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Strategic Focus
 
COMPETITION COMMISSION: M&A NORMS
Right idea, wrong radar
Competition Commission of India has notified its norms to prevent M&As from creating monopoly like situations. But they may prove ineffective and even counterproductive in their current form by virat bahri
Issue Date - 23/06/2011
 
Chances are bright that you will not catch the usually staid Bill Gates make a politically sensitive statement. But in one of his very famous comments a few years back, he had made three of them in one go. He lampooned his own country for not being able to catch Saddam Hussein, called the EU a passing fad (doesn’t look so way off anymore!) and also exclaimed that he was sick of fascist lawsuits! Gates’ reaction was to the different lawsuits that Microsoft had to confront on either side of the Atlantic. A number of companies like Microsoft have gone through hell facing legal ire when they are deemed to have reached dominant positions in their respective industries and also misused these positions to generate supernormal returns, kill competition or exploit customers.

The Competition Commission of India (CCI) has recently taken some steps to prevent the possibility of M&As leading to monopoly-like situations in India, whether they are solemnised within or beyond its borders. The norms stipulate that post merger/acquisition entities with combined assets greater than Rs.15 billion (or > $750 million globally and at least Rs.7.5 billion in India) or belonging to a corporate group with turnovers greater than Rs.60 billion in India (or >$3 billion globally & at least Rs.7.5 billion in India) will have to notify. Similarly, combinations with turnovers greater than Rs.45 billion in India (or > $2.25 billion globally & at least Rs.22.5 billion in India) or belonging to groups with turnovers over Rs.180 billion in India (or >9 billion globally & at least Rs.22.5 billion in India) will have to seek approval. Industry people hail it as a great decision for a country that is seeing increasing M&A activity. But will these norms be effective enough? Or can they prove counterproductive instead?

As per data from PwC, M&A deals in India reached $36.15 billion in 2010, a growth of 85.67% yoy. The more interesting part is that $10.7 billion from the value is accounted for by the Bharti-Zain deal, one of the key strategic bases for which was the unparalleled extent of competition in the Indian telecom market! A point that needs to be underscored is that when you are discussing the entire concept of past and current monopolies in the Indian market, a number of names would actually come up from the public sector itself like Coal India, SAIL (when you consider captive ore mines) NMDC, BHEL, or Indian Railways!

 
Even a company of the size of Reliance Industries could not monopolise retail in India as competitors had feared. The latest is the claim of the company that it had become the country’s largest food & grocery retailer with a business of Rs.25.13 billion from Reliance Fresh was quickly countered by Pantaloon CEO Kishore Biyani in the media. Meanwhile, Wal-Mart is gaining traction and international players like Carrefour would further open up the market. However, one cannot ignore that when it comes to the private sector in India, a number of situations amounts to oligopolies or monopolistic competition across industries. And when it comes to understanding whether a monopoly situation exists or is being misused in diverse sectors, financial benchmarks can fall short. For instance, in aviation, even a Jet-Sahara (which just managed a profit of Rs.96.9 million in FY 2010-11) or a Kingfisher-Air Deccan combine (net loss of Rs.10.27 billion for FY-2010-11) has found it tough to stay in the black. And these players are actually monopolising some key sectors in the aviation space! In industries like cement and steel or even real estate, the dominant issue that has pestered the government has been cartelisation. Indeed, private companies in such sectors have succeeded in duping customers and artificially raising prices, but can M&A laws specific to one combined entity/corporate group really help there?

Size is considered to be a highly inadequate measure to judge an emerging monopoly type situation, as per a wide consensus. US regulatory body Federal Trade Commission (FTC) uses the Herfindahl-Hirschman Index (HHI) to measure possible monopolies. The index is calculated by taking the squares of market shares of all the firms in the market. The greater the concentration, the higher the index will go. FTC scrutinises deals with HHI beyond 2500. Even though CCI does commit to measuring relative market share in later analyses, the method has loopholes. A report by Grant Thornton states, “In the case of highly specialised, small markets, two entities could combine to form a monopoly, and still remain outside the ambit of CCI due to their small size.” Also, players could become monopolies in a particular geographic region, and remain ‘exempt’. Moreover, in sectors like telecom, M&As are of critical importance, where India has as many as 6-8 players per circle. And it is of significant importance for the merging entities to integrate at the earliest to derive some competitive advantage. CCI has reduced its time limit for approval to 180 days and the outer limit as 210 days. Even these are considered long by the industry. Ambiguities could also trouble normal deals, as it would scrutinise deals where control is not acquired too. Chandrajit Banerjee, Director General, CII, comments on the time frame, “Transactions which qualify for the short form filing do not benefit from a shorter review process. CCI could have provided a quick clearance commitment in relations to these transactions.” And how CCI will work with international regulators for global deals is still a key question.

Finally, CCI’s composition, which is primarily led by retired bureaucrats who have little understanding of corporate norms, gives little hope of being able to understand operational intricacies of competition, or even tackling counter claims and legal complications that well equipped companies may raise. Without more lawyers, bankers, people from the industry, business strategists, economists, et al in its ranks, CCI may not be able to make the cut when it matters. In that case, the notification may remain a step where only the direction is right.

          

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