Copyright - Dr. S. Chakravarthy1 GREETINGS TO CHARTERED ACCOUNTANTS FOR ICAIS POST QUALIFICATION COURSE VIDEO CONFERENCE FROM HYDERABAD 31 AUGUST 2005

Copyright - Dr. S. Chakravarthy2 COMBINATIONS SURVEILLANCE Dr. S. CHAKRAVARTHY (Profession : Civil Servant) Formerly, Member, Monopolies and Restrictive Trade Practices Commission, Member, High Level Committee on Competition Policy and Law And Member of Committee for Drafting the Law. Presently, Adviser/Consultant Competition Policy and Law HYDERABAD, INDIA

Copyright - Dr. S. Chakravarthy3 MOTIVATION FOR MERGERS n DIVERSIFY AREA OF ACTIVITIES n ACHIEVE OPTIMUM SIZE OF BUSINESS n REMOVE CERTAIN KEY FACTORS AND BOTTLENECKS OF INPUT SUPPLIES n IMPROVE PROFITABILITY n SERVE CUSTOMERS BETTER n ACHIEVE ECONOMIES OF SCALE - INTERNAL AND EXTERNAL n ACQUIRE ASSETS AT LOWER THAN MARKET PRICE n BRING ENTERPRISES UNDER SINGLE CONTROL n GROW WITHOUT GESTATION PERIOD n NURSE A SICK UNIT - TAX ADVANTAGES

Copyright - Dr. S. Chakravarthy4 ADVERSE FEATURES OF MERGERS n INDUSTRIAL UNDERTAKING - ACTUAL OR POTENTIAL COMPETITOR - GETS ELIMINATED n A LARGE UNIT MAY SWALLOW AN EFFICIENT MEDIUM OR SMALL UNIT n AFTER MERGER, THE MARKET POWER EXERCISED MAY BE TO THE DETRIMENT OF THE CONSUMERS OR SUPPLIERS n AFTER MERGER, THE LARGER UNDERTAKING MAY SUFFER DETERIORATION IN PERFORMANCE PREJUDICIAL TO PUBLIC INTEREST, SHAREHOLDERS AND STAKEHOLDERS

Copyright - Dr. S. Chakravarthy5 FACTORS IMPACTING MERGERS n STAKE OF FINANCIAL INSTITUTIONS - TERM LOANS, EQUITY, UNDER WRITING ETC. n INDUSTRIAL LICENCES - TIME CONSUMING, EXPENSIVE n RESTRICTION IN THE MRTP ACT PRIOR TO 1991 AMENDMENTS

Copyright - Dr. S. Chakravarthy6 REGULATORY LAWS IN INDIA n THE COMPANIES ACT, 1956 n THE MONOPOLIES AND RESTRICTIVE TRADE PRACTICES ACT, 1969 (TILL 1991) n THE COMPETITION ACT, 2002 n TAKE-OVER CODE OF SEBI n SICK INDUSTRIAL COMPANIES ACT (SICA) n OTHERS - NOT DIRECTLY BUT INDIRECTLY

Copyright - Dr. S. Chakravarthy7 MERGER REGULATION STATUS TODAY IN INDIA n MRTP ACT 1969 SHED MERGER REGULATION PROVISIONS IN 1991 n COMPETITION ACT 2002 HAS MERGER PROVISIONS BUT THEY HAVE YET TO BE BROUGHT INTO FORCE THUS TODAY MERGERS ARE NOT UNDER REGULATION ON THE COMPETITION PERSPECTIVE

Copyright - Dr. S. Chakravarthy8 COMBINATIONS MERGERS/AMALGAMATIONS 1. REDUCTION IN NUMBER OF PLAYERS 2. ACQUISITION OF ENORMOUS ECONOMIC STRENGTH 3. DISCOURAGEMENT OF NEW ENTRANTS PEJORATIVE EFFECTS 4. DICTATION OF PRICES 5. DOMINANCE 1. COMPETITION LAW TO HAVE SURVEILLANCE OVER COMBINATIONS BEYOND A THRESHOLD LIMIT (Assets > Rs.1000 Crores or Turnover > Rs.3000 Crores ) 2. NOTIFICATION OF COMBINATIONS VOLUNTARY AND NOT MANDATORY 3. CCI MANDATED TO DECIDE WITHIN 90 WORKING DAYS ELSE DEEMED APPROVAL REGULATION ON COMPETITION PERSPECTIVE

Copyright - Dr. S. Chakravarthy9 IS COMBINATION CONTROL REQUIRED AT ALL? n SCAN OF 72 COMPETITION LAWS IN THE WORLD SHOWS THEY HAVE MERGER CONTROL n 51 OF THOSE HAVE MANDATORY PRE MERGER NOTIFICATION REQUIREMENT n ANOTHER 12 ALSO HAVE MANDATORY NOTIFICATION REQUIREMENT BUT AT A SLIGHTLY LATER STAGE, NAMELY, POSTCLOSING STAGE n REMAINING 9 HAVE VOLUNTARY NOTIFICATION REQUIREMENT n THIS IS NOT THE ONLY REASON WHY INDIAN LAW SHOULD HAVE MERGER CONTROL n OTHER REASONS : POSSIBLE ABUSE OF DOMINANCE, LESS CHOICE AND BARRIERS TO NEW ENTRANTS ETC n THE NEW LAW IS VERY BENIGN ON MERGER CONTROL n NOTIFICATION IS VOLUNTARY n HIGH THRESHOLD LIMIT n DEEMED APPROVAL AFTER 90 WORKING DAYS n VERTICAL AND CONGLOMERATE MERGERS WILL GENERALLY BE ALLOWED TO PASS n ONLY HORIZONTAL MERGERS WILL BE SCREENED ON COMPETITION PERSPECTIVE

Copyright - Dr. S. Chakravarthy10 CAN COMBINATIONS BE CONTROLLED BY COMPANIES ACT? n COMPANIES ACT REGULATES MERGERS IN TERMS OF SHAREHOLDERS AND STAKEHOLDERS INTEREST n A FURTHER PERSPECTIVE IS SHARE VALUATION n THE HIGH COURTS DECIDE ON MERGERS OVER A PERIOD BETWEEN 6 MONTHS AND 2 YEARS OR MORE n COMPETITION PERSPECTIVE IS NOT A FACTOR IN COMPANIES ACT n THE NEW LAW HAS A TIME LIMIT OF 90 WORKING DAYS WHICH WILL BE SUBSUMED IN THE PERIOD UNDER COMPANIES ACT n CCI (MERGERS BENCH) WILL BE A SPECIALISED BODY TO HEAR COMPETITION MATTERS AND IT IS BETTER TO LEAVE MERGER REGULATION ON COMPETITION PERSPECTIVE TO IT n MAKING AN OMELETTE IS NOT DIFFICULT AND CAN BE ORGANISED BUT DESCRAMBLING IT IS IMPOSSIBLE - IT CARRIES HIGH SOCIAL COSTS

Copyright - Dr. S. Chakravarthy11 FACTORS RELEVANT FOR ADJUDICATION OF MERGERS n THE ACTUAL AND POTENTIAL LEVEL OF COMPETITION THROUGH IMPORTS IN THE MARKET n THE EXTENT OF BARRIERS TO ENTRY TO THE MARKET n THE LEVEL OF COMBINATION IN THE MARKET n THE DEGREE OF COUNTERVAILING POWER IN THE MARKET n THE LIKELIHOOD THAT THE COMBINATION WOULD RESULT IN THE PARTIES TO THE COMBINATION BEING ABLE TO SIGNIFICANTLY AND SUSTAINABLY INCREASE PRICES OR PROFIT MARGINS n THE EXTENT OF EFFECTIVE COMPETITION REMAINING IN THE MARKET

Copyright - Dr. S. Chakravarthy12 FACTORS RELEVANT FOR ADJUDICATION OF MERGERS (Continued) n THE EXTENT TO WHICH SUBSTITUTES ARE AVAILABLE IN THE MARKET OR ARE LIKELY TO BE AVAILABLE IN THE MARKET n THE MARKET SHARE OF THE PARTIES INVOLVED IN THE COMBINATION, INDIVIDUALLY AND AS A COMBINATION n THE LIKELIHOOD THAT THE COMBINATION WOULD RESULT IN THE REMOVAL FROM THE MARKET OF A VIGOROUS AND EFFECTIVE COMPETITOR n THE NATURE AND EXTENT OF VERTICAL INTEGRATION IN THE MARKET n THE POSSIBILITY OF A FAILING BUSINESS n THE NATURE AND EXTENT OF INNOVATION n WHETHER THE BENEFITS OF THE COMBINATION OUTWEIGH THE ADVERSE IMPACT OF THE COMBINATION, IF ANY.

Copyright - Dr. S. Chakravarthy13 HARMONISATION n PROTECTION OF COMPETITION TO GO HAND-IN-HAND WITH PROMOTION OF EFFICIENCY AND CONSUMER INTEREST

Copyright - Dr. S. Chakravarthy14 EFFICIENCY GAINS n RATIONALISATION OF RESOURCES n ECONOMIES OF SCALE n MORE ADVANCED TECHNOLOGY n POOLING OF KNOWLEDGE, R&D CAPACITY, FINANCIAL RESOURCES

Copyright - Dr. S. Chakravarthy15 CONSUMER INTEREST n MINIMISING COST AND PRICES n MAXIMISING VALUE, QUALITY AND CHOICE

Copyright - Dr. S. Chakravarthy16 CCI TO EVALUATE AND ASSESS WHETHER EFFICIENCY GAINS OUTWEIGH EFFECTS OF REDUCTION IN COMPETITION

Copyright - Dr. S. Chakravarthy17 SYNERGIES Integration decisions are often justified by the synergies they create. Synergies exist when assets are worth more when used in conjunction with each other than separately. Synergies of some form are essential for integration to be successful. Integration offers little or no potential benefits when they do not exist. T.N. Hubbard - Expert in Mergers

THANK YOU FOR YOUR KIND ATTENTION Copyright Dr. S. Chakravarthy 18