Is India’s Competition Regulator Averse To Blocking Deals?

From directing Sun-Ranbaxy to divest certain products back in 2015 to recently ordering behavioural remedies in L&T-Schneider deal, the Competition Commission of India’s approach in Phase II investigations has come a long way. If the regulator believes that on the face of it, a deal is likely to cause appreciable adverse effects on competition, it conducts a detailed investigation into the transaction. This, in competition law parlance, is known as a Phase II investigation which includes analysing market share of the parties’ before and after the deal, substitutes available in the market the deal will impact, entry barriers for new players etc.

So far, the CCI has conducted eight such investigations and no deals have been blocked by the regulator. Is it that none of the transactions deserved to be blocked or is the regulator hesitant to take that approach?

If you look at just the market share of the combining entities in some of the deals and take a traditional approach, there could be concerns, Geet Gouri, former member of CCI, told BloombergQuint. But you balance it by analysing factors such as—is there consumer gain, who is getting harmed, are there efficiencies being achieved. While some of this is being talked about in the regulator’s orders, more emphasis to economic outcomes needs to be given, she said.

The regulator wants to be seen as facilitating business, but it has taken pains to ensure that this doesn’t come at the cost of competition, and that has meant taking exhaustive commitments from parties to the deal, experts said.

The CCI has clearly evolved as a regulator from a point where it hesitated to accept behavioural remedies to most recently in the L&T-Schneider deal where it not only accepted such remedies but also decided to monitor their implementation for the next 10 years, Avaantika Kakkar, competition law partner at Cyril Amarchand Mangaldas, said.

The CCI’s decisions in these eight cases has key learnings for industry, in how the regulator has:

Delineated the relevant market
Decided on remedies
Approached structural links

CCI Approach: Market Definition

The eight cases of Phase II investigations have been in the:

Pharmaceutical market: Sun Pharma’s acquisition of Ranbaxy
Agro-chemical market: Bayer’s acquisition of Monsanto, merger of Dow and DuPont, amalgamation of Agrium and PotashCorp
Industrial gas market: merger of German company Linde with U.S.-headquartered Praxair
Cement market: Holcim’s acquisition of Lafarge
Switchgear industry: Schneider Electric’s acquisition of L&T’s electrical and automation business, and
Film screening market: PVR’s acquisition of DLF’s DT Cinemas

When you look at the definition of the relevant market, there has been a lot of overlap internationally in the cases that the CCI has assessed, Gouri pointed out. So, the CCI has looked at the U.S. and EU to define relevant markets in many of these cases.

There are some cases where the CCI could’ve delineated the relevant market more broadly, for instance, the PVR-DT Cinemas deal, Gouri said. The CCI had defined the relevant product market to be high-end single screen and multiplex theatres. The regulator talks about substitutes like streaming services but goes on to exclude it from the market definition, which then results in extensive remedies, Gouri explained. Interestingly, the dissent order in PVR-DT Cinemas had recognised this aspect, noting that substitutes like CDs, DVD players, TV channels, internet streaming are cost-effective and easily accessible.

Defining the relevant market more broadly would’ve resulted in lesser divestiture requirement by the parties, Gouri said. The regulator had directed PVR to divest some assets in South Delhi.

Independent of the relevant market delineation, the dissent order had concluded this as well.

“The divestiture of 11 screens in South Delhi though not impossible is burdensome without corresponding gains. Almost all screens in South Delhi are being run on a long-term lease, and in the event of the divestiture, the acquirer will have to pay the residual lease rent for the unexpired period of lease, which is substantial.” - CCI Dissent Order, PVR-DT Cinemas

Sometimes, even if parties to the deal have high market concentration—60 percent or even 80 percent—the regulator can take a leap and approve the transaction rather than insist on onerous divestitures, Gouri further argued. And if there is a case of abuse post the deal, it can be dealt with by provisions of abuse of dominance under the competition law, she added.

Kakkar disagreed with this view.

It is a little simplistic to state that we can go ahead and approve the merger because anyone who has a problem can talk about it under section 4 (abuse of dominance) through a complaint because then the question is can you substantiate your complaint. The effects have already played out by the time you get to the complaint and it will take a few more years before the CCI gets down to studying it, gathering the economic evidence for abuse of dominance.

Avaantika Kakkar, Partner, Cyril Amarchand Mangaldas

It would be oversimplifying the law; perhaps the middle path could be that the CCI market tests the effects of divestitures or behavioral commitments in the relevant market—something that the European Commission does but isn’t required under Indian law, Kakkar added.

CCI’s Approach: Remedies

A deal that’s likely to adversely impact competition in CCI’s opinion may attract divestitures or behavioral commitments or a combination of both as a remedy.

In Sun-Ranbaxy, the deal approval was contingent upon the parties divesting seven brands each, where the market share of the combined entity would exceed 50 percent. In Dow-Dupont, the regulator had directed transfer of Dow’s Maleic Anhydride Grafted Polymer business in India to an independent and unconnected third party.

Leading competition regulators or literature on best practices suggests that in horizontal mergers—where parties to a deal are competitors in the same market—the regulator should ideally focus on clean cut structural remedies like divestitures, Kakkar said.

The reason is because they are easier, she said, as opposed to vertical mergers where the combining entities are not competitors. For instance, in PVR-DT Cinemas which was a horizontal merger, the CCI didn’t accept behavioral remedies offered by PVR and insisted on divestiture of screens. PVR had offered price caps and quality commitments to address competition concerns but the CCI had noted that these would be difficult to implement and monitor.

But we’ve seen this principle evolve by the time L&T-Schneider came to the regulator, where it accepted that simple divestitures might be unfair, and the competition’s concerns can be addressed via behavioral remedies.

The principle is that would the remedy be disproportionate to the benefits of the proposed transaction and would it also be disproportionately unfair to one or more of the parties to divest the entire plant when that plant produces many other products beyond the ones that the CCI was really concerned about.

Avaantika Kakkar, Partner, Cyril Amarchand Mangaldas

So, for five products, the CCI accepted white labelling as a remedy which is also popular internationally, Kakkar said. A white-label product is manufactured by one company and rebranded by another. To strengthen existing third-party low-voltage switchgear manufacturers, Schneider agreed to offer white-labelling product manufacturing services in relation to five products manufactured by L&T to be sold in India. Schneider also agreed to allocate a specified level of its installed capacity for the five products for five years.

Other behavioural commitments included changes to distributorship and commercial agreements to remove exclusivity clauses relating to termination, discontinuation of loyalty rebates; transfer of non-exclusive technology license to a third party that availed of white labelling manufacturing services, maintaining existing number of distributors, product range and R&D expenditure, export commitments etc.

The regulator has also shown the willingness to modify remedies if their implementation becomes impossible, both the experts said. For instance, the CCI issued a revised divestment order in Holcim-Lafarge after the original divestment process ran into regulatory hurdles as a result of amendments to the Mining Act.

CCI’s Approach: Structural Links

While assessing a deal for its competition effects, the regulator also looks at the existence of structural links between the parties and with any other competitor in the relevant market. This could be in the form of minority shareholding, common directors etc.

The issue of structural links came up in the Agrium-PotashCorp deal. Both these companies supplied potash to India through a joint venture Canpotex. Besides these two companies, the joint venture had one other shareholder, Mosaic, with equal control. The CCI had noted that once the deal is through, Agrium and PotashCorp will be able to exercise greater control over the JV Company versus the third shareholder.

“Proposed combination strengthens structural links between the parties vis-a-vis management and control of Canpotex by reduction in competitive constrains on each shareholder of Canpotex.” - CCI, Agrium-PotashCorp order

To remedy this, the CCI directed PotashCorp to divest its minority interest in three other companies—Arab Potash Company, Sociedad Quimica y Minera and Israel Chemicals Ltd.—through which it was present in India.

This case was handled very well by the CCI, especially the issue of cross holding, Gouri said.

This was a good structural remedy to ensure that Agrium and PotashCorp couldn’t in any matter have a concerted effect on raising prices of potash. And through this remedy, besides addressing price concerns, the CCI also created three independent competitors, which in turn would benefit consumers.

Geeta Gouri, Former Member, CCI

Besides these themes under merger control, one issue that’s being debated across the world relates to public interest concerns like loss of jobs, national security—is that something that a competition regulator should look at while doing merger reviews, Kakkar commented.

A glimpse of it was seen in the Monsanto-Bayer order, where the regulator took a commitment from the parties to give the government free access to Indian agro-climatic data collected by them. “Was it anti-trust concerns that justified this commitment? I don’t think so, but it was given ultimately to get the deal done,” she opined.