Events & Issues

New Delhi, 23 November 2009

Competition Regulator

NEEDLESS DEBATE OVER TURF

By Dr PK Vasudeva

In a surprise move, the Government is considering whether the Competition Commission of India’s (CCI) mandate to regulate corporate mergers, acquisitions and amalgamations should be restricted to sectors where the new regulator does not come in conflict with other sectoral regulators already in existence such as the Reserve Bank of India (RBI) and the Telephone Regulatory Authority of India (Trai). Following powerful sections within the Government expressing divergent views, the Cabinet Secretary is reviewing the fledgling regulator’s role.

As per the Competition Act 2007, prior approval from the Commission is required for mergers, acquisitions and amalgamations above specified thresholds. The idea is to ensure that the combined entity’s market power should not harm competition in the relevant market. Acquisition plans involving Indian and foreign entities would also come under its lens if a strong domestic nexus in terms of market share is established.

A number of experts and agencies have expressed divergent views on the CCI’s mandate. They largely speak about the undesirability of the Commission’s proposed role in the matter, even as things would look different from the broader perspective of competition law. Hence, there are pros and cons of the CCI being an M&A regulator across sectors.  

It is over seven years since the Competition Act 2002 came into force. But certain key provisions of the amended Act 2007, meant to give full powers to the anti-monopoly watchdog, the CCI, are yet to be notified. This is so as the Government is yet to address the concerns on some of the issues such as combination - mergers and acquisitions (M&As).

India is perhaps the only country that is bringing into force its Competition Act in bits and pieces by notifying section by section. This is one of the reasons that unfair trade practices are going on unabated and corruption is increasing. In contrast, China notified its anti-monopoly law in August 2008 in one go.

Among the key areas in the amended Competition Act of India are Section 3 (on cartels and anti-competitive pacts regarding production, storage, distribution, and supply), Section 4 (abuse of dominant position by companies), Sections 5 and 6 combinations (pertaining to M&A regulations). While Sections 3 and 4 were notified this May, the Government has yet to notify Sections 5 and 6. On its part, the regulator is awaiting for the Government to act, before it finalises the detailed M&A regulations.

It is also learnt that the Government is also examining “legal issues” that overlapping jurisdictions emanating from different laws could create. The RBI, Trai and the shipping ministry have expressed reservations over the plan to give the Commission wide powers to scrutinise “combinations.”

While the RBI has suggested that the CCI keep out of the banking sector, the latter had said the apex bank would do well to restrict its role to prudential regulation and leave competition issues to it. As it is, public sector banks have certain unfair advantages over private banks because of various entry barriers, according to the CCI. 

Similarly, the Commission had opposed Trai’s proposal to put a cap of 40% market share and no less than four players in each “telecom circle “ as part of its merger regulations, saying it would create confusion and inflate compliance costs. Also, the Petroleum and Natural Gas Regulatory Board Act has a clause on restrictive trade practices. Trai defines mergers merely in terms of acquisition of equity and merging of licences, whereas the CCI looks at “acquisition of control, shares, voting rights or assets.” It also looks at many other forms of combinations—such as acquisition of assets like market presence in a given geographical territory.

M&A guidelines are in-built in the telecom licensing policy and according to Trai it is best to keep the sector out of the CCI’s purview. Although the DoT is the licensor in its sector, it seeks recommendation from Trai under the Act. The situation in the electricity sector is unique as the need is to create competitive markets where none exists. Even though the Electricity Act 2003 envisages competition in all areas, the country has national monopolies in power generation, transmission and trading. 

In the case of banks, an opinion is that unlike other sectors, bank mergers don’t need the concerned High Court’s approval. This is because of the special nature of the banking sector. In such cases, the global practice is that the special would override the general. The industry thus had vehemently opposed the Competition Act provision for prior notification of M&As above the prescribed threshold. It said the provision would scupper corporate mergers that are often done in haste, and amid uncertainties. The CCI had given verbal assurance that 90% of M&A proposals put up for its approval would be cleared within 60 days, although the upper limit is 210 days.

Internationally, competition regulators under Sherman Act 1890 and Clayton Act 1914 would clear 80-85% of M&As within 30-60 days. However, longer timelines are prescribed in laws considering that some cases could be complex enough to demand longer scrutiny time. The issue of multiple regulatory agencies was not unanticipated. In fact, the Competition Act, which draws the best from international models (Sherman Act), is equipped to tackle and solve these questions. 

A key feature of advanced capitalist economies is an independent and competent competition regulatory body. And India can be no different. Not surprisingly, then the immediate controversy surrounds turf. Apparently, sectoral regulators are resisting the Commission’s jurisdiction in their spheres of influence. So, we find the RBI arguing that the Commission has no right to comment on whether public sector banks have an unfair advantage over private sector banks. Trai too argues that the CCI cannot recommend how many operators per circle the regulator should grant licences to.

Both sides have a point. The CCI cannot and should not pronounce on what are essentially policy decisions for a sector as a whole. That should be left to the Government or to the sectoral regulator. However, that is not the same as arguing that the CCI should not have any jurisdiction at all in consolidation/ M&A activity in sectors where there are independent regulators in any case.

Following global best practices, the CCI should consider individual cases (of consolidation, merger or acquisition, or even collusion) from every industry and judge them in the context of maintaining a competitive market. Competition is a complex issue and it isn’t always the case that having more players in a particular market is a guarantee for fair competition.

The airline industry, in different parts of the world, has often been guilty of cartelisation despite numbers. On the other hand, some heavily concentrated industries can be brutally competitive—look at Coca-Cola and Pepsi, or the near duopoly of Boeing and Airbus. So, if Coca-Cola acquires a smaller soft drink company other than Pepsi, it need not be an anti-competitive move. Even when Boeing bought out McDonnell Douglas, a competitor, it was allowed to do so as competition was ensured by Airbus. In fact, the aircraft manufacturing industry needed consolidation for economies of scale. Many other industries need that too and consolidation per se isn’t necessarily against competition.

The CCI would, therefore, have its hands full just examining various individual cases thoroughly. It doesn’t need to get entangled in broader policy issues. Actually, the controversy over turf is needless because just like everywhere else, competition authorities and sectoral regulators co-exist peacefully and effectively. It’s simply a matter of each sticking to its own area of expertise. --INFA

(Copyright, India News and Feature Alliance)