Good Intention, Bad Outcome

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.

They may have just hit upon the perfect system. The new Competition Act — first passed by Parliament in 2002, then amended in 2007 after going through a parliamentary standing committee on finance, but yet to be notified — might be their ticket to the gravy train. As things stand, once the amended Competition Act is notified, industry is scared that this will signal a return to the nightmarish days of Monopolies and Restrictive Trade Practices Act, which required every company, industrial group, entrepreneur to seek approval for every step they took, every move they made. In some ways, it was the MRTP Act of yore which not only stifled competition but also gave birth to the unholy industry-politician-bureaucrat nexus and provided India with a high-ranking berth in the global corruption league tables.

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)