Raising The Bar: Tightening The Thresholds Of The Combination Regime Of The Competition Commission Of India

ABSTRACT

The purpose of competition law is to prevent monopolistic markets and unjust practices of body corporates abusing their dominant position in the market. The Competition Act, of 2002, states that, there shall be no agreement entered into for the production of goods or supply of services that would cause adverse effect on competition within India. And that, any agreement entered in contravention of the said provision shall be void. The Act also regulates combinations (as defined under the Act), and states that no person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void. Further, Section 6 of the Act mandates that any person or enterprise, who or which proposes to enter into a combination, shall give notice to the Commission, in the form as may be specified, and the fee which may be determined. However, due to the arguably lax thresholds present in the current parameters requiring approval of the Competition Commission of India prior to effectuating a combination, certain large-scale mergers (which may result in unfair competition in the market) manage to bypass the said approval requirement. In the aftermath of such combinations, these resultant body corporates can abuse their dominant position in the market to unfairly regulate market forces. The CCI currently does not have any power to claw back the approval granted to restore fair competition in the market, due to the concept of "regulatory certainty"; there is hence a need instead for stricter thresholds beyond the sole criteria of asset value and turnover, prior to effectuating such combinations. This paper attempts to widen the possible other criteria that may be established by the CCI to ensure a more stringent regime for approving combinations.

I. INTRODUCTION

The Competition Act, 2002 ("Act") was passed to promote and regulate healthy competition, and to discourage the abuse of dominant position(s) of companies and other body corporates. There are certain set parameters/ thresholds for 'enterprises' (as defined in the Act) to give notice to the Competition Commission of India ("CCI") if, the combined turnover or combined value of assets of the combining entities is more than prescribed limit under Section 5 of the Act.

While the Companies Act, 2013, Sections 230-240 deal with mergers and amalgamations including corporate re-structuring through compromises and arrangements, procedures involved and defines the powers of the NCLT to enforce such compromises and arrangements, the Act on the other hand, prevents monopolistic and/or oligarchic trade practices in the market (Section 3) and abuse of dominant position (Section 4). Section 5 of the Act, which deals with combinations, defines the same as any acquisition of one or more enterprises or merger or amalgamation of enterprises that are crossing the thresholds prescribed by the Act. And Section 6 of the Act mandates that any transaction which is qualified as a combination under Section 5 is required to notify the CCI and seek clearance before proceeding further.

However, the Act does not provide for any other thresholds apart from turnover and asset value, to determine whether a proposed transaction requires to be notified to the CCI for the transaction to be evaluated as to whether the combined entity that will remain can cause an adverse effect on the competition in the market. Due to these limited and narrow thresholds, huge combination transactions manage to bypass and duck the said parameters (on account of reasons further discussed hereinafter), and therefore crossed the CCI's radar.

In the aftermath of such merger transactions, the resultant dominant position of such merged entities can very possibly lead to the entity imposing significantly higher prices, and lesser choices to the end-customer, and would dis-incentivise other competitors in the market due to the resultant entity's new combined market share, which would inevitably disrupt the market forces of demand and supply. Therefore, there is a need to widen the criteria and thresholds set out in Section 5 of the Act for filtering such combination transactions that would adversely affect the competition in the market, and this paper attempts to address the said lacunae.

II. LEGAL PROVISION UNDER EXAMINATION

Section 5 of the Act:

5. The acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises, if —

(a) any acquisition where —

(i) the parties to the acquisition, being the acquirer and the enterprise, whose control, shares, voting rights or assets have been acquired or are being acquired jointly have,—

(A) either, in India, the assets of the value of more than rupees one thousand crores or turnover more than rupees three thousand crores; or

(B) [in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars, including at least rupees five hundred crores in India, or turnover more than fifteen hundred million US dollars, including at least rupees fifteen hundred crores in India; or]

(ii) the group, to which the enterprise whose control, shares, assets or voting rights have been acquired or are being acquired, would belong after the acquisition, jointly have or would jointly have,—

(A) either in India, the assets of the value of more than rupees four thou sand crores or turnover more than rupees twelve thousand crores; or

(B) [in India or outside India, in aggregate, the assets of the value of more than two billion US dollars, including at least rupees five hundred crores in India, or turnover more than six billion US dollars, including at least rupees fifteen hundred crores in India; or]

(b) acquiring of control by a person over an enterprise when such person has already direct or indirect control over another enterprise engaged in production, distribution or trading of a similar or identical or substitutable goods or provision of a similar or identical or substitutable service, if—

(i) the enterprise over which control has been acquired along with the enterprise over which the acquirer already has direct or indirect control jointly have, —

(A) either in India, the assets of the value of more than rupees one thousand crores or turnover more than rupees three thousand crores; or

(B) [in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars, including at least rupees five hundred crores in India, or turnover more than fifteen hundred million US dollars, including at least rupees fifteen hundred crores in India; or]

(ii) the group, to which enterprise whose control has been acquired, or is being acquired, would belong after the acquisition, jointly have or would jointly have, —

(A) either in India, the assets of the value of more than rupees four thou sand crores or turnover more than rupees twelve thousand crores or

(B)[in India or outside India, in aggregate, the assets of the value of more than two billion US dollars, including at least rupees five hundred crores in India, or turnover more than six billion US dollars, including at least rupees fifteen hundred crores in India; or]

(c) any merger or amalgamation in which—

(i) the enterprise remaining after merger or the enterprise created as a result of the amalgamation, as the case may be, have, —

(A) either in India, the assets of the value of more than rupees one thou sand crores or turnover more than rupees three thousand crores; or

(B)[in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars, including at least rupees five hundred crores in India, or turnover more than fifteen hundred million US dollars, including at least rupees fifteen hundred crores in India; or]

(ii) the group, to which the enterprise remaining after the merger or the enterprise created as a result of the amalgamation, would belong after the merger or the amalgamation, as the case may be, have or would have, —

(A) either in India, the assets of the value of more than rupees four-thou sand crores or turnover more than rupees twelve thousand crores; or

(B) 12 [in India or outside India, in aggregate, the assets of the value of more than two billion US dollars, including at least rupees five hundred crores in India, or turnover more than six billion US dollars, including at least rupees Fifteen Hundred Crores in India

Explanation. — [...]

(c) the value of assets shall be determined by taking the book value of the assets as shown, in the audited books of account of the enterprise, in the financial year immediately preceding the financial year in which the date of proposed merger falls, as reduced by any depreciation, and the value of assets shall include the brand value, value of goodwill, or value of copyright, patent, permitted use, collective mark, registered proprietor, registered trade mark, registered user, homonymous geographical indication, geographical indications, design or layout- design or similar other commercial rights, if any, referred to in sub-section (5) of section 3.

III. ANALYSIS OF RECENT MERGERS IN THE LIGHT OF ABOVE PROVISIONS

a. PVR-INOX MERGER

On March 27, 2022, PVR Limited ("PVR") announced that it proposes to merge with INOX Leisure Limited ("INOX"). At that instance, INOX market capital was Rs 64 billion whereas PVR was trading at Rs 116 billion¹.

The PVR-INOX transaction brought together two of India's largest cinema brands with a combined network of more than 1,500 screens across 109 cities.² The merged entity now has around 50% multiple-screens market share and around 42% box office collection market share. This has raised concerns as generally the transaction of this magnitude would require approval of the Competition Commission of India (CCI), however, due to a decrease in turnover due to the pandemic, the PVR-INOX transaction enjoyed a statutory exemption from notifying the CCI. It is however interesting to note that, as per the data released by The Economic Times, both PVR and INOX had, in the financial years ending in March 2019 and 2020, posted an income of more than double of that which was declared in March 2021 and 2022. Assuming the accuracy of the above reports, it is clearly a case for consideration to widen the threshold prescribed in Section 5 of the Act.

The Consumer Unity & Trust Society (CUTS/ Informant)³, an NGO had filed a complaint under Section 19(1) (a) of the Act against PVR and INOX, alleging contravention of the provisions of Section 3(1) of the Act.

CUTS alleged that both the entities were entering into an anti-competitive agreement for the 'exhibition of films in multiplex theatres and high-end single-screen theatres in different cities in India'. The listed concerns in the complaint included potential reduction in consumer choice, high ticket prices, high bargaining power of merged entity post the merger, due to enhanced market power.

The above complaint was rejected by the CCI stating that there was no prima facie case as the apprehension of 'appreciable adverse effect on competition' by "an entity which is yet to take form cannot be a subject matter of inquiry under Section 3 of the Competition Act, 2022".

It is to be noted that, Section 5 (c) relies on the valuation of the assets as determined from the financial year preceding the financial year in which the proposed merger is to take place. The financial year prior to the date of the merger in this case was during the peak of the pandemic, and as consequence, the businesses of these entities in question were brought to a halt. .

The above events would, without any rumination, lead to an obvious inference that, the PVR-INOX merger was only a result of an advantage that presented itself due to the pandemic and the unfavorable financial consequences that several entities had to confront.

b. PVR-DT MERGER

In 2005 PVR Limited and DT Cinemas entered into a Combination Agreement for the acquisition by PVR of DT Cinemas comprising of 39 screens (29 existing and 10 upcoming) as a going concern on a slump sale basis.

PVR issued a notice under Section 6(2) of the Act and the CCI was of the prima facie opinion that the Proposed Combination is likely to cause an "Appreciable Adverse Effect on Competition" ("AAEC") in the relevant markets for the exhibition of films in multiplex theatres in New Gurgaon, South Delhi, North, West and Central Delhi, NOIDA and Chandigarh.

In PVR's acquisition of DT Cinemas CCI raised concerns that the deal will give effect to monopoly in certain parts of Delhi.⁴ Subsequent to Show Cause Notice issued by the CCI, responses from PVR, and proposals for amendment to the deal from PVR that followed, CCI then approved the merger on the condition that PVR can acquire only 32 screens as obtaining all the screens would make it a dominant player in Delhi-NCR. The agreement was amended to exclude DT Savitri (one screen) and DT Saket (six screens) from the sale. The deal value was reduced to INR 433 crore from INR 500 crore to complete the deal. As part of the deal, DT Cinemas was asked by the CCI to sell the other seven screens in South Delhi to any competitor other than PVR.⁵

The CCI determined the product market to be multiplexes and high-end single theatres as they tend to attract a similar clientele. It observed the geographical market to be narrower than city-wide as cinemagoers are reluctant to travel long distances to watch a movie. Thus, the relevant markets (to determine market share) ranged from multiplexes in Gurgaon, Noida, and Chandigarh.

This transaction highlights the possibility of having a carefully crafted threshold whereby, a resultant entity of a combination being above a particular percentage of market share in the relevant geographic market, requires notification to the CCI in order to proceed with the transaction.

c. SONY-ZEE Merger

In the end of 2021, SONY – ZEE merger was announced by the companies when a term sheet was executed. The resultant of the SONY-ZEE merger, forming a $10 billion TV giant is set to create an entertainment growth market of 1.4 billion people, challenging the likes of Walt Disney. According to the preliminary CCI competition assessment, the merged entity would have approximately 45% of the Hindi language segment.

Upon being faced with objections from the CCI, Sony and Zee agreed to certain modifications in their proposed deal. Subsequent to the same, on October 04, 2022, CCI cleared the proposed Sony-Zee merger. Due to the objection of CCI concerning the unfair market share, Sony and Zee agreed to sell three Hindi Channels. The sale of those channels also imposed conditions like:

• the purchaser should not be "Star India Private Limited or Viacom18 Media Private Limited";
• the purchaser should be independent of and with no connections to whatsoever with the resultant entity and its affiliates;
• it should not be either a past or present employee or director as per the order;
• the purchaser should have the financial resources, expertise, and incentive to maintain and develop the divestment business as a viable and active competitor to the parties and/or the resultant entity in the relevant market;
• The purchaser "neither be likely to create any prima facie competition concerns, nor give rise to a risk that the implementation of the Order will be delayed, and must, in particular, reasonably be expected to obtain all necessary approvals from the relevant regulatory authorities for the acquisition and operation of the divestment business," the order said.

CCI also noted that in case the parties fail to comply with the voluntary modifications submitted, the proposed combination would be deemed to have caused an appreciable adverse effect on competition in India.⁶

IV. CONCLUSION AND RECOMMENDATIONS

The introduction of The Competition Act, 2002, primarily was to keep a vigilant eye on mergers & acquisitions, and combinations and thereby protect consumer interest and restrict unfair trade and monopolisation. The Competition Commission of India which assumes the role of a watchdog, as vigilant and active as it may be, if not governed and dictated appropriately and sufficiently by the statute empowering it, would be rendered futile and fail to achieve the motive behind its roles and responsibilities. It is therefore essential that the statute covers scenarios that were unconceived at a time and be welcoming of changes to the text that would ensure better implementation of the preamble of the Act.

Below are some recommendations that the above events have proved necessary:

1. Widen the scope of criteria provided under Section 5 of the Competition Act, 2002.

Section 5 of the Act provides limit for an entity formed after the mergers or amalgamations. If the combination is over the turnover limit, the transaction has to pass through CCI for approval. However, the criteria only include the value of assets and turnover in previous financial year. The scope of the section should be wider to include the criteria provided under Section 19 (4) of the Act such as:

a. market share of the enterprise,

b. size and resources of the enterprise,

c. size and importance of the competitors,

d. economic power of the enterprise including commercial advantage over the competitions,

e. monopoly or dominant position.

According to Section 5 of the Act, the value of assets shown in the audited books in the financial year immediately preceding the financial year in which the date of the proposed merger falls is taken into consideration while calculating the limit under the section. Restricting the ambit of time to one year preceding the proposed year would only act as a cushion for unfair mergers as one year's data would not be precise enough to measure the intended particulars and deduce an opinion. This would only lead to loophole mergers such as the PVR-Inox deal, which, if not for the liberal condition restricted to one preceding year, would not have been possible. Therefore, it should be a valid consideration for CCI to summon and peruse relevant records applicable to three preceding financials to understand the position an entity enjoys and ascertain the probability of abuse of its dominant position in the market. CCI should also revise the present limit of the value of assets and turnover in accordance with the change in the market forces due to the pandemic.

Footnotes

1. IDBI Report on Valuation and Rating of Indian Media Sector, https://images.assettype.com/bloombergquint/2022-03/d15b24ba-743d-44a9-87e5 781cdeae57c2/IDBI_Capital_Media_PVR_Inox_Merger_Update.pdf

2.Press Release "PVR Limited and INOX Leisure Limited Announce Merger" dated 27 March 2022, available at https://archives.nseindia.com/corporate/PVR_27032022150923_PVR_PressRelease.pdf

3. Consumer Unity & Trust Society Vs PVR Limited (Competition Commission of India), Case No. 29 of 2022

4. Order dated 04.05.2016 passed by CCI under Section 31(7), pursuant to Notice filed under Section 6(2) by PVR Limited (https://indiacorplaw.in/wp-content/uploads/2016/07/C-2015-07-288.pdf )

5. https://www.thehindubusinessline.com/companies/pvr-revises-deal-with-dt-cinemas-post-objection-from-competition-watchdog/article8673677.ece

6. https://www.business-standard.com/article/companies/zee-sony-merger-media-groups-agree-to-sell-three-hindi-channels-122102600738_1.html

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