Overseas
M&As are providing Indian companies with a new competitive edge. The
Competition Act, instead of adding teeth to this new-found competitive
advantage, might end up debilitating Indian industry
JUST when
you thought India Inc had acquired the muscle to play the global sweepstakes,
Indian lawmakers have struck back with attempts to rein in the corporate
sector’s worldly ambitions. Prima facie, it seems to be the handiwork of a bunch
of people who were nourished on the economic rent built into the licence raj
system and are now desperate to restore their cash flows to the pre-reforms era.
The
intentions of the Competition Act are actually honourable. The Act aims to
protect citizens from the ill-effects of concentration of power in any company
or industrial group and their ability to influence market outcomes, through
pricing muscle or market domination. The Act’s opening lines are: “An Act to
provide…for the establishment of a Commission to prevent practices having
adverse effect on competition, to promote and sustain competition in markets, to
protect the interests of consumers and to ensure freedom of trade carried on by
other participants in markets, in India…” Every developed country has a similar
legislation in some form or the other. But, it is the design and the purport of
this Act that promises to incapacitate industry. Here’s an example: had the Act
been notified, the Idea-Spice telecom deal might still be
languishing in bureaucratic muddle.
The Act
has several grey areas, and the purpose behind leaving these gaps in the
drafting is anybody’s guess. Given the country’s abysmal judicial and regulatory
infrastructure, the first question that arises is whether the country is ready
for it. The Competition Commission of India (CCI), a quasi-judicial body
entrusted with enforcing the Competition Act, has no wherewithal to adjudicate
on any of its mandates. It has a paltry budget, skeletal staff, a crummy office
and none of the knowledge base that’s de rigueur for any regulator.
Let’s look
at some of the trip-wires left in the Act. First, any M&A deal has to
mandatorily notify the CCI. Then, under the Act, CCI gets 210 days to give its
assent — a rather long period in today’s competitive environment. Assume the
commission feels the deal is not inimical to any of its stated objectives and
gives it a green signal. Now comes the fun part — any person can go on appeal to
the Appellate Tribunal, which does not have any mandatory
time limits. Imagine the scope for mischief. The Act states: “The appeal filed
before the Appellate Tribunal…shall be dealt with by it as expeditiously as
possible and endeavour shall be made by it to dispose of the appeal within six
months from the date of receipt of the appeal.” What if the “endeavour” does not
result in a verdict in six months? The Act is silent on the issue. But, that’s
not the end. Even if the tribunal overturns the appeal, the appellant can still
approach the Supreme Court which will then, in keeping with the tenets of
natural justice, need to hear all sides before reaching a verdict. Which M&A
deal can wait for so long?
The amended
Act also requires all Indian companies bidding for overseas acquisitions to
obtain a pre-deal approval first. In fact, all sellers will henceforth require
that bidders get all their approvals in place first even before considering
their bids. However, many sellers might not be willing to keep the deal in
abeyance for 210 days. In addition, there is the issue of confidentiality.
Government offices are notorious for
leaks — not only to the media but even to business rivals. In comparison, many
Indian companies which acquired European targets in the recent past, including
some marquee names, not only obtained a pre-deal approval in less than 30 days,
but also claim that not a word leaked from the European competition authorities.
Then,
there is the threshold level of assets or turnover which is used to decide
whether the Act should be made applicable to any company entering into an
M&A deal, whether in India or abroad (it will also include two foreign
companies merging overseas, if they have operations in India, subject to a
threshold level as well). Section 20(3) of the Act requires the government to
increase or reduce the threshold levels every two years, on the basis of either
the wholesale price index or the foreign exchange rate.
There is a
whole range of other contentious issues that is exercising industry, such as the
large tracts of ambiguous drafting or the powers granted to the government. For
instance, the government has reserved for itself the right of exemption: “The
central government may, by notification, exempt from the application of this
Act... (a) any class of enterprises if such exemption is necessary in the
interest of security of the state or public interest…” While it is strange that
the commission, as regulator, has been deprived of this power, the Act also does
not include any provisions for exempting “any class of acquisition”, such as
creeping acquisitions.
Of the
three issues that the Act is expected to tackle, we have touched upon only one
here, namely M&As. The other two — preventing cartelisation and abuse of
dominant position — also contain enough landmines to trigger off a raft of
disputes. But, all this raises one fundamental issue. Overseas M&As were
providing Indian companies with a new competitive edge. Legislation, instead of
adding teeth to this new-found competitive advantage, might end up debilitating
Indian industry.
Published as as an Op-Ed in The Economic Times (August 20, 2008)
