INTRODUCTION

Mergers and acquisitions (or combinations) refer to a situation where the ownership of two or
more enterprises is joined together. A merger is said to occur when two or more companies
combine to form a new company. In this, two or more companies may merge with an existing
company or they may merge to form a new company. The assets and liabilities of the transferor
company become the assets and liabilities of the transferee company after the merger. The
purpose of a merger is usually to create a bigger entity, which accelerates growth and leads to
economies of scale. However, a merger may lead to unwanted socio- economic implications that
are often frowned upon.1 Mergers and acquisitions (abbreviated M&A) are both aspects of
corporate strategy, corporate finance and management dealing with the buying, selling, dividing
and combining of different companies and similar entities that can help an enterprise grow
rapidly in its sector or location of origin, or a new field or new location, without creating a
subsidiary, other child entity or using a joint venture. Mergers and acquisitions activity can be
defined as a type of restructuring in that they result in some entity reorganization with the aim to
provide growth or positive value.

Mergers & Acquisitions mean any situation in which the ownership of two or more enterprises is
joined together. In business world, joining of ownership may take many different forms, and may
be either amicable and consensual, or unwelcome and hostile. In India, Mergers are regulated
under the Companies Act and also under the SEBI Act. With the enactment of the Competition
Act in 2002, mergers also come within the ambit of this legislation. For the purposes of this
paper, the discussion with regard to Mergers and Acquisitions would be restricted to only
Competition Act, 20022.

ASPECTS OF COMBINATION

HUMAN ASPECT

It is difficult to extract strong predictions about the employment consequences of acquisition

activity from the extensive literature on merger theories. Whilst it seems reasonable to
assume that mergers instituted by profit-maximising managers are more likely to be followed
by cost savings and employment losses than those undertaken by managers anxious to
empire build or dissipate free cash flow (Jensen, 1986), the actual employment outcome
would appear to depend on the complementarities between the merged entities and on the

1
http://www.legalindia.com/effect-of-compitition-law-on-mergers-and-acquisition/ last accessed: 30/03/2016.
2
Agarwal, Manish and Bhattacharjea, Aditya, Mergers in India: A Response to Regulatory Shocks. Emerging
Markets Finance and Trade, Vol. 42, No. 3, pp. 46-65, May-June 2006. Available at:
http://ssrn.com/abstract=983290 last accessed: 30/03/2016.
post-merger market position. Nevertheless, certain conjectures relating post-merger
employment to merger type may be advanced: First, employment losses appear likely to be
more substantial in horizontal mergers than in vertical or unrelated cases, particularly where
the industry exhibits substantial economies of scale and/or surplus capacity (Dutz, 1989);
Second, where vertical mergers are undertaken to reduce transactions costs (Williamson,
1975) the result is likely to be employment reducing unless the gains resulting from cost and
price reductions are sufficient to offset job losses in the sales function of the upstream firm
and the procurement function of the downstream party.

ECONOMIC ASPECT

 Expansion and growth: One of the common reasons for merging is to sustain growth. It
could be achieved by increasing market share, gaining access to additional customers (as
in the case of telecom and financial sector mergers). It could also result from better
access to distribution and marketing through the partner.
 Synergies through consolidation: If the resources of one company are capable of merging
with the resources of another company effortlessly, resulting in higher productivity in
both the units, it is case of synergy.
 Dealing with the entry of multinational companies: Mergers and joint stock enterprises
are a possible strategy for survival with the arrival of multinational companies. It may be
difficult to beat the multinational companies without strategically aligning with them
 Diversification of risk: Merger could also be a strategy to diversify operations so as to
increase returns or to reduce risk of the shareholders. However there is a school of
thought who feels that diversification of companies is of no value to the shareholders as
they can diversify their own portfolio more cheaply and efficiently as an individual.
 Acquiring the competition: It is said 'if you cannot fight them, join them.' It is not
uncommon for the leading player in a market to acquire the second or third player in the
market to retain market position. Thus merger can help the company to reduce
completion in the market. It also helps to increase market power.
 THRESHOLD OF COMBINATION

In terms of section 5 of the Competition Act “combination” includes:3

1. Acquisition of one or more enterprises by one or more persons,

2. Merger of enterprises;
3. Amalgamation of enterprises.

The basic principle of this section is that a combination would result, subject to the other
prescriptions of the section, such as the monetary thresholds of assets or turnover of the
enterprises specified therein, on:

(a) acquisition of control, shares, voting rights or assets of one or more enterprises by one or
more persons;

(b) acquiring of control by a person over an enterprise when such person has already direct or
indirect control over another enterprise engaged in production, distribution or trading of a similar
or identical or substitutable goods, or provision of a similar or identical or substitutable service;

(c) any merger or amalgamation.

To first understand combinations, the monetary thresholds of assets and turnover need to be
analysed. Section 5(a) provides that: any acquisition where—

1. The parties to the acquisition, being the acquirer and the enterprise, whose control, shares,
voting rights or assets have been acquired or are being acquired jointly have,—

• Either, in India, the assets of the value of more than rupees two thousand crores or
turnover more than rupees six thousand crores; or
• In India or outside India, in aggregate, the assets of the value of more than one
billion US dollars, including at least rupees one thousand crores in India, or
turnover more than three billion US dollars, including at least rupees three
thousand crores in India; or

2. The group, to which the enterprise whose control, shares, assets or voting rights have been
acquired or are being acquired, would belong after the acquisition, jointly have or would jointly
have,—

• Either in India, the assets of the value of more than rupees eight thousand crores
or turnover more than rupees twenty four thousand crores; or
• In India or outside India, in aggregate, the assets of the value of more than four
billion US dollars, including at least rupees one thousand crores in India, or

3
Ravi Kumar, Analysis of terms “Assets” & “Turnover” for determination of threshold limits under Competition
Act, available at: http://cci.gov.in/images/media/ResearchReports/RaviIntern030311.pdf last accessed: 02/04/2016.
 turnover more than twelve billion US dollars, including at least rupees one
thousand crores in India.

Combinations involving parties below these thresholds are among those that will be regarded as
“not likely to cause an appreciable adverse effect on competition in India”.4 Threshold limits
have been based upon the monetary value of assets and turnovers, therefore, it is necessary that
these terms be understood. Value of turnover shall include amount of sale of goods and services 5.
Horizontal combinations are those that are between rivals and are most likely to cause
appreciable adverse effect on competition. Vertical combinations are those that are between
enterprises that are at different stages of the production chain and are less likely to cause
appreciable adverse effect on competition. Conglomerate combinations are those that are
between enterprises not in the same line of business or in the same relevant market and are least
likely to cause appreciable adverse effect on competition. The scrutiny of a combination under the
Act is usually expected to take place before it comes into effect with an idea of preventing a possible anti-
competitive behaviour which may adversely affect the consumers. Combinations likely to have an anti-
competitive effect can be permitted after such effects are removed by modifications. 6

INQUIRY INTO COMBINATIONS BY CCI

Section 6 of the Competition Act, 2002 states that, no person or enterprise shall enter into a
combination which causes or is likely to cause an appreciable adverse effect on competition
within the relevant market in India and such a combination shall be void. It further provides that
any person proposing to enter into a combination shall give notice to the CCI and the
combination in respect of which notice has been given to the CCI shall not take effect for a
period of 210 days from the date of notification unless approved by the CCI earlier. 7 Sub-section
(11) of Section 31 provides that where the CCI has not passed any order in respect of a notice
within a period of 210 days, then the combination shall be deemed to be approved.

Upon receiving a notice, the CCI proceeds to assess the combination’s likelihood of Appreciable
Adverse Effect on Competition (AAEC) in India. For the assessment of AAEC, the CCI
considers all or any of the following factors8:

(a) Actual and potential level of competition through imports in the market;
4
Ibid.
5
Section 2(y) of the Competition Act 2002.
6
Available at http://www.cci.gov.in/index.php?option=com_content&task=view&id=34 last accessed: 04/04/2016.
7
Section 31(1) of the Competition Act, 2002.
8
Sub-section(4) of Section 20 of the Competition Act, 2002.
(b) Extent of barriers to entry into the market;

(c) Level of concentration in the market;

(d) Degree of countervailing power in the market;

(e) Likelihood that the combination would result in the parties to the combination being able to
significantly and sustainably increase prices or profit margins;

(f) Extent of effective competition likely to sustain in a market;

(g) Extent to which substitutes are available or are likely to be available in the market;

(h) Market share, in the relevant market, of the persons or enterprise in a combination,
individually and as a combination;

(i) Likelihood that the combination would result in the removal of a vigorous and effective
competitor or competitors in the market;

(j) Nature and extent of vertical integration in the market;

(k) Possibility of a failing business;

(l) Nature and extent of innovation;

(m) Relative advantage, by way of the contribution to the economic development, by any
combination having or likely to have appreciable adverse effect on competition;

(n) Whether the benefits of the combination outweigh the adverse impact of the combination, if
any.

Upon assessment of a combination based on the factors stated above, the CCI may:

(a) approve the combination;

(b) block the combination; or

(c) approve the combination subject to certain conditions which are generally referred to as
modifications.9

The modifications are merger remedies that are intended to remedy the potential anti-competitive
outcome of the proposed merger. In general, remedies are imposed when the same is practical,
capable of being monitored and sufficient enough to address anti-competitive outcome of the
merger.

9
Section 30 (1) of the Competition Act, 2002.
In the case of the Board of Trade of the City of Chicago v. United States 10, it was held: If the
expression “appreciable adverse effect on competition” is not defined abstractly or in general
terms in the Competition Act, every case has to be examined individually and facts are to be
considered peculiar to the business condition before and after the restraint was imposed, the
nature of restraint and its effect- actual or probable, as to the competition generally prevailing in
the relevant market.

Also- in the case of, Haridas Exports v. All India Float Glass Manufacturers Association,11 it
was held, the words “adverse effect on competition” embraces acts, contracts, agreements or
combinations which operate to the prejudice of the public interests by unduly restricting
competition or unduly obstructing due course of trade. Public interest is the first consideration. It
does not necessarily mean interest of the industry.

It is interesting to take note of the decision rendered by the U.S. Supreme Court in the case of
Brown Shoe Co. v. United States,12 here, the SC prohibited a merger under Section 7 of the
Clayton Act, 1914 between two shoe manufacturers stating that the paramount issue in the case
was to protect small businesses against potential abuses of power by larger firms, despite
acknowledging that the merger would allow the firms to ‘market their own brands at prices
below those of competing independent retailers’. Hence, the courts may apply the principles of
judicial balancing and thereby may give more regards to one criteria pertaining to AAEC over
the others.

CONCLUSION

10
246 U.S. 231
11
(2002) 111 Comp. Cas. 617 (SC).
12
370 U.S. 294 (1962).
Competition Law is a complex mixture of a country's law, economics and administrative action
intended to favour competition in the economy. Since competition is seen as critical to economic
development, competition law seeks to protect this competitiveness in the economy. The
underlying theory behind competition law is the positive effect of competition in an economy's
market, acting as a safeguard against misuse of economic power.

The link between competition law and economic development emphasized over and over again
seems rather undeniable and the need for competition law seems like the order of the day. The
operation of competition law by prevention of anti-competitive agreements, prohibiting abuse of
dominant position by firms and regulation of combinations which might adversely affect
competition in the economy, thus seems crucial for India. The Commission is bound by the
Preamble of the Act to interpret it in a fashion that promotes economic development of the
country. Competition laws in India are aimed to imbibe the social and economic philosophy
enshrined in the Directive Principles of State Policy contained in the Constitution. The mandate
to draw up a policy that prevents the concentration of wealth and means of production to the
common detriment can not only be located in the Constitution but also in the Act which aims to
prevent anti-competitive practices. Amongst the principal kinds of anti-competitive behaviour
the Act prohibits are combinations resulting in an appreciable adverse effect on competition
(‘AAEC’) within the relevant market in India. The regulation of Combinations in India is to take
place in line with Section 5 & 6 of the Competition Act, 2002 read with the Combination
Regulations 2011.
Competition Law is a complex creation of law and the Government of India and Competition
Commission of India should take time to understand it in the light of special needs of the Indian
economy and understand it accordingly.
 BIBILIOGRAPHY

1. Book resources
 Dhall, Vinod, ‘Competition Law Today’, Oxford University Press, (New Delhi, 1st Edn.,
2007)
 Dugar, S.M. ‘Commentary on MRTP Act, Competition Law and Consumer Law and
Procedures: Law Practices and Procedures’, Wadhwa & Co. (New Delhi, 1st Edn., 2006)
 Mittal, D.P., ‘Competition Law and Practices: As amended by Competition Amendment
Act, 2007 and 2008’, Taxmann Allied Services, (New Delhi, 1st Edn., 2008)
 Mittal, D.P., ‘Taxmann’s Competition Law and Practice: A comprehensive sectionwise
law relating to Competition Act’, Taxmann Allied Services, (New Delhi, 3rd Edn., 2011)
 Singh, Avatar, ‘Competiton Law’, Eastern Book Co., (Lucknow, 1st Edn., 2012)

2. Web resources

 http://www.ebc-india.com/lawyer/articles/733.htm
 http://cci.gov.in/images/media/ResearchReports/3102012.pdf
 http://ieg.ignou.ac.in/wiki/images/1/11/Acquisitiions_in_banks.pdf
 http://www.cuts-ccier.org/pdf/Why_India_Adopted_a_new_Competition_Law.pdf