Ss. 5 and 6 of the Competition Act, 2002. Demystifying the competition implications of mergers and acquisitions in India

Publication Date28 December 2012
DOIhttps://doi.org/10.1108/13590791311287382
Pages88-115
AuthorRishi Shroff,Ashwita Ambast
SubjectAccounting & finance
Ss. 5 and 6 of the Competition
Act, 2002
Demystifying the competition implications
of mergers and acquisitions in India
Rishi Shroff and Ashwita Ambast
National Law School of India University, Bangalore, India
Abstract
Purpose – The jurisprudence concerning the regulation of mergers and acquisitions in the Indian
context, from the perspective of competition law, is vast. Mergers and acquisitions in India have been
regulated by the Indian Companies Act, the Monopolies and Restrictive Trade Practices Act and
several sector specific legislations. After their notification in June 2011, Ss. 5 and 6 of the Competition
Act read with the Combination Regulations of 2011 is the primary law that currently governs this field.
In this paper, the authors, using a comparative perspective, analyse whether the present legal regime is
effective in tackling the problems associated with regulating mergers in the Indian and international
context. These problems include identifying the appropriate market definition, devising an effective
test to weed out mergers that cause an “appreciable adverse competition”, understanding the roles of
the multiple sector-specific regulatory bodies, inter alia. It is concluded that the present regime does
not deal with several of these important concerns.
Design/methodology/approach – The approach is both analytical and comparative. This paper
provides an in-depth study of a recent development in the law relating to mergers and acquisitions in
India, which has cross-border implications.
Findings – The paper shows that the application of Ss. 5 and 6 of the Indian Competition Act has
serious flaws which need to be ironed out.
Originality/value – As the notification is recent, there is no substantive writing in the field. This
paper bridges that gap. Also, this paper provides comparative perspectives, juxtaposing the Indian
regime with the US and EU regimes where applicable.
Keywords India, Acquisitionsand mergers, Legislation, Anti-trustlaw, Indian Competition Act, 2002
Paper type Research paper
Introduction
The Indian corporate diaspora is in constant metamorphosis as companies, both Indian
and foreign, are perennially engaged in global deal making. It is therefore not surprising
that Indian enterprises have recently been party to some of the largest cross-border
mergers and acquisitions. Competition control regimes across jurisdictions seek to
provide a framework to regulate such business activities in order to maximise the
benefits of these deals whilst also ensuring that consumer and competitor interest are
adequately protected. The growing, bullish nature of the contemporary Indian market,
signals the rising need for effective merger control in competition law.
Through this paper it will be argued that while competition and antitrust regimes are
intended to achieve the fine balance between free competition, efficiency derived from
market dominance and consumer welfare[1], it remains to be seen whether the present
Indian regime will secure these objectives. In establishing this, first, a historical
overview will be provided of the attempts made by Indian authorities to formulate
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-0790.htm
JFC
20,1
88
Journal of Financial Crime
Vol. 20 No. 1, 2013
pp. 88-115
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590791311287382
effective competition law, culminating in the notification of Ss. 5 and 6 of the Competition
Act. Second, the current regime will be juxtaposed with the existing jurisprudence in
other nations and recommendations to improve the regime will be outlined.
The Indian legal regime governing mergers and acquisitions: a historical
overview
Indian law pertaining to mergers and acquisitions has constantly been evolving,
especially since the liberalization of the Indian economy[2]. Initially, the basic law
governing mergersin India was found in Ss. 391-396 of the Companies Act, 1956[3].This
law was to be read alongwith other regulatory enactments. WhilstS. 391 gives the High
Court where the registered office of the company is situate the power to sanction
a “compromise”or “arrangement” between a company andits creditors/members subject
to certain conditions[4], S. 392 empowers the Court to enforce and supervise such
compromises or arrangements with creditorsor members[5]. S. 394 makes provisions for
facilitatingthe reconstructionand amalgamation of companiesby making the appropriate
applicationbefore the Court. This section specificallyempowers the Court to make orders
determining the rights and liabilities of the parties involved in the transaction and can
essentially be seen as a tool to protectthe interests of secured creditors of a company[6].
Further, S. 395 allows for the acquisition of shares of shareholders dissenting from the
scheme or contract which has been approved by the majority. S. 396 also enables the
government to provide for an amalgamation of companies in nationalinterest.
Accompanying the Companies Act, the erstwhile Monopolies and Restrictive Trade
Practices Act, 1969 (hereinafter “MRTP Act”) was enacted to ensure that:
[...]the operation of the economic system does not result in the concentration of economic power
to the common detriment, for the control of monopolies,for the prohibition of monopolistic and
restrictive trade practises and for matters connected therewith or incidentalthereto[7].
The term “concentration of economic power” was not specifically defined under the Act
though the Monopolies Inquiry Commission stated that one manifestation of economic
power is the “achievement by one or more units in an industry of such a do minant
position that they are able to control the market by regulating prices or eliminating
competition”[8].
The legal regime comprised by the Companies Act, 1956 and the MRTP Act failed
to adequately take into account the economic impact of mergers and acquisitions on
competition in the market, particularly since the 1990s saw an paradigm shift in India’s
economic policy. Thus, in 1991, all regulatory provisions dealing with mergers and
acquisitions were omitted by an amendment to the MRTP Act, with a view to give
effect to the new industrial policy of liberalisation and deregulation[9]. Following this,
certain provisions in relation to the restriction on acquisition and transfer of sh ares
were re-inserted in Ss. 108A-108F in the Companies Act, 1956 which mandated that the
approval of the Central Government was necessary for the acquisition of shares by an
individual, firm, or body corporate where the increased shareholding went beyond a
prescribed value[10].
In light of the criticism levelled against merger regulation under the Comp anies
Act, 1956 for being slow and requiring the constant intervention of the Court, the J.J. Irani
Committee was constituted with the mandate of making recommendations for the better
management of mergers and acquisitions under Indian law[11]. Commenting on the
Ss. 5 and 6 of
the Competition
Act, 2002
89

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