Indian industry should welcome the implementation from June 1 of the new merger and acquisition (M&A) norms under sections 5 and 6 of the Competition Act, 2002. Union Minister of Corporate Affairs Murli Deora has assured India Inc that its opinions will be taken on board before the Competition Commission of India (CCI) frames the regulations. But for most businesses, the very fact that most M&As will be subject to CCI approval is cause for concern. To be sure, the government has set limits, but these are hardly reassuring. Corporations with turnovers above Rs 1,500 crore will have to inform the CCI before merging with another firm. Currently, about a third of the country’s 1,000 largest listed companies would qualify for this threshold if they opted for an M&A. Also, CCI will vet only those M&As that have combined assets of Rs 1,000 crore or more or combined turnover of Rs 3,000 crore or more. The target company’s net assets have to be a minimum of Rs 200 crore or it should have a turnover of Rs 600 crore for CCI intervention. The major concern, however, is not so much the deal size as the fact that prior information would jeopardise confidentiality, a critical risk that needs to be considered in these uber-competitive times. Given the colander-like quality of information flows in almost every public institution, Indian companies would be right to doubt CCI’s confidentiality standards.
It is also uncertain whether market domination should be such a major issue in an economy like India’s. In such economies, large corporations often create markets that encourage competitors to enter, thus benefiting consumers, the principal motive behind competition law. For instance, had it been done under the new law, Hindustan Unilever’s buy-out of the various factions of the domestic ice-cream maker Kwality would probably have attracted CCI scrutiny. But since that deal, the market for ice cream has expanded so much that many other competitors – some of them multinationals – have entered the fray. Indeed, it is worth noting that India had more sectoral monopolies when the CCI’s predecessor, the Monopolies and Restrictive Trade Practices Commission, was in operation than it does today! Also, at a time when M&A activity is gathering steam again – the January-March quarter saw a threefold surge in the value of M&As over the same quarter last year – CCI scrutiny adds another layer of officialdom for companies to contend, in addition to sectoral strictures and the Securities and Exchange Board of India takeover code.
Indeed, when sector regulators are already in place, manned by industry specialists, it is difficult to understand why approval from a generalist institution like CCI, which appears to have become a sinecure for former bureaucrats, is considered necessary. Indeed, the government has already undermined CCI’s authority by suggesting that it has the power to grant exceptions — banking M&As are unlikely to be under its purview, for instance. Poor infrastructure, corruption and poor regulation have prompted many Indian companies to look overseas for companies to buy. Poorly designed competition law is likely to encourage them further — to the detriment of Indian companies, their customers and stakeholders.