Drafting a correct merger filing in India for CCI approval – Part II (Market Size, Market Concentration)

In furtherance of my earlier piece on defining relevant market, another important factor for determining and accessing the appreciable adverse effect on competition (AAEC) due to the proposed combination is market concentration.  I have made an attempt to discuss the issues faced by the practitioners and the parties to the combination while dealing with this issue below.

8.3 – Provide an estimate indicating the relevant source and the basis of estimate of the total size of the market, in terms of value of sales (in Rs) and volume (units),  of identical/ substitutes/ similar products or services produced/ distributed/ supplied in India.

8.4 – Provide details with regard to the sales in value (in Rs) and volume (units) along with an estimate of the market share of each of the parties to the combination for identical/ substitutes/ similar products or services produced/ distributed/ supplied in India. In case of a group, same information should be given for all the enterprises of the group.

Introduction

Key aggregation indicators used in assessing market structure and concentration include market shares, concentration ratios and Herfidahl-Hirschman Index.  Data on market shares may be collected from a number of sources including trade associations, customers or suppliers and market research report.

For most competition authorities, including the Competition Commission of India (CCI) market shares are the starting point of the merger review. They are indicative of the past market success of the firms who are entering into a combination and their rival firms. CCI looks are the pre-combination market share and the post-combination market share for its analysis of market structure. In case, the post-merger market share is same as or any increase in market share is insignificant, there are very few horizontal overlaps and vertical relationship, then CCI will take relatively less time in clearing the combination transaction.

Typically, market share denotes percentage of total sales (or some other measure) of the product or services to be held by the merging firms and each of their rivals in the relevant market.

Herfidahl-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.

CCI has not come out with any 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.

CCI guidance note

CCI in its guidance note has provided a format which is required to be filled and submitted by the parties to combination with the CCI. According to CCI, the market share figures should preferably be based on the reports available in public domain and/or prepared by the independent third parties. The parties are required to properly place on records the source of the information. In the event the public reports etc., are not available then the parties should submit its internal estimated (and these internal estimates should be backed by some solid rationale and full methodology of calculation should also be submitted to the CCI). The parties may also submit their working papers and draft notes before the CCI for its consideration.

Orders by CCI

Simply on the basis of market shares of the parties of the relevant product, CCI has on two occasions asked the parties to divest the assets of one of the parties to the transaction.[1]

Reasons of the decision

·         The combined market share of the Parties post combination for the relevant products mentioned above is very high/ substantial resulting in near monopoly. The Parties post combination is likely to face more or less no competition from the competitors/ only one significant competitor remains in the relevant market.

·         The remaining players have negligible market share and thus may not be in a position to exert significant competitive constraints on the merged entities.

·         Because of the combination, number of players of the relevant product will be reduced to two and in some cases, giving near monopoly to the Parties.

·         The proposed combination will eliminate a significant competitor and is likely to have an AAEC in the relevant market.

In case the post-merger scenario leads to a monopoly situation, then, CCI may ask for divestment of certain assets. Parties should clearly determine such possibilities while undertaking the competition law assessment and the due diligence process i.e., time period before even notifying to the CCI.

Other remarks

Determination of market share and concentration in itself will not lead to a conclusion that the combination transaction has any AAEC. A detailed analysis of other market factors and of theories of unilateral and/ or coordinated effects is always required for determining and concluding any AAEC.

Parties often submit Upward Pricing Pressure analysis before the CCI for ascertaining the market concentration.

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[1] Sun Pharmaceutical Industries Limited /Ranbaxy Laboratories Ltd (C-2014/05/170); Holcim Limited/ Lafarge SA (C-2014/07/190)

Recent Amendments in Combination Regulations

The Competition Commission of India (CCI) on July 1, 2015 amended the Competition Commission of India (Procedure with regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations) for the fourth time[1] keeping in view some of the issues it faced while dealing with some of the recent combination transactions and in line with some of the best international practices in other jurisdictions.

This blog piece seeks to summarize certain substantive and procedural changes made in the Combination Regulations.

Revised Form I for notifying combinations

In Schedule II of the Combination Regulations, a new Form I (wherein certain information is required to be filed by the notifying parties as to the combination transaction (Combination) to the CCI) has been substituted.

Form I now comprise of eight parts, namely:

Part I: Basis Information – Information about each party to the Combination for e.g., legal name, registration number, address, date of pre-filing consultation (if any) etc.,;

Part II: Proof of payment of fees – Details of fees deposited and mode;

Part III: Authorization regarding communication –Information to be provided is similar to information provided under Part I (but for an individual);

Part IV: Meeting the thresholds – Describing the nature of the combination and breach of threshold in a specified format;

Part V: Summary of Combination – Parties to a Combination are required to file a short and a long summary in the prescribed formant;

Part VI: Description of the Combination – Information to the furnished as regards structure and purpose of the Combination, furnishing the copies of the merger filings in other jurisdictions, information and justification on non-compete agreements etc,;

Part VII: Details about parties to the combination and sector overview – Information about details of the products (manufactured/ sold) and/ or services of the parties to Combination, details of horizontal overlaps and vertical relationships, details of supply chain, customers etc,;

Part VIII: Relevant Market – Information regarding the relevant product market and relevant geographic market of the products/ services involved in the Combination.

Guidance notes for filing of Form I and Form II

CCI on its website has published fairly detailed guidance notes (Guidance Notes) for filing of Form I on the information it requires from the parties to the Combination to be submitted for its review of the transaction. CCI has also published an introductory note on its website giving details on purpose of Combination filings, filing requirements, requirement of correct and complete information and notification process. Guidance Notes for Form II is not yet published on its website.

Trigger event for notification of Combination: Limiting the definition of “other documents”

In case of acquisition transaction, the requirements for filing the notification under the Competition Act, 2002 (Competition Act) and Combination Regulations occurs, when the parties to a Combination executes, a definitive agreement or any ‘other document’. The parties are required to file the notification within 30 days of execution of such agreement or other document. Under the requirements of the older Combination Regulations, ‘other documents’ included the documents submitted to the Central or the State Governments indicating the intention of the parties to enter into a Combination transaction.[2] The definition of ‘other document’ is now limited to intimation of the intention to acquire another enterprise to a statutory authority (for e.g., public announcement under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011).

Number of copies required to be filed

CCI has reduced the filing copies to be submitted from two copies to one copy in case of submission of Form I, Form II and Form III.

Failure to file notice

CCI has now clarified that in case of failure to file the requisite notification within prescribed time limits, the parties shall be required to file the notification in Form I or Form II (along with requisite fees) as directed by the CCI. Earlier the requirement was to file only Form II as per the directions of the CCI.

Authorised signatory to the notifications

CCI has amended the requirement for signing of the notification by the managing director, director or company secretary of an enterprise. Now, any person duly authorized by the board of directors of the company for the purposes of Combination can sign the notification (Form I or Form II) to be submitted to the CCI.

Combination filing in case of inter-connected transactions

CCI has clarified that in case of series of inter-connected or inter-dependent transactions/ composite transactions, comprising of several steps or smaller transactions, a single notification (Form I or Form II) is mandatorily required by the parties to the Combination to be filed with the CCI.

Confidential treatment of information

CCI has codified the practice currently being followed in relation to the request of the parties to the Combination for confidential treatment of the price sensitive and commercially sensitive information files by the parties to the CCI. In terms of the Competition Commission of India (General) Regulation, 2009, parties to the Combination are required to also file a public version of the notice (and an electronic version) to the CCI. The parties are also required to clearly state the reasons, justifications and implications for keeping the information disclosed to the Commission as confidential.

Summary of the Combination and publication on summary on CCI website

The parties to Combination are now required to file a summary of the Combination in not more than 500 words comprising details among other things of type of combination, area of activities of the parties to Combination and relevant market to which the Combination relates to. The summary submitted shall be published on the website of the CCI. According to Ministry of Corporate Affairs press release dated July 3, 2015, such publication will provide stakeholders an opportunity to submit their comments to CCI regarding the proposed Combination.

Treatment of invalid notices

CCI has been expressly granted the power to invalidate the incomplete notification (Form I or Form II) filed with it. The CCI may do so (such invalidation) after recording reasons for the invalidation which shall be communicated to the parties to Combination with 7 days of such decision by the CCI.

Termination of the proceedings in cases of modifications

In case a modifications or structural changes (as regards the Combination), suggested by the CCI to the parties, the proceedings for review of Combination by the CCI will be terminated upon acceptance of the compliance report submitted by the parties to the CCI. This amendment clarifies the position already existing in the old Combination Regulations.

Timelines for Phase-I review

CCI has modified the timelines for Phase-I review of Combination from 30 calendar days to 30 working days and have also given itself a clock stop of 15 working days during Phase-I review for seeking comments from the third parties.

Exemption from filing of notification

The amendment exempts the purchaser/acquirer (of shares control, voting rights or assets) for filing the notification (Form I or Form II) for review by CCI, in case such acquisition has been approved by the CCI in terms of the Competition Act. For e.g., acquisition of certain divested assets by the purchaser, in case where CCI directs the parties to a primary Combination transaction to divest certain products in a relevant market before approving the transaction.

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[1] The gazette notification for the amended Combination Regulation was published on the CCI website on July 6, 2015

[2] There were cases where the details of the transaction were not even clear to the parties as their submission for approval were pending before the government agency such as Foreign Investment Promotion Board (FIPB). In the case of Tesco/ Trent (C-2014/03/162), CCI treated the FIPB submission of the parties to Combination as ‘other document’ and since the parties had not filed the notification within 30 days after FIPB submission the Tesco was fined with Rs. 30,000,000 for delay in filing of the notification.