[By Swetha Somu and Sanigdh Budhia]
The authors are students at the Gujarat National Law University.
Mergers and acquisitions that fall below a certain threshold are not required to be disclosed to the Competition Commission of India (CCI) for prior clearance under the Competition Act, 2002 (the Act). This exemption, granted by the Indian Ministry of Corporate Affairs (MCA), is based on certain de-minimis thresholds enshrined under Section 5 and Section 6 of the Act. Transactions in which the target’s assets are valued at less than INR 350 crore; or the target’s turnover is less than INR 1,000 crore (Small Target Exemption) are exempted from the CCI’s approval requirement. First introduced on 27 March 2017, the MCA extended the applicability of the Small Target Exemption for another five years, till 27 March 2027, through a notice dated 16 March 2022.
Recently, PVR Limited (PVR) and INOX Leisure Limited (INOX) announced their intention to merge. Post the merger (PVR-INOX Merger), INOX shareholders will get shares of PVR at the approved share swap agreement as a result of the transaction. While existing PVR and INOX screens will retain their current branding (i.e., ‘PVR’ or ‘INOX,’ respectively), new cinemas that open after the merger will be labelled as ‘PVR-INOX Ltd.’ With a combined network of over 1,500 screens, i.e., nearly 50% of the total screens in the country, the PVR-INOX Merger is intended to bring together two of India’s top multiplex companies.
Normally, a deal of this nature would have necessitated prior permission from the CCI. However, this merger comes at a critical time as COVID-19 has adversely impacted multiplex businesses across the country due to fierce competition from over-the-top media service or OTT platforms. According to the financial documents of the fiscal year ending 2020-21, PVR’s revenue was INR 280 crore and INOX’s revenue was INR 106 crore. However, the PVR-INOX Merger is exempt from seeking CCI’s mandatory approval given that their post-merger turnover falls below the Small Target Exemption requirement (i.e., being below INR 1000 crores),
In view of this, this article analyses the potential negative consequences of CCI’s inability to review non-notifiable mergers that prima facie seem to be anticompetitive in nature. The article further delves into existing international jurisprudence on merger reviews of non-notifiable mergers. The authors then acknowledge the differences in the objectives and legislations between different jurisdictions, thus, finally concluding by recommending changes to the Indian framework on competition law.
An Anti-Competitive Post-Merger Scenario and The Consequences Of the CCI Being Unable To Review Horizontal Mergers
The CCI’s inability to review the PVR-INOX Merger may have severe implications on the promotion and sustenance of competition in India’s multiplex market as mentioned under the Act’s primary objectives. This is due to the fact that CCI is not empowered to review transactions that are exempted. Since the proposed merger is estimated to have a combined market share of 42%, there is a high possibility of the creation of a dominant position in the multiplex market. Whilst under the Act, being the dominant entity in a market is not per se unlawful; however, the abuse of that dominant position is strictly regulated under Section 4 of the Act. In addition to this, all anti-competitive agreements with or without abuse of such a dominant position will be subject to regulation under Section 3 of the Act.
Section 3 and Section 4 of the Act will become applicable only at the post-merger stage. One of the key issues with post-merger regulation is the costs incurred by the parties to the transaction. A merger involves a change in the organisational structure. Given In the present scenario, both PVR and INOX may very well have invested large amounts into ensuring the legal and financial aspects of the PVR-INOX Merger are kosher. Moreover, horizontal mergers such as the PVR-INOX Merger eliminate one main competitor in the market thus reducing the competitive pressure (to reduce service prices) amongst them and the remaining non-merging firms as well. Consequently, this might result in a unilateral price increase or a coordinated price increase in the market. In both scenarios, the customers stand to lose due to increased prices and a smaller number of substitutes in the market.
These anticompetitive post-merger scenarios could be avoided if CCI, like in the EU, the US or the UK, was empowered to review and regulate non-notifiable mergers that raise concerns. Although there are provisions under Indian law to regulate anti-competitive practices which arise post-merger, the late regulation of false-negative mergers incurs heavy costs. These costs have a negative take on the merged entities, their customers, the economic market structure and the consequences arising from it.
The Reawakened Article 22 Of the European Union Merger Regulation (EUMR): An Inspiration
Article 22 of the EUMR has been reinvigorated through a new guidance issued by the European Commission (EC), (EUMR Guidance). The guidance allows the EC to review mergers falling under the national merger threshold through referrals raised by the member states. The condition for a referral by a European Union member state (Member State) is that “the concentration must: (i) affect trade between the Member States; and (ii) threaten to significantly affect competition within the territory of the Member State or States making the request.” The EUMR Guidance is designed to encourage Member States to approach the EC for the review of such mergers which are proved prima facie to be anticompetitive. This was brought in the light of a rise in ‘killer acquisitions’.
A ‘killer acquisition’ is the acquisition of a small, nascent company by a large established entity. It has the potential to hamper effective competition by reducing the number of competitors while growing its own market share through such acquisitions. The guidance was brought to address this gap in enforcement, as the turnover of a small entity falls under the prescribed national threshold.
Similarly in the United States, Section 7 of the Clayton Antitrust Act of 1914 provides for the Federal Trade Commission (FTC) or Department of Justice (DOJ) to prohibit mergers which substantially lessens the competition. It may be noted that both the FTC and DOJ are empowered [not debarred] from reviewing and scrutinising mergers that fall below the prescribed ‘size-of-transaction’ or the ‘size-of-person’ threshold under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Furthermore, in the United Kingdom, the Competition and Markets Authority, under Section 23 of the UK Enterprise Act, is allowed to review mergers suo moto if a non-notifiable merger poses concerns to effective competition.
Possible Amendments to Indian Law for Reviews of Non-Notifiable/Exempt Mergers
In view of the above, the Indian competition framework may take inspiration from the EU, the US and the UK to review mergers falling below the threshold limits under the Small Target Exemption. However, it is important to note that the EUMR Guidance has been introduced for a different objective. It was brought about to regulate killer acquisitions in the digital and pharma sectors. Nonetheless, since the new guidelines bring in non-notifiable mergers under the competition authorities’ review, similar provisions could be incorporated into the Competition Act too, but with the objective of regulating transactions falling under the Small Target Exemption.
Firstly, if a merger prima facie seems to pose threat to competition in the market, it should be reviewed irrespective of its asset or turnover threshold. To decipher whether a merger poses threat to the competition, the market share of the merging entities should also be looked at, apart from its assets and turnover, while considering criteria for small target exemptions. As explained above, a higher market share of the merged entity could create a dominant position in the market, which could potentially be abused.
Secondly, it is recommended that Paragraph 2 of the 2017 MCA notification (Paragraph 2) should be amended. Paragraph 2 states that “the value of such assets or turnover is to be determined from the annual report of the target enterprise for the preceding financial year in which the transaction takes place or from the auditor’s report in case financial statements are not available.”
Now, as previously mentioned, the current deal is not facing CCI’s scrutiny as their combined past year turnover is less than INR 1000 crores. This is because both PVR and INOX’s revenues plunged during the COVID-19 lockdown. However, the combined assets of PVR and INOX still cross the asset-based threshold (INR 350 crores). Hence, the current deal should not be given exemption from CCI’s scrutiny based on their low turnover. Further, it is recommended that instead of taking the value of assets or turnover from the previous year only, the average of these values from the preceding three financial years should be taken.
Concluding remarks
In conclusion/summation, the CCI could be clothed with the additional power to scrutinize prima facie anti-competitive non-notifiable mergers falling below the Small Target Exemptions during exceptional circumstances. This power could be given by taking into account the market share of the merging entities or from the value of the asset or the turnover from the preceding three financial years. This will ensure that mergers, having the potential to hamper competition in the market like the present one, do not remain unscrutinized.