India: Changing the rules

Author: | Published: 1 Oct 2009
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On September 1 2009, the sun set on the Monopolies and Restrictive Trade Practices Commission (MRTP Commission), the competition regulator in India for the last four decades. This was because the Indian Government repealed the Monopolies and Restrictive Trade Practices Act 1969 (MRTP Act). The MRTP Act, framed with the object of ensuring that "the economic system did not result in the concentration of economic power", adopted a 'check the box' filing based approach to deal with restrictive agreements (with the onus on the authorities to bring an action), failing which criminal sanctions could be imposed. The MRTP Act remained largely benign primarily due to the manner in which it was enforced and the perception that it 'lacked teeth'.

In May, the Indian Government, after a wait of over seven years, notified and brought into force the substantive provisions of the Competition Act 2002 dealing with behavioural matters such as prohibition of anti-competitive agreements (including cartels) and abuse of dominance. Provisions relating to regulation of merger control have not yet been notified, although this is expected by the end of 2009. The coming into force of the Act will herald a sea change in the way competition law is understood and applied, and how business is done, in India. The industry has no choice but to sit up and take notice of the new law given the financially crippling penal consequences of non-compliance. Joint ventures, restrictive contractual arrangements (including exclusivity and non-compete), market conduct of enterprises with significant market shares, information sharing and other forms of co-operation through industry and trade associations, inorganic growth and consolidation through M&A activity will be impacted by the new regime.

Easily one of the most debated laws in India in recent memory, the Act casts the onus of compliance on market participants with illegality arising when any agreement or practice has an 'appreciable adverse effect' (AAE) on competition in India. The absence of advance ruling provisions in the Act would further exacerbate the onus, though we hope the Competition Commission of India (CCI) would be open to providing guidance, at least at an informal level. Enterprises operating in India or outside (due to jurisdictional nexus clauses in the new law) are required to assess their business behaviour with competitors and others in the supply chain. This is to determine the implications on the relevant market in India without having the benefit of the erstwhile 'check the box' approach.

Behavioural control

With the Act prohibiting anti-competitive business behaviour, the legality of all exclusive supply and distribution arrangements (including through franchises), until now considered integral to doing business in India, now require a detailed examination from an impact on competition perspective. The market impact of all such arrangements would now have to be judged on the touchstone of the considerations set out in section 19(3), the creation of entry barriers, driving out existing competitors, consumer benefits, improvement in production and technical efficiencies and the like to assess their legality and continuity.

Determination of the "relevant market" (based on the relevant "product" and "geographical" market) with reference to which the impact on competition is required to be examined is extremely important. This analysis is not expected to be easy given that as per section 19(6), factors such as language, consumer preferences, trade barriers, transport costs and the like would all be at play to determine the geographical market. The penalty for an incorrect determination of either the AAE of a particular arrangement or the relevant market specific to which the AAE analysis is to be conducted can be up to 10% of the average turnover for the three preceding years.

Further, exclusivity arrangements in markets where an enterprise enjoys dominant position are likely to be viewed with greater suspicion by the CCI given the greater likelihood of adverse effects on competition in terms of market foreclosure that such arrangements may have.

The prohibition and illegality is, however, clearer when one looks at horizontal business arrangements (among enterprises engaged in similar or identical business). Such arrangements, when pertaining to price, production, supply or market sharing, are presumed to be anti-competitive under section 3(3) of the Act. Consequently, the room to establish their legality has been significantly limited with the onus of proving an absence of AAE resting on the enterprise accused of the breach to rebut the presumption.

Interactions, of any form, with competitors will have to be carefully scrutinised, modified or limited from a compliance with competition law perspective going forward. The legality of non-compete arrangements pursuant to business transfer arrangements, share acquisition, joint ventures, mergers or amalgamations or otherwise would have to be revisited from a competition law perspective.

A window is provided for establishing that a horizontal arrangement is not anti-competitive if such arrangement qualifies as a joint venture improving efficiency. While "joint venture" has not been defined, typical cartel behaviour would most certainly not qualify and it would require competitors to pool resources and share the business risk through a non-fully functional joint venture in a manner that improves efficiency and benefits consumers to qualify. The onus of proof lies on the enterprises seeking to rely on the aforesaid "joint venture" defence. Fully-functional joint ventures would be governed by the rules relating to combinations.

The other exception to the prohibition on anti-competitive horizontal and vertical arrangements are reasonable conditions (which again have not been prescribed) as may be necessary to protect any rights conferred under intellectual property legislations in India. Unfortunately, a plain reading of section 3(5) (which confers the aforesaid exception) suggests that the exception only extends to IP protection under specified Indian statutory law and does not extend to rights and restrictions arising from IPR law outside India or even under common law in India.

The standard of proof for establishing illegal horizontal arrangements will be circumstantial evidence based on a preponderance of probability, without requiring a detailed discovery process. Oral arrangements including through a wink, nod or even silence may tantamount to cartel behaviour based on the attendant circumstances. To guard against potential violations, businesses operating in India now require a comprehensive competition compliance policy based on zero-tolerance towards deviations and involving a 360 degree compliance approach.

Enterprises dealing with commoditised products or operating in special market conditions such as those involving market glut, low profit margins or in oligopolistic markets (as opposed to atomised market segments) are likely to be more vulnerable. This is because of the obvious lack of efficiencies and the possibility of collaboration among competitors destroying any remaining competition and enhancing entry barriers in such markets.

Unfortunately, the Act does not enable the CCI to provide block exemptions (like in the EU) based on industry specific problems or issues or on the basis of generic assessment of the AAE of a practice or arrangement. The standard provision conferring the extraordinary power on the Central Government to exempt application of provisions of the Act in public interest and other specified reasons is not expected to achieve the aforesaid critical objective.

The CCI is seeking to deal with some of these issues through regulations being framed by them under the Act and a lot will depend on their implementation and enforcement of the Act. Indian market realities like government control over production, pricing and raw materials in several sectors and their impact on competitive conduct will also have to be taken into account by the CCI. Industry associations will now have to closely monitor information exchange systems operating within their precincts and be on the lookout for cartel-like behaviour being carried out through them by its members.

Further, a leniency regime has been prescribed under the Act and in the Competition Commission of India (Lesser Penalty) Regulations 2009 notified by CCI in August 2009. Under the leniency provisions, the CCI has the power to reduce the penalties for members of a cartel that make "vital disclosure" to the CCI (in other words, whistle blowers), helping them to establish or investigate the cartel.

The seriousness of the CCI to proceed against cartel arrangements has been clearly evidenced by its, within days of being armed with enforcement provisions under the Act, issuing notices to some of the largest private airline companies in India for having entered into code-sharing arrangements and to motion picture and producers associations for allegedly blocking new movie releases.

Merger control

Presently, merger control regulation in India is contained in the Companies Act 1956. These provisions, which mandate prior Central Government approval or intimation for acquiring more than certain specified shareholding thresholds of an Indian company, where it creates a 'dominant' undertaking, have largely not been implemented or enforced. However, sector specific regulators like the Telecom Regulatory Authority of India Act and the Reserve Bank of India have been taking into account merger control considerations whilst regulating their sectors.

The merger control provisions of the Act (sections 5 and 6), which will override all other legislations that are inconsistent with it, are expected to be brought into effect by end of 2009. Once enforced, all large M&A deals (domestic, cross-border and totally offshore with an India nexus) would be required to notify and seek the approval of the CCI. The CCI can ask the parties involved to modify or keep certain businesses out of the deal to ensure fair competition in the relevant markets.

The merger control provisions of the Act have been criticised on several counts by industry and practitioners alike. The pre-merger filing process, though voluntary when the Act was enacted in 2002, was turned into a mandatory and suspensory process through an amendment in 2007. The thresholds (based on asset and turnover tests) that would trigger a merger notification requirement were originally prescribed in 2002 and have not been revised thereafter. Though they required to be revised biennially by the Government on the basis of the wholesale price index or fluctuations in exchange rate of the Indian or foreign currencies.

Since then, the number and size of M&A deals have seen exponential growth. The asset and turnover basis are also applied at a group level, with 'group' being very widely defined. A 'group' may comprise of several undertakings irrespective of commonality of their product market or industry in which they operate. The low notification thresholds coupled with a wide definition of 'group' would practically capture many small M&A transactions, which will not have an impact, much less an AAE, on competition.

The only exempted category of transactions prescribed under the Act (in addition to the usual sovereign function exemption and those that may be specifically exempt by the government in 'public interest' or 'national security') are those in relation to certain type of transactions involving public financial institutions, foreign institutional investors (FIIs), banks and venture capital funds (VCFs). No generic exemption has been provided for purely financial investors who don't fall into any of the aforesaid categories.

The Draft Combination Regulations being framed by the CCI in relation to merger control in India (which are subject to change as they have not yet been notified and brought into force) exempt certain other types of transactions from pre-merger notification requirements by introducing local nexus tests, de minimis rule and the like. Whilst these regulations do seek to deal with some of the issues with the Act, they run the risk of challenge on the basis of constitutionality if they go further than the Act.

The Draft Combinations Regulations seek to address concerns in relation to the extremely long (210 days, extendable by up to 60 working days) review period under the Act through the conduct of a combination investigation in two phases. Phase I is the time period during which, depending on the type of the notification form filed by a party, the CCI forms a prima facie opinion within 30 days (when a long form is filed) or 60 days (when a short form is filed). If the CCI is of the prima facie opinion that a combination will not cause an appreciable adverse effect on competition, it will approve the combination at the end of Phase I.

The trigger event for mandatory notification is board approval for a proposed transaction, execution of any agreement or other document for acquisition or acquiring of control over the target enterprise, within 30 days of which the transaction is required to be notified to the CCI. Cross-border transactions requiring multiple pre-merger filings may find the 30 day notification requirement period difficult to comply with.

Another area for concern is the application of the merger control rules to transactions that have signed but not closed if the provisions are notified in the interim.

Most of the issues identified in relation to the merger control provisions of the Act are not unique to India and are faced in several jurisdictions globally. A lot is expected in terms of most, if not all, those issues being addressed through the Combination Regulations, which are in the process of being finalised. One gap that can only be addressed through an amendment to the Act is the repeal of the merger control provisions in the Companies Act 1956 once sections 5 and 6 of the Act come into force.

The way ahead

Though there has been a broad shift in the approach towards competition law through the Act, the jurisprudence developed under the MRTP Act is likely to remain relevant for implementing the Act. Although a lot of emphasis is likely to be placed on competition jurisprudence in the EU given that the Act is modeled on the same.

Industry level attempts have been made to simplify the new competition law and clarify some of the present ambiguities concerning the merger control provisions. However, it must be said that the Government and the CCI have made commendable efforts in addressing the concerns of all stakeholders and in further refining the merger control regime over the last few years. Repeated assurances have been given by the CCI that the final regulations on mergers and acquisitions will make the application of competition law more rational. They will do this by excluding from regulation combination transactions, which do not adversely affect competition but meet the asset-turnover criteria. The government has further clarified that the merger control law would not be implemented in a manner that impedes growth and consolidation of industry in India.

The Act will change the way business is done in India. As can be expected with any enactment that has such far reaching implications for commerce, the initial period will be difficult whilst the CCI refines its application and implementation of the Act. Much depends on the CCI, the Act depending on the manner in which it is implemented and enforced can either support or impede the growth of the Indian economy. The Competition Appellate Tribunal (the appellate body created under the Act) will also have a crucial role to play.

About the author

Cyril Shroff is a managing partner at Amarchand & Mangaldas with 25 years of experience in a wide range of practice areas, including corporate, banking, infrastructure among others. Cyril has been consistently rated as India’s top corporate, banking and project finance lawyer by several international surveys including those conducted by International Financial Law Review, Euromoney, Chambers Global, Asia Legal 500, Asialaw and others. 

A leading practitioner in the field of securities law, Shroff has been associated with a significant number of high-profile and complex mergers and acquisitions and securities market transactions by Indian issuers. He has been a member of several government and other regulatory committees on law reform concerning corporate and securities market, bankruptcy laws, commercialisation of infrastructure and the like.

Cyril has authored several publications on legal topics. He is a part time lecturer of securities law at the Government Law College. He is a member of the Centre for Study of the Legal Profession established by the Harvard Law School and a member of the Advisory Board of National Institute of Securities Markets. He has also participated in several technical assistance projects of the Asian Development Bank in relation to the reform of laws relating to secured lending, bankruptcy and other related topics.

He has been a solicitor, High Court of Bombay, since 1983.
Contact information

Cyril Shroff
Amarchand & Mangaldas & Suresh A. Shroff & Co.

Peninsula Chambers
Peninsula Corporate Bank
Ganpatrao Kadam Marg
Lower Parel, Mumbai 400 013
India
Tel: +91 22 2496 4455
Fax: +91 22 2496 3666
cyrilshroff@ amarchand.com

About the author

Ashwath Rau is a partner based in Amarchand & Mangaldas’ Mumbai office. He joined the firm in 1999 after graduating from the National Law School of India University (Bangalore). Rau has over 10 years of experience as a M&A and private equity lawyer with a special focus on financial regulatory, funds (heading the practice of the firm) and competition law. He has been rated by Chambers & Partners (Chambers Asia) as among the leading M&A and private equity practitioners in India and by Asia Pacific Legal 500 as a leading investment funds practitioner in India.

He has advised clients on competition law compliance under the erstwhile regime (being the MRTP Act, together with the Companies Act for merger control particularly in the context of global M&A transactions) and has also advised clients in the cement, FMCG, manufacturing and logistics sectors on implications under the Competition Act 2002.
Contact information

Ashwath Rau
Amarchand & Mangaldas & Suresh A. Shroff & Co.

Peninsula Chambers
Peninsula Corporate Bank
Ganpatrao Kadam Marg
Lower Parel, Mumbai 400 013
India
Tel: +91 22 2496 4455
Fax: +91 22 2496 3666
ashwath.rau@ amarchand.com