Saturday, October 24, 2015

Drafting a correct merger filing in India for CCI approval – Part I (Defining Relevant Market)



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.[1]

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.


[1] VISCAS Corporation C-2014/10/219
 

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