The Competition Act in India
What do you need to know in case of a merger or acquisition?
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The Indian Competition Authority is considered to be one of the strictest in the world. Even big, international companies such as Google and Monsanto were fined heavily for violating the Indian Competition Act. A foreign company that wants to come to India through an acquisition or merger has to adhere to the local competition rules, because the consequences can be severe. We give you an insight in what this means for foreign companies.
The Competition Act of India
The aim of competition law is to ensure that the free market system functions optimally. The underlying idea is that fair competition leads to products and services becoming better and cheaper for the consumer. Fair competition therefore provides an incentive for companies to innovate. Competition law ensures that each company develops its own strategy independently. In order to achieve this objective, the Indian competition act prohibits any mutually beneficial agreements between companies that have the effect of appreciably restricting competition and abusing dominant positions.
The competition law of India, as enshrined in the Competition Act, regulates economic activities that may monopolise competition in the market. This Competition Act prohibits all business arrangements that may create an intertwining within the chain of supply, distribution, storage, acquisition and control of goods or services. The Competition Act identifies three areas of potential anti-competitive behaviour:
- Anti-competitive agreements.
Any agreement that results or may result in an appreciable adverse effect on competition. The agreement does not have to be formal or written; it can be inferred from the circumstances. - Abuse of dominance
Although the law does not prohibit “dominance,” abuse of it through price manipulation, exploitation or exclusion is prohibited. A company is in a dominant position if it can influence competitors or consumers to its advantage. Thus, the Competition Act provides that no company may abuse its “dominant position” in the market through control of supply, manipulation of purchase prices, or adoption of practices that deny market access to other competing companies. - Mergers
The Competition Act prohibits mergers or other combinations that have or may have an appreciable adverse effect on competition. The Competition Act also has prior notification requirements for transactions that meet a certain financial threshold (see below).
Competition Commission of India (CCI)
Competition Commission of India (CCI), a statutory authority established under the Competition Act as a body of the Government of India, is responsible for the enforcement of Competition Act in India. CCI has the power to issue notices to companies exporting/selling to India if CCI is of the opinion that the companies concerned may adversely affect competition in the market in India.
Combinations that fall under the prescribed monetary thresholds, based on the assets or turnover of the parties (or groups), require filing and prior approval from the CCI.
Monetary thresholds
A combination is an acquisition of one or more undertakings by one or more persons, or a merger or amalgamation of undertakings, if it meets the prescribed monetary thresholds, and includes:
- Any acquisition of control, shares, voting rights or assets of a business;
- Any acquisition of control by a person over an undertaking, when that person already has direct/indirect control over another undertaking in a similar business; or
- Any merger or amalgamation of undertakings.
CCI Procedure
Before a company can actually merge or acquire another company in India, it must obtain approval from the CCI within 30 days of making a proposal for any form of merger or acquisition. In case of a merger, both parties must jointly seek approval from the CCI. In case of an acquisition, the acquiring company is responsible for obtaining approval.
However, this is different in case of a hostile takeover. Here, the acquiring party is required to provide the CCI with only information that is available to them. The CCI will then, if necessary, ask other interested parties to provide further information.
Companies can use the CCI’s online portal to file the required documents. CCI also provides a facility for pre-filing consultations in case of doubts/queries. However, the advice given during the pre-filing consultation is not binding and may not necessarily reflect the opinion of the CCI.
The CCI’s assessment of whether the combination in question is likely to cause or has caused adverse effects on competition in the relevant market in India consists of two stages:
- (i) CCI must form a prima facie opinion within 30 days of receipt of the notice; and if such opinion confirms that there is likely to be an appreciable adverse effect on competition in India,
- (ii) within 180 days thereafter, CCI shall conduct a thorough investigation, which may include calling upon the Director General to make a report, asking the parties to furnish the details of the combination in the prescribed form, inviting written representations from those affected or likely to be affected by the combination and giving such parties an opportunity to be heard.
Thereafter, the CCI may either: (i) decide that the combination is approved; or (ii) if CCI finds that a combination has an appreciable adverse effect on competition, it may order that (a) the combination not be put into effect; or (b) propose amendments to modify the transaction structure.
Non-compliance with the Competition Act
Investigations under the Competition Act commence either when someone files a complaint or the CCI initiates an investigation on its own. If a company is found guilty of violating the Competition Act, the CCI can impose fines of up to 10% of the average turnover of the preceding three years. In cases of cartel agreements, this can be extended to more than 10% and up to three times the profits made during the entire duration of the cartel agreement.
For example, the CCI imposed a fine of $20 million on Google for violating competition laws by abusing its dominant position. This is a clear example of why international companies operating in India must comply with applicable competition laws and be aware of the consequences of non-compliance.
The CCI can also impose fines if a company refuses to cooperate in an ongoing investigation. An example of this is the investigation against Monsanto because of violation of competition norms. The CCI imposed a fine of $300,000 on Monsanto and three of its units for allegedly failing to cooperate with the investigation against its officials.
Competition law has a strong influence on the way business is done. A foreign company that wants to enter India through an acquisition or merger has to abide by the country’s competition laws. The fines imposed by the CCI are among the highest in the world.
CCI does not have the final say. Companies can always appeal to the National Company Law Appellate Tribunal (NCLAT).
