THE COMPETITION ACT, 2002

 

 

 

An Act to provide, keeping in view of the economic development of the country, for the establishment of a Commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets, in India, and for matters connected therewith or incidental thereto.

 

Definitions

 

• “Acquisition” means, directly or indirectly, acquiring or agreeing to acquire: -
• Shares, voting rights or assets of any enterprise; or
• Control over management or control over assets of any enterprise;

 

• “Enterprise” means a person or a department of the Government, who or which is, or has been, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services, of any kind, or in investment, or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, either directly or through one or more of its units or divisions or subsidiaries, whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or at different places, but does not include any activity of the Government relatable to the sovereign functions of the Government including all activities carried on by the departments of the Central Government dealing with atomic energy, currency, defence and space.

 

Combinations [Section 5]

 

What is combination?

Broadly, combination under the Act means

1. Acquisition of control, shares, voting rights or assets by a person,
2. Acquisition of control by a person over an enterprise where such person has direct or indirect control over another enterprise engaged in competing businesses, and

• Mergers and amalgamations (including demerger, or under any court arrangement as sanctioned under section 230- 232 of Companies Act, 2013) between or amongst enterprises when the combining parties exceed the thresholds set in the Act.

 

Section 6 of Competition Act provides for regulation of combinations. As per section 6, any person or enterprise entering into a combination shall mandatorily give a notice to commission of any such acquisition, merger or an amalgamation. The objective behind regulating such combinations is to assess the appreciable adverse effect (explained afterwards) on competition in India while looking at certain factors. However, all amalgamations and mergers are not covered in the definition of “Combination”. Only those acquisitions and mergers which cross the specified assets and turnover criteria as set out in the Competition Act as regulated.

 

Thresholds for Combination under the Act

 

Enterprise Either the combined assets of the enterprises would value more than (INR) 2,000 crores in India or the combined turnover of the enterprises is more than (INR) 6,000 crores in India. In case either or both of the enterprises have assets/turnover outside India also, then the combined assets of the enterprises value more than US$ 1 billion, including at least (INR) 1000 crores in India, or turnover is more than US$ 3 billion, including at least (INR) 3000 crores in India.

 

Group: The group to which the enterprise whose control, shares, assets or voting rights are being acquired would belong after the acquisition or the group to which the enterprise remaining the merger or amalgamation would belong has either assets of value of more than (INR) 8000 crores in India or turnover more than (INR) 24000 crores in India. Where the group has presence in India as well as outside India then the group has assets more than US$ 4 billion including at least INR 1000 crores in India or turnover more than US$ 12 billion including at least INR 3000 crores in India.

 

The above thresholds are presented in the form of a table below: -

 

For the purposes of this

 

• “Control” includes controlling the affairs or management by—

1. One or more enterprises, either jointly or singly, over another enterprise or group;
2. One or more groups, either jointly or singly, over another group or enterprise.

 

• “Group” means two or more enterprises which, directly or indirectly, are in a position to —

1. Exercise twenty-six per cent or more of the voting rights in the other enterprise; or
2. Appoint more than fifty per cent of the members of the board of directors in the other enterprise; or

• Control the management or affairs of the other enterprise;

 

Central Government in public interest, has exempted following categories of combination from reporting: -

• As per the notification dated 29.06.2017, Central Government has exempted every person or enterprise who is a party to a combination as referred to in section 5 of the said Act from giving notice within thirty days, for a period of five years from the date of publication of this notification in the Official Gazette

 

• An acquisition of shares or voting rights, in another enterprise solely as an investment or in the ordinary course of business in such a manner that the investment doesn't gives the acquirer more than twenty five per cent (25%) of total shares or voting rights of the another enterprise and such an acquisition should not lead to control of the enterprise whose shares or voting rights are being acquired.

 

• An acquisition of shares or voting rights, where the acquirer, prior to acquisition, has fifty percent (50%) or more shares or voting rights in the enterprise whose shares or voting rights are being acquired, except in the cases where the transaction results in transfer from joint control to sole control.

 

• An acquisition of shares or voting rights pursuant to a bonus issue or stock splits or consolidation of face value of shares or buy back of shares or subscription to rights issue of shares, not leading to acquisition of control.

 

• An acquisition of assets, not directly related to the business activity of the party acquiring the asset or made solely as an investment or in the ordinary course of business, not leading to control of the enterprise whose assets are being acquired except where the assets being acquired represent substantial business operations in a particular location or for a particular product or service of the enterprise, of which assets are being acquired, irrespective of whether such assets are organized as a separate legal entity or not.

 

• An acquisition of current assets in the ordinary course of business.

Regulation of combinations [Section 6]

 

• 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.

 

• Any person or enterprise proposing to enter into a combination shall give notice to the Commission in the specified form disclosing the details of the proposed combination within 30 days of the approval of the proposal relating to merger or amalgamation by the board of directors or of the execution of any agreement.

 

• Any combination for which notice has been filed with the Commission would not take effect for a period of 210 days from the date of notification or till the Commission passes an order, whichever is earlier. If the Commission does not pass an order during the said period of 210 days, the combination shall be deemed to have been approved.

 

Orders of Commission on certain combinations

 

• Where the Commission is of the opinion that any combination does not, or is not likely to, have an appreciable adverse effect on competition, it shall, by order, approve that combination.

 

• Where the Commission is of the opinion that the combination has, or is likely to have, an appreciable adverse effect on competition, it shall direct that the combination shall not take effect.

 

• Where the Commission is of the opinion that the combination has, or is likely to have, an appreciable adverse effect on competition but such adverse effect can be eliminated by suitable modification to such combination, it may propose appropriate modification to the combination, to the parties to such combination.

 

Recently, CCI in case of merger of Ranbaxy with Sun Pharma (2014) after determining whether there is Adverse Appreciable Effect (AAE), issued a show cause notice to Sun Pharma and Ranbaxy, asking the companies why a public investigation should not be ordered into Transaction, stating that the transaction would results in significant market domination by one company and could affect prices of life-saving drugs in a domestic market. The major concern of the CCI appears to be the combined entity’s highly concentrated market in its portfolio of certain drug formulations.

On August 28, 2014, after the first phase of investigation, CCI found that there would be AAE if the Transaction is consummated, and ordered a second stage inquiry into the Transaction and issued orders to Sun Pharma and Ranbaxy under Section 29(2) of the Competition Act, 2002 to make public, specific details of the Transaction in Form IV within 10 days of the date of the order.

The CCI by way of its order dated December 5, 2014 approved the Transaction with certain conditions, such as divestment of 7 brands. The CCI was of the opinion that the Transaction is likely to have an AAE in India for 7 formulations.

Accordingly, CCI proposed modifications to the scheme in terms of Section 31(3) of the Competition Act, by way of letters dated November 27, 2014 and November 28, 2014.

 

 

Anti-Competitive Agreements [Section 3]

 

Anti-competitive agreements that cause or are likely to cause an appreciable adverse effect on competition within India are void under the provisions of the Competition Act. The Competition Act essentially contemplates two kinds of anti-competitive agreements– horizontal and vertical agreements.

 

• Horizontal Agreements, which take place between competitors which produce or supply similar or identical products
• Vertical Agreements, which take place between enterprises at different levels in the chain of production, distributors etc. like manufacturers and distributors

 

Evaluation of ‘Appreciable Adverse Effect on Competition’

 

• No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.

 

• The Act envisages appreciable adverse effect on competition in the relevant market in India as the criterion for regulation of combinations. In order to evaluate appreciable adverse effect on competition, the Act empowers the Commission to evaluate the effect of Combination on the basis of some factors.

 

Acts taking place outside India but having an effect on competition in India [Section 32]

 

The Commission shall, notwithstanding that:-

• An agreement referred to in section 3 has been entered into outside India; or
• Any party to such agreement is outside India; or
• Any enterprise abusing the dominant position is outside India; or
• A combination has taken place outside India; or
• Any party to combination is outside India; or
• Any other matter or practice or action arising out of such agreement or dominant position or combination is outside India.

have power to inquire into such agreement or abuse of dominant position or combination if such agreement or dominant position or combination has, or is likely to have, an appreciable adverse effect on competition in the relevant market in India.

 

Appeals [Section 53B]

 

Under the relevant provisions of the Act, an appeal to Competition Appellate Tribunal (COMPAT) may be filed within 60 days of receipt of the order /direction/decision of the Commission.

 

QUESTIONS

 

1. What are the factors to be considered by the Commission while evaluating appreciable adverse effect of Combinations on competition in the relevant market?

• Factors to be considered by the Commission while evaluating appreciable adverse effect of Combinations on competition in the relevant market:
• Actual and potential level of competition through imports in the market;
• Extent of barriers to entry into the market;
• Level of concentration in the market ;
• Degree of countervailing power in the market;
• Likelihood that the combination would result in the parties to the combination being able to significantly and sustainably increase prices or profit margins;
• Extent of effective competition likely to sustain in a market;
• Extent to which substitutes are available or are likely to be available in the market;
• Market share, in the relevant market, of the persons or enterprise in a combination, individually and as a combination;
• Likelihood that the combination would result in the removal of a vigorous and effective competitor or competitors in the market;
• Nature and extent of vertical integration in the market;
• Possibility of a failing business;
• Nature and extent of innovation;
• Relative advantage, by way of the contribution to the economic development, by any combination having or likely to have appreciable adverse effect on competition;
• Whether the benefits of the combination outweigh the adverse impact of the combination, if any.

 

2. Which party to the transaction requires complying with the approval and filing process in case of restructuring transaction?

• Initially in case of a merger or an amalgamation, it was required that the parties to the combination shall jointly file the notice in Form I or Form II, as the case may be, duly signed by the person(s) as specified under regulation 11 of the Competition Commission of India (General) Regulations, 2009. As per the notification dated 29.06.2017, Central Government has exempted every person or enterprise who is a party to a combination as referred to in section 5 of the said Act from giving notice within thirty days, for a period of five years from the date of publication of this notification in the Official Gazette.

3. How will “assets” under the said Act be worked out?

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 accumulated depreciation appearing in balance sheet , and the value of assets shall also include all intangible assets as appearing in balance sheet including 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,.

 

4. On which date turnover or assets are to be taken?

• Parties to the combination need to furnish details regarding turnover and asset as per audited annual accounts of the immediately preceding financial year. If annual accounts for the immediate preceding financial year are not audited, details has to be furnish as per the last audited annual accounts

 

 

5. Can a commission investigate combination? If yes then are the procedures to be followed by entity against whom investigation is made?

 

• Where the Commission is of the opinion that a combination is likely to cause, or has caused an appreciable adverse effect on competition within the relevant market in India, it shall issue a notice to show cause to the parties to combination calling upon them to respond within thirty days of the receipt of the notice, as to why investigation in respect of such combination should not be conducted.

 

The Commission, is of the opinion that the combination has, or is likely to have, an appreciable adverse effect on competition, it shall, within seven working days from the date of receipt of the response of the parties to the combination, direct the parties to the said combination to publish details of the combination within ten working days of such direction, in such manner, as it thinks appropriate, for bringing the combination to the knowledge or information of the public and persons affected or likely to be affected by such combination.

 

The Commission may invite any person or member of the public, affected or likely to be affected by the said combination, to file his written objections, if any, before the Commission within fifteen working days from the date on which the details of the combination were published.

 

The Commission may, within fifteen working days from the expiry of the period specified above, call for such additional or other information as it may deem fit from the parties to the said combination.

 

After receipt of all information and within a period of forty-five working days from the expiry of the period specified above, the Commission shall proceed to deal with the case in accordance with the provisions contained in section 31.

 

6. What are the penal consequences of not complying or adhering to the approval, notification or declaration or acting as per directions of the Competition Commission?

• The Commission has the power to impose a fine which may extend to one per cent of the total turnover or the assets of the combination, whichever is higher, for failure to give notice to the Commission of the combination.