September 1990 and March 2007 only 19 were prohibited. The structure based principle in Europe too is now giving way to an economic and effects based test. In addition, the presence of a specific provision under the competition Act, 2002 to regulate combinations (unlike in Europe where the Commission did not have the power to regulate mergers) should ensure that the CCI does not apply Sections 3 and 4 for combinations. It is only a matter of time before mergers are brought within the purview of combination regulations. Anyways, enterprises post May 20, 2009 (the date when sections 3 and 4 came into force) will still have to ensure that they do not violate Sections 3 and 4 of the Competition Act, 2002. Therefore, the reason for the CCI to adopt Sections 3 and 4 for acquisitions / combinations would be unnecesary.
In this connection, we need to see if the pre-merger consultation process will help dispel doubts in the minds of investors (please see this article in the ET on the doubts created by the first draft regulations) and make the regulatory regime more investor friendly. The CCI seem to be heading in the right direction in so far as they are not emulating their European Counterparts by applying sections 3 and 4 for combinations and in assisting the potential enterprises that fall within the combination thresholds to get acquainted with the regulatory scheme through the medium of pre-merger consultations.
