“Why India Needs Merger Review Now”
Excerpt from a submission to the Indian government on India’s proposed new merger control law
(Dr. Derek Ireland, wtih contributions from Steve Szentesi & Manish Agarwal)
India’s amended Competition Act, including the merger review provisions, was approved by the country’s Parliament in 2007, and enforcement of the abuse of dominance and anti-competitive agreement sections of India’s Competition Act began in the May 2009. However, enforcement of merger review has been delayed because of business lobbying and the time needed to prepare merger regulations. Once the current recession comes to an end, the next global merger wave will begin, and many domestic and cross-border transactions will involve companies and markets in the major developing country jurisdictions — starting with the higher growth and more dynamic economies such as India, China, Indonesia and Brazil. A small but growing number of these domestic and cross-border transactions are expected to raise serious competition issues for developing economies.
The domestic and international business and legal communities are continuing to raise concerns that implementing the merger review section of India’s Competition Act will reduce merger activity and significantly delay and increase the cost of transactions that involve Indian companies. However, empirical evidence indicates that merger review does not impede cross-border merger activity, the cost of merger review on average amounts to only about 0.1% of the total value of the transaction, and the vast majority of mergers are approved by competition authorities with minimal delay.
It is imperative that India complete its merger regulations and begin proactive enforcement of merger review as soon as possible. Otherwise, India will have no mechanism to block or modify mergers that will cause anticompetitive harm to its economy, and will have no influence on the many cross-border transactions reviewed by other competition law jurisdictions that will significantly affect India’s enterprises, consumers, farmers, markets and ability to compete in foreign markets. Instead, India will continue to be subject to the merger review rules of in particular the more developed OECD jurisdictions.
There are other fundamental reasons why India needs to implement merger review without delay. Most importantly, India needs to begin enforcement of merger review in order to complete the triad of the inter-related pillars of the country’s modern competition law, which interact together, support each other and are much more than the sum of their parts.
The Inter-related “Triad” of India’s Modern Competition Law
Merger review prevents a major supplier from further dominating and entrenching itself in a domestic or global market, and from further strengthening its anticompetitive agreements with other suppliers through a merger or acquisition that eliminates a vigorous and effective competitor. Without merger review, two or more firms that are now colluding or conducting abuse of dominance strategies in a coordinated manner can simply merge to avoid an expensive and embarrassing investigation and penalties under the other two sections. Further delaying merger review in India increases the risks and high business, economic, social and possible political costs of divestiture, demerger and trying to “unscramble the scrambled eggs” of the merged entity, through applying the abuse of dominance section after the transaction is completed and the merged company is fully operational.
Merger review prevents a multinational enterprise with a history of cartel activity and other anticompetitive conduct in the global market from entering India’s domestic market through acquiring an efficient local firm that is complying with competition rules. These foreign-to-local mergers are at times used to “pre-empt” future entry and competition in domestic and global markets through preventing the efficient domestic firm from following through on its plans to expand and diversify into the global market.
Delaying merger review, as well as overly permissive merger review enforcement, biases the entry decisions of multinational corporations in favour of mergers and acquisitions, and thus reduces greenfield investments that often generate greater benefits for competition, consumers and the total developing economy. Finally, the expertise, skill development and learning that are created by conducting a complex merger investigation, will increase the quality of the competition agency’s investigations and enforcement actions against cartels, other anti-competitive agreements, and abuses of Dominant position. Modern merger analysis gives special attention to post-merger coordinated effects that result from the creation or strengthening of a cartel, or similar collusive arrangement, as well as the unilateral effects that occur when the merger establishes or strengthens a dominant firm. The assessment of existing anticompetitive conduct and effects before the transaction and the risk of unilateral and coordinated effects after the merger employ the same industrial organization models and analytical techniques that are used in investigations of anticompetitive agreements and abuses of dominant position.
Further delaying merger review enforcement will cause considerable harm to competition, consumers and the credibility of India’s new competition law and agency. In contrast, as noted at the outset, the costs of merger review to businesses, taxpayers and the economy are minimal when compared with the large assets and sales of the comparatively few merger transactions that are reviewed in detail by competition agencies. India can further reduce these merger review costs and delays through adopting to the extent possible and desirable merger notification, review and clearance procedures that are similar to those applied in other major competition law jurisdictions. These are summarized in the eight “Guiding Principles for Merger Notification and Review” prepared by the International Competition Network (ICN).
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