Recently
in an order (Notice given by PVR Limited
(PVR) (C-2015/07/288)) dated May 4,
2016 the Competition Commission of India (CCI),
by majority, conditionally approved the proposed combination between PVR and
DLF Utilities Limited (DLF) under
the provisions of the Competition Act, 2002 (Competition Act) and the Competition Commission of India (Procedure
in regard to the transaction of business relating to combinations) Regulations,
2011 (Combination Regulations) (CCI Order). The proposed combination
was in relation to acquisition by PVR of DLF’s film exhibition business
comprising of 39 screens in the respective relevant markets of Delhi, Gurgaon
and Noida (described below).
In terms
of the CCI Order, among other commitment,
PVR was:
·
required
to terminate its agreements in the relevant markets of Noida and Gurgaon and
DLF (costing it around 22 screens);
·
submit
an certificate that, it will not expand organically or inorganically in Noida and
Gurgaon (for next three years) and in South Delhi (for next five years); and
·
submit
a certificate that, for the next five years it will not acquire directly or
indirectly any interest in the properties in which it is terminating the
agreement
DLF was:
·
required
to submit an undertaking that it will either continue to operate for a period
of five years or sell/ lease or transfer some of the assets in the relevant
market of South Delhi (of 7 theatre screens) to an effective and viable
competitor of PVR
The
competition assessment process took the CCI three hundred two days (as against
the maximum of two hundred ten days prescribed under Section 6(2A) of the
Competition Act) to approve the proposed combination. This blog seeks to
highlight some of the salient features of the CCI Order.
Determination of relevant market
The
delineation or defining of relevant market (comprising of relevant product
market and relevant geographic market) in a combination transaction is the
backbone for any merger analysis. In the instant case, the CCI has taken the
purposive and pragmatic interpretation of the term ‘relevant market’ (in line
with its decisional practice in the matter of Carnival Cinemas/ Big Cinemas (C-2015/01/236) and have defined the
relevant product market as market for exhibition of films in multiplex theatres
(in Gurgaon, Noida and Chandigarh) and at some geographies such as South Delhi
and North, West & Central Delhi it also include high-end single scree
theatres.
Assessment of appreciable adverse
effect on competition (AAEC)
·
Market concentration
(determination by Herfindahl Hirschman Index (HHI)): HHI is calculated by summing
the squares of the market shares of all the firms active in the market. Both the absolute level of the HHI and the
change in HHI as a result of merger can provide an indication of whether a
merger is likely to raise competition concerns.
It
may so happen that the entire market share (because not all players market
share is known) is not known. In that event, it would be appropriate to
calculate delta of HHI (i.e., difference between HHI pre and post-merger). Delta is also calculated as 2ab, where ‘a’ and
‘b’ denotes the market share of the respective firms.
In
the instant case, the CCI has for the first time has come out with guidance as
to the absolute HHI and delta HHI, which provides for a safe harbour to the
parties to combination for assessment as under the Competition Act and
Combination Regulations.
The
CCI has categorically mentioned that:
“Keeping
in view the thresholds used in the advanced jurisdictions, it is observed that
the markets with post-merger HHI more than 2000 are considered as highly
concentrated and markets with post-merger HHI between 1000 and 2000 as
moderately concentrated, with the indication of concern of an adverse effect on
competition in the market, if: (a) the post-merger HHI is above 2000 and
increase in HHI is 150 or more; or (b) the post-merger HHI is between 1000 and
2000 and increase in HHI is 250 or more”.
·
Efficiency: The parties (in relation to
relevant market in Noida and South Delhi) stated that the proposed combination
is expected to bring operational and organizational efficiency by pooling
resources together and utilizing them optimally, reducing overheads etc.
However,
the CCI observed:
“The
efficiencies are not combination specific; and
No
evidence has been provided as regards the efficiencies translating into lower
prices or better quality foe customers on a lasting basis”.
It
may be mentioned that, proving efficiencies in combination cases is often very
difficult and competition authorities around the world including the CCI
require a high evidentiary standard to prove such a case. Further, the
quantification of combination specific efficiencies is also challenging and is
perhaps one of the most speculative single element of combination review.
·
Non-compete and Non-Solicitation
Agreement: Like in several previous cases, the CCI was
concerned about the period and geography of the non-compete clause entered
between PVR and DLF.
In
the instant case, PVR amended the non-compete and non-solicitation agreement to
reduce the terms from five years to three years and geographical extent from
India to Delhi-NCR and Chandigarh.
Concept of ‘merger remedies’
explained
Under
the competition law domain, there are two kinds of remedies for combination
cases, namely, (a) structural remedies, and (b) behavioural remedies. Under the
structural remedy, the competition authority orders or at times the parties to
combination voluntarily submits to divest certain assets or undertakings and
for cases involving behavioural remedy, the competition authority orders or the
parties offers for certain commitments (such as altering the business plan, amending
the agreements such as non-compete/ non-solicitation, price caps, quality
commitments etc.) for a specific period of time for a specific defined relevant
market.
The CCI
has dealt with the concept of merger remedies in quite a few orders now including
ordering of divestiture in atleast two cases.
While
explaining about merger remedies, in the context of the present case, the CCI
mentioned:
“The purpose of remedies is to
preserve to the extent possible the pre-combination level of competition by recreating
as far as possible the competitive status quo in the affected markets…Behavioural
commitments (such as price caps and quality commitments offered by PVR) would
not effectively alleviate the competition concerns in the relevant market for
exhibition of films in multiplex theatres…apart from the fact that behavioural
commitments would be difficult to formulate, implement and monitor and run the
risk of creating market distortions. This is in line with international best
practices wherein structural remedies as they directly address the
cause of competitive harm arising from the elimination of a vigorous competitor
and have durable impact by way of creating an effective competitor to
the combined entity, are preferred to behavioural remedies for horizontal
combinations.”
It
further noted:
“In case of divestiture, there
would be no need for ongoing oversight or intervention. It is also noted that
international best practices suggest that in the absence of a suitable
remedy, such as when divestiture is not possible, in a case where a structural
remedy is required to address AAEC, the only alternative may be to
direct that the proposed combination shall not take effect”
The CCI
appears to be a view that in a highly concentrated market where
post-transaction the market share of the parties is very high (for e.g., more
than 75% as was the situation in this case) then, behavioural remedy may not be
the solution and the only option left is divestment or structural remedy. And
in a situation the divestment is not possible than the only alternative the CCI
has is to block the combination transaction.
Keeping out divestiture process
under the Competition Act
In this instant case, in its proposal for modification
under Section 31(3) of the Competition Act, the CCI suggested for divestment of
assets in relevant market of South Delhi and provided for aspects for
appointment of MA, divestiture agency etc.
Regulation 27 of the Combination Regulations mandates the
CCI to appoint a monitoring agency (MA) in case the CCI orders for
certain structural remedies. This is in contrast to the practice followed in
some of the major jurisdictions such as EU and US, where the parties to
combination transaction appoint the MA.
There are no guidelines/ stated parameters for selection/
appointment of MA, however, in practice the CCI appoints the MA on the basis of
RFP floated by it to a select consultancy firms and basis certain criteria such
as independence, conflict etc., it select the MA on the basis of two bid system
process (technical bid and financial bid). This process typically takes 2-3
weeks to complete and is often burdensome for parties to combination as it
involves payment to MA along with some legal costs.
PVR seems to have taken a pragmatic approach (based on
the learning of the past cases, i.e., divestiture in the matter of Sun
Pharma Industries Limited/ Ranbaxy Laboratories Limited (C-2014/05/170)
and Holcim Limited/ Lafarge SA (C-2014/07/190), which involved
appointment of MA, were mired with legal proceedings before the courts and took
a lot of time for consummation / closing of the transaction) by requesting the
CCI that, it prefers the mechanism of amending the respective transaction
documents to exclude certain theatres of DLF over acquiring the theatres and
thereafter divesting (as proposed by the CCI). This request was accepted by the
CCI.
Basis the above request,
among other things, the CCI has sought for undertaking from (a) PVR to amend
its agreement with DLF in relation to acquisition of theatre screens, and (b)
DLF to provide effective competition to PVR in the relevant market in South
Delhi by continuing the operations itself or transferring/ selling the assets
to the effective and viable competitor, independent of PVR.
Epilogue
PVR and DLF had to re-work on the terms of the
original deal which perhaps was not envisaged by them when they had signed the
term-sheet for the transaction. In my humble opinion, PVR should have
challenged the proposal of modification or the refusal of the CCI to accept the
terms of hybrid proposal, proposed by it as the competition assessment issues
such as threat of substitutes, threat of new entrants, industry rivalry,
bargaining power of distributors and buyers was not extensively discussed
(these issues were also mentioned in the minority order), which should have
clarified some of the concepts under the Indian competition law jurisprudence.
However, I understand that the main motive of the parties (after ten months of
deliberations with the CCI) in the best interest of business was to close the
transaction and move ahead with the integration process rather than prolonging
the legal battle.
