Unleashing the turf war

With the notification of the merger control thresholds and powers under Sections 5, 6, 20, 29 to 31 of the Competition Act, 2002 (Act), the law on this much delayed aspect is expected to be fully operational from June, 2011. But the issues and controversies which have been dogging this law have not been put to rest, while additional discomforts have surfaced in the context of the notification itself. There is an opinion that there should have been an amendment to the Act to provide for the substitution of the relevant sections, instead of a notification by the Ministry. This could snowball into a critical issue, in view of other laws which provide for sector-specific merger regulations, on whether such administrative notification can or should override the sectoral regulations. The key conflict areas have been identified as telecom, banking, electricity and capital markets.

 

Prevention of dominance and/or merger controls have a peculiar history under Indian Law. Originally provided for under the Companies Act 1956 in relation to acquisition of shares, these were transposed to the Monopolies & Restrictive Trade Practices (MRTP) Act in 1984, extending the concept of dominance applied to assets as well as shares. With the abolition of the provision on dominance in the MRTP ACT, 1991, in the wake of liberalisation, the provisions on shares were reinstated in Section 108 G of the Companies Act, and have reportedly not been invoked in the last twenty years.

Reverting to the current scenario, electricity laws are probably the best example of the overlapping provisions. The Electricity Act 2003 and the Competition Act 2002, in their respective non-obstante clauses, have identical language which reads as follows:

“shall have effect notwithstanding anything in therewith contained in any other law for the time being in force.”

Similar provisions on derogation are found in Section 175 of the Electricity Act and Section 2 of the Act. What is interesting is that the Electricity Act also addresses market domination, specifically empowering the regulator to issue appropriate directions to a Licensee or a generating Company in instances of any agreement in abuse of dominant position or entering into a combination likely to cause adverse effect on competition. Electricity Tribunals have been entertaining disputes on market domination — notably Tata Power Company’s challenge of allocation of power distribution licenses against Reliance. While no means as exhaustive as the list provided in Sections 3 to 6 and the powers under Sections 27 to 36, but certainly adequate to resist the intervention of the Competition Commission (‘CCI’) in their jurisdiction.

Another sector is telecom, wherein the license itself envisages inbuilt sectoral M&A guidelines in permitting circle mergers. Nowhere as inclusive and wide as the Electricity Act, there is scope in the telecom sector for CCI intervention, if not absolute, in applying merger control provisions in the context of combinations involving shareholder control, voting rights, assets, over and above what TRAI regulates. Even then, the telecom industry is unlikely cede its turf easily.

In so far as SEBI regulated takeovers are concerned, the CCI approval period of 210 days has potential for escalating interest payments by the acquirer. The timeframes would have to be synchronised.

Mergers and acquisitions of Banks have never been subject to the provisions of Sections 391 to 394 of the Companies Act, 1956, the operational law. Even when the issue of dominance was addressed in the MRTP Act, and the Commission’s no objection was sought, this was not required for Bank mergers, which are approved by the Reserve Bank of India in exercise of its powers under Section 45 of the Banking Regulation Act. The Banking Laws Amendment Bill 2010 seeks to exclude applicability of the Competition Act and the jurisdiction of the CCI. However, it is too soon to predict how this issue will be addressed and/or resolved in going forward.

The recent controversy between the CCI and the RBI in relation to CIC’s notice to Banks asking for explanation on imposition of penalty on borrowers for prepayment of home loans, has raised concerns in the Banking industry and in RBI of CIC’s intrusion on their exclusive jurisdiction.

While this concern is justified for some sectors, it is not correct: there can and should be more than one regulator for any activity. The scope of the Act and role of CCI is confined to anti-competition issues in interest of protection of consumers and freedom of trade. The preamble of the Act provides as such, and the laws can actually complement and supplement each other in most instances, provided there are mechanisms to contain forum shopping. A way forward could be to seek exemption under Section 54 of the Act which empowers the Ministry of Corporate Affairs to grant, also implies submission to its authority. Otherwise, in situations where the jurisdiction of CCI and the sectoral regulator is either duplicated or in conflict, the special law should prevail, as per best practices.

Kumkum Sen is a partner at Bharucha & Partners Delhi office and can be reached at kumkum.sen@bharucha.in