Over a past few months, I have been receiving quite a few
queries from various colleagues in the industry as to the problems they are
facing with the Competition Commission of India (CCI or the Commission) and its seemingly long
approval process. Many are perplexed by the range of questions CCI is hitting back
at the parties to a proposed combination transaction after the submissions of
the prescribed forms.
In this blog and some others (coming soon), in parts I will make an
attempt on how to draft a legible and complete merger/ combination filing
before the CCI. My submissions are part
based on my time at CCI, where I was working as an Expert in the Combination
Division of CCI and part on the working experiences I have encountered.
For the
sake of simplicity, I have tried to model my submissions with respect to the
relevant/ respective question of the form I prescribed by the CCI under the
Combination Regulations.
8.1 – What, according to the
parties to the combination, is the relevant product and geographic market?
Provide a detailed explanation regarding the delineation of relevant product
and relevant geographic market.
8.2 – Whether the parties to
combination are engaged in any business activities in the same relevant market?
If yes, please specify.
Introduction
The
delineation or defining of relevant market in a combination transaction is the
backbone for any merger analysis. The
definition of relevant market is the key for any merger analysis. A lot will
depend on how a relevant market is defined by the parties to a transaction.
Basis
the relevant market, the CCI will ascertain that there is or will be any appreciable adverse
effect on the competition in the markets in India due to such transaction post
consummation.
CCI has
provided guidance notes for assisting the parties for determining and
ascertaining relevant market in a combination transaction. However, it is up to
the parties to determine what a relevant market is and to submit to the CCI its
reasons along with evidences of why the parties considers a relevant market
defined or ascertained by them to be considered by CCI as relevant market for
analysis of the combination transaction.
Relevant
market comprises of (a) relevant product market; and (b) relevant geographic
market. When conducting market
definition analysis, it is generally practical to describe the relevant product
market first, and then to determine the relevant geographic market.
Practically,
in the interest of time, it is advisable that the parties, defines relevant
market as narrowly as possible so that the charges of any lacuna are not there
and the risk of CCI coming back on the definition of relevant market is
minimized.
Determining relevant product market
When
ascertaining product market scope, substitutability from both demand and supply
side is commonly considered.
Demand-side substitutability (DSS)
This
involves assessment of the extent to which customers could and would switch
among substitute products in response to a change in relative prices or quality
or availability or other features. DSS involve analysis of customer’s behaviour
by applying hypothetical monopolist test or SSNIP test (small, but significant
non-transitory increase in price). For CCI submissions, it is necessary to
obtain evidence on possible substitution by customers.
Other
factor required to analyse are switching costs and brand loyalty, buying
pattern of the customers (how have they responded to previous price rises).
It will
also be helpful to analyse the commercial strategies and other internal
documents such as internal communications, public statements, and studies on
consumer preferences, market research, advertising plan, general marketing
plans or business plans. Some information/ documents which are relevant may
also be asked by the CCI for submissions.
Supply-side substitutability (SSS)
To
address the question of whether, to what extent, and how quickly, undertakings
would start supplying a market in response to a price increase in that
market. Proper evidences as to
substitutability of the products have to collect.
The
conclusion for ascertainment of relevant market has to be supported by
econometric evidence, derived from data collected from various sources and
elasticity of demand.
CCI on
occasions may refer or connect with the competitors of the parties to a
combination transaction and try to obtain from them the material on the
relevant market and any effect of such a combination on the markets in India.
CCI have an internal prepared set questionnaire for such queries which it
shares with the competitors.
Additionally,
now a brief summary of 500 words about the combination transaction is available
at the CCI’s website. Any competitor or party who is affected by such a
combination may approach the CCI with its analysis about the combination and
try to block the merger or slow the process of merger approval by the CCI.
As per
the guidance note issued by the CCI, for assessment of relevant product market,
the parties are required to provide to CCI the information with evidences with
full and true disclosures of the following (wherever applicable):
·
- the
analysis of why the products or services in these markets are included an why
others are excluded
- classification
of industrial products
- substitutability
of products and services
- physical
characteristics or end-use
- price
- consumer
preferences
- cross-price
elasticity of demand
- supply
side substitutability
Determining relevant geographic
market
In many
cases CCI has applied ‘Elzinga Hogarty Test’ for determining the relevant
geographic market. It also use ‘Critical loss analysis Test’ for determining
the relevant geographic market.
Data on
imports may also be informative for analysing the competitive constraints such
a relevant product market faces. Any anti-dumping issues which the industry in
question faces should also be taken into consideration while determining the
relevant geographic market.
As per
the CCI guidance note in order to help the CCI in its investigation for
relevant geographic market, for assessment parties have to provide:
- the
nature and characteristics of the products or services concerned
- regulatory
trade barriers
- local
specification requirements
- national
procurement policies
- transport
costs
- need
for secure or regular supplies or rapid after-sales services
- language
- consumer
preferences
- adequate
distribution facilities,
- appreciable
differences in the parties market shares between the neighbouring geographic
areas,
- substantial
price difference
While
analysing the relevant geographic market on the basis of any of the factors
enumerated above, the parties are also required to give evidences with full and
true disclosures to the CCI.
Other remarks
On many
occasions while analysing the combination transaction from the perspective of
Competition Act, CCI has not defined relevant market as defining of relevant
market will not or will have no impact on the analysis of AAEC by CCI and has
left the definition open.
There
could be an instance where the parties to combination are not sure about the
exact relevant market; they may have one or more markets (based on their analysis)
that could be classified as relevant market. In that event, parties should go
with the definition of the relevant market which it deems most appropriate and
in parallel bring to the CCI’s attention other possible relevant market which
they identified. The fall back of this could be that the CCI may treat the
other identified market as the relevant market and resultantly the notification
made by the parties will or might have to be amended, which may prolong the
approval process.
In my
view, the parties should stick to ‘one relevant market approach’ and should
only disclose about the other relevant market if they are really confused
(which is very unlikely) or they have done robust analysis of the requirements
under Section 20(4) of the Competition Act, and they are sure that in spite of
disclosing two or more relevant markets, CCI will not stop or delay the merger
approval process.
