REGULATION OF COMBINATIONS:

INTRODUCTION:

One of the key features of globalization of trade and commerce has been rapid increase in
transnational mergers giving rise to global corporations. A merger could be a complete union of two
or more companies, a more one-sided takeover or the transfer of parts of one firm to another. A
merger is sought to be effected for a variety of reasons:- It is an inexpensive way of entering into a
new activity or a new market; it gives the opportunity to use the spare capacity in the acquiring
company with the assets of the other company; where the companies are under the control of the
same group, a merger may be seen as a means of effecting economies in making a company just an
another unit of another company.

TYPES OF MERGERS:

Mergers can be horizontal or vertical. Horizontal mergers are between enterprises that are existing or
potential competitors at the same level in the supply chain. Vertical mergers are between enterprises
at different levels at the supply chain. If a merger is likely to give a controlling market power, such
market concentration has to be controlled. Horizontal mergers are considered as more harmful with
anti-competitive as well as monopoly effects. Vertical mergers are considered as less harmful as it
benefits for the merging enterprises and for consumers.

SECTION 5 OF THE ACT:

Mostly the companies use merger as a combination method to avoid competition in the market and
consequently gain the market power. So as to curb down the combinations The Act contains
adequate provisions for the regulation of mergers, amalgamations and acquisitions. The Act uses a
composite expression- combination--to cover these modes, viz. merger, acquisition of shares, assets,
acquiring control of an enterprise. Section 5 of the Act deals with combination of enterprises and
persons. It makes provision for what would amount to a combination that would require regulation
under the provisions of section 6 of the Act .

Section 5 of the Act defines ‘combination’ to mean acquisition of one or more enterprises by one or
more persons or merger or amalgamation of enterprises. Broadly, combination under the Section 5
means acquisition of control, shares, voting rights or assets, acquisition of control by a person over
an enterprise where such person has direct or indirect control over another enterprise engaged in
competing businesses, and mergers and amalgamations between or amongst enterprises where the
combining parties exceed the thresholds specified in the Act. The threshold are specified in the Act in
terms of assets or turnover. If a combination causes or is likely to cause an appreciable adverse effect
on competition within the relevant market in India, it is prohibited and can be scrutinized by the
Commission.

Thus, Section 5 specifies a threshold below which a merger, acquisition or acquiring of control is not
regarded as a combination. In short section 5 covers only those combinations which are above the
threshold limits in terms of value of assets and turnover. In simple language, Section 5 states that
combination that exceeds the threshold limits specified in the Act in terms of assets or turnover,
which causes or is likely to cause an appreciable adverse impact on competition within the relevant
market in India, can be scrutinized by the CCI. The threshold limits are specified in terms of assets or
turnover. The threshold limits are different according to whether the combination involves an
enterprise or a group, and also whether the combination has assets or turnover only in India or
worldwide. Thus, section 5 of the Act provides for mandatory notification of combination to the CCI if
combining parties exceed the threshold specified in the Act. In order to estimate whether a
particular transaction is "Combination" and falls under the provisions of Competition Act, 2002, first
it is important to understand the following :

(a) The nature of Transaction (b) The values involved in Transaction (Threshold Limits)

(A) NATURE OF TRANSACTION Combinations under Section 5of the Act includes the following three
types of transactions: 1. Acquisition 2. Acquiring of Control by a person over an Enterprise 3. Merger
or Amalgamation

1. Acquisition “ Acquisition” has been defined under Section 2(a) of the Act. It provides that
‘acquisition’ means acquiring or agreeing to acquire directly or indirectly, of : (i) Shares, voting rights,
or assets of an enterprise; or (ii) Control over management; or (iii) Control over the assets of an
enterprise.

2. Acquiring of Control by a person over an Enterprise The Act further covers any acquisition of
"Control" by a "Person"over an "Enterprise" where: (i) such person has direct or indirect control on
any other enterprise and, (ii) the any other enterprise is also in production, distribution or trading of:
(a) similar goods or services; or (b) identical goods or services; or (c) substitutable goods or services,
as that of the Enterprise whose control is being acquired. Here a 'person' includes an individual or
body corporate as defined under the Act6 .

3. Merger or Amalgamation The term merger or Amalgamation has not been defined specifically
under the Act, though the meanings of the same may be drawn from Section 2(1B) of the Income tax
Act, 1961 to mean the merger of one or more companies with another company or the merger of
two or more companies to form one company in such a manner that: • All properties of the
amalgamating companies immediately before the amalgamation become the properties of the
amalgamated company; • All liabilities of the amalgamating companies immediately before the
amalgamation become the liabilities of the amalgamated company; * Shareholders holding not less
than three-fourths in value of the shares in the amalgamating companies after that share already
held therein immediately before the amalgamation by or by a nominee for, the amalgamated
company or its subsidiary become shareholders of the amalgamated company.

Types of Mergers In corporate world ‘ mergers’ are of following three types :- 1. Horizontal Mergers
2. Vertical Mergers 3. Conglomerate Mergers , conglomerate merger, which generally refers to
mergers between entities, which are not linked. In short 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 threshold limits are given under as say there are three entities in the market as A,B,C now, as per
the section if these limits are exceeded then section 5 would be applicable.
CASE ANALYSIS : JET AIRWAYS AND ETIHAD AIRWAYS COMBINATION CASE Order dated November 12,
2013.

FACTS The Government of India (Gol) liberalised its FDI Policy and set a 49% cap for foreign
investments in Civil Aviation Sector in India. Inc f 2013, Etihad, a company incorporated in the United
Arab Emirates (UAE), a national airline of UAE, proposed to acquire 24% in Jet, a listed company
incorporated in India. Etihad is wholly owned by the Government of Abu Dhabi and is primarily
engaged in the business of international air passenger transportation services, commercial holiday
services and cargo services. It is also stated to hold 29.21 percent equity in Air Berlin; 40 percent
equity in Air Seychelles; 10 percent equity in Virgin Australia and 2.9 percent equity in Aer Lingus. Jet
on the similar lines, is primarily engaged in the business of providing low cost and full service
scheduled air passenger transport service to/ from India along with cargo, maintenance, repair
&overhaul service and grounds handling services. The proposal got approved by the Security
Exchange Board of India (SEBI), the Foreign Investment Promotion Board (FIPB ) and Cabinet
Committee of Economic Affairs (CCEA). Thereafter the Investment Agreement, Shareholders
Agreement and a Commercial Cooperation Agreement between Jet and Etihad were submitted to CCI
for its approval .
ISSUE Whether the proposed combination between Jet and Etihad has an Appreciable Adverse Effect
on Completion (AACE) in India.

DECISION/ ORDER

(i) The Competition Commission of India first considered the issue of ‘Relevant Market in India.
According to CCI,a relevant market in this case is market of international passenger air transport
based on the point of origin or point of destination [O & D] . Thus, each such O&D constituted a
different route ,and hence each different route, constituted a different relevant market. To ascertain
relevant market following points were considered:

1. Direct and Indirect flights between O&D being substitutable.

2. Indirect flights by competitor between O&D being substitutable.

3. Different classes of passengers, and inflight services rendered to different classes, being
substitutable

. 4. Time and price sensitive passengers (Business/Holidays).

5. Etihad being not operating in domestic (Indian) aviation sector and India's open skies policy in
respect of international air cargo transportation. Thus, CCI concluded that the relevant market in the
instant case would be pertaining to: 1. O&D from or ending in 9 cities in India to/from UAE). 2. O&D
from or ending in India to/from international destinations on the overlapping routes of the parties to
the combination.

(ii) After defining the relevant market, the CCI ventured into ascertaining, whether or not there
would be any AAEC pertaining to such routes. CCI stressed upon the relevancy of trans-boundary
competition, as routes were international, while ascertaining AAEC through this proposed
combination. It was observed that there were 38 routes to/from India to other destinations where
Etihad and Jet fly and there was at least one competitor on each of such route. Except 7 destinations,
where Jet and Etihad had a combined share of more than 50 percent, rest all destinations had less
combined share. Also of these 7 destinations, on 3 routes, the share of one was more than 50
percent and of the other less than 5 percent.

Thus, post transaction change in the market share was observed, not to marginally alter the
competition dynamics. However, CCI observed that when considering the network effects, the
assessment must go beyond the O&D pairs and consider potential network effects of the proposed
combination. It was noted that the complementarily of routes of Jet and Etihad makes the network
effects stronger. Hubs, increased access to gates, slots and other infrastructure interfaces that link
markets. Competition was observed to be increasing among systems rather than on point to point
O&D pairs. Therefore, high market shares of Jet (India) and Etihad (Abu Dhabi), in their respective
hubs, do not imply lack of competition.