Combinations: Concept under the Competition Act, 2002
Synopsis:
F
Introduction
F Regulation of Combinations
F Relevant Product Market
F Relevant Geographical Market
F Regulation of Cross-Border
Combinations
F Conclusion
Introduction
The Competition Act, 2002 was
enacted to promote and sustain fair competition in the Indian market by
preventing practices that harm consumer interests and economic efficiency.
Among its key provisions, the regulation of combinations which include mergers, acquisitions, and
amalgamations holds special importance. Combinations are not inherently
harmful; they can enhance efficiency, bring economies of scale, foster
innovation, and strengthen businesses. However, if left unchecked, they may
also reduce competition, create monopolies, and adversely affect consumer
choice.
To address this, the Act lays down specific rules for regulating combinations, focusing on aspects such as thresholds of assets and turnover, the relevant product and geographical market, and even cross-border transactions. The Competition Commission of India (CCI) acts as the watchdog to ensure that such combinations do not cause an Appreciable Adverse Effect on Competition (AAEC), thereby balancing the interests of businesses with those of consumers and the overall economy.
The term “Combination”
under the Competition Act, 2002
broadly covers mergers, acquisitions, and amalgamations which cross specific
financial thresholds and are likely to affect competition in India. The intent
is not to prohibit all business consolidations, but to regulate only those
which could have an Appreciable Adverse
Effect on Competition (AAEC) in the market.
Section 5 of the Act specifies three broad
categories of combinations:
1)
Acquisition of
Control, Shares, Voting Rights, or Assets
o When
a person or enterprise acquires control
(direct or indirect), shares, voting rights, or substantial assets of another enterprise.
o For
example, if Company A acquires a large stake in Company B that allows it to
influence B’s management or policies, it qualifies as a combination.
o The
test is whether such an acquisition increases concentration of power in the
market.
2)
Acquisition of
Control over a Similar Enterprise
o When
a person already controlling one enterprise acquires control over another
enterprise engaged in a similar or
identical line of business, thereby strengthening market dominance.
o For
instance, if a telecom operator already controlling one company acquires
another telecom firm, it could reduce the number of independent competitors in
the market.
3)
Merger or
Amalgamation between or among Enterprises
o When
two or more enterprises combine into a single entity (merger) or when one
company absorbs another (amalgamation).
o Such transactions often result in increased market share and operational efficiencies but may also reduce competition.
The Competition Act regulates only large-scale mergers and acquisitions that may affect competition in India. For domestic transactions, if the combined assets exceed ₹2,000 crore or turnover exceeds ₹6,000 crore, CCI approval is required. For global deals involving Indian operations, the thresholds are USD 1 billion in assets (with at least ₹1,000 crore in India) or USD 3 billion in turnover (with at least ₹3,000 crore in India). Smaller transactions are excluded to avoid unnecessary regulation.
Combinations are reviewed only when significant in scale and are assessed with a forward-looking approach to predict their impact on competition. The law applies equally to domestic and cross-border transactions. Importantly, combinations are not always harmful; many lead to efficiency, innovation, and consumer benefits, but CCI intervenes when they threaten competition.
The Walmart–Flipkart deal (2018) was cleared by the CCI after review, as Walmart acquired 77% of Flipkart crossing the thresholds. Similarly, in the Holcim–Lafarge merger (2015), the CCI approved the deal but required divestment of assets to prevent regional dominance in the cement sector.
Thus, a
combination refers to significant mergers, acquisitions, or amalgamations that
cross these thresholds and may potentially influence competition in India.
F Regulation of Combinations
The
primary regulatory framework lies under Sections 5 and 6 of the Act:
The Competition Act sets specific asset and turnover thresholds for both Indian and global transactions. If a merger, acquisition, or amalgamation crosses these limits, it must be reported to the Competition Commission of India (CCI) before being carried out. This ensures that only large and significant transactions come under CCI’s review.
Section 6 of the Act makes it clear that any combination which causes, or is likely to cause, an Appreciable Adverse Effect on Competition (AAEC) in India will be considered void. This provision acts as a safeguard to stop mergers or acquisitions that might harm consumer choice, raise prices unfairly, or create monopolies.
When the CCI examines a combination, it looks at several factors to judge its effect on competition. These include the market share of the merged entity, the level of concentration in the market, whether there are entry barriers for new players, the scope of innovation and consumer benefits, the degree of vertical integration, and the bargaining power of consumers. These factors help the CCI decide whether the combination will harm or benefit the market.
The law requires that parties to a combination must notify the CCI within 30 days of approval by their board or shareholders. Once notified, the CCI conducts a preliminary review (Phase I) to check for immediate competition concerns. If the case needs deeper scrutiny, it goes into a detailed investigation (Phase II). If the CCI finds no adverse effect on competition, it approves the combination. However, if concerns are found, it may suggest modifications or block the deal.
F Relevant Product Market
The concept of the Relevant Product Market under the Competition Act, 2002, is central to understanding how competition is assessed in cases of mergers, acquisitions, or abuse of dominance. It refers to a market that consists of all products or services which are considered interchangeable or substitutable by the consumer. Substitutability is based on three important factors:
1)
Characteristics:
Products with similar features, design, or composition may be regarded as
substitutable. For example, different brands of toothpaste with similar
cleaning and whitening properties would fall within the same product market.
2)
Price: If
consumers are willing to switch from one product to another due to small
changes in price, those products are considered substitutes. For instance, Coca-Cola
and Pepsi belong to the same product market because a rise in the price of one
may shift demand to the other.
3) Intended Use: Products used for the same purpose or function are also placed in the same market. For example, in the pharmaceutical sector, two drugs curing the same illness, even if produced by different companies, fall under the same product market.
The idea of the relevant product market helps the Competition Commission of India (CCI) to properly define the boundaries of competition. Without this definition, it would be unclear whether a merger or acquisition reduces competition or not. For instance, if a company acquires another firm producing a product in the same relevant market, the combined entity may gain excessive control over prices and supply, harming consumers.
This
concept helps the CCI analyze the scope of
competition and whether a combination may create dominance in a particular
product/service line. For instance, in the pharmaceutical sector, two companies
producing similar drugs may be in the same relevant product market.
F Relevant Geographical Market
The Relevant Geographical Market under the Competition Act, 2002 refers to a specific territory or region where the conditions of competition are uniform and distinguishable from other areas. In simple terms, it identifies the physical space where firms actually compete with each other and where consumers view products as interchangeable. This concept is important because competition is not always national in scope; it may be limited to a state, a region, or even a city, depending on the product or service.
Several factors help in defining the boundaries
of a geographical market:
1)
Regulatory Trade
Barriers – Rules and restrictions imposed by the government, such as
taxes, licenses, or quotas, may divide markets across regions or states.
2)
Local Consumer
Preferences – Consumer tastes often vary by location. For instance, in
food and beverages, regional preferences play a big role in deciding market
boundaries.
3)
Transportation
Costs – If the cost of transporting goods is very high, the market may
be limited to nearby areas. For example, bulky goods like cement or bricks are
usually consumed closer to production sites.
4) Distribution Network – The availability of dealers, suppliers, and retailers affects how widely a product can be sold. If a company’s distribution system is limited to certain regions, its competitive market is also confined there.
Defining the relevant geographical market allows the Competition Commission of India (CCI) to examine whether a merger or acquisition reduces competition in a specific area. A deal that may look harmless at the national level could still reduce consumer choice in certain states or regions. For example, if two cement companies merge, they may dominate in South India, even though competition may still exist in the North. Hence, the CCI often studies competition at the regional level.
F Regulation of Cross-Border
Combinations
In today’s globalized economy, mergers and acquisitions are not restricted within national boundaries. Large corporations often engage in cross-border transactions that can impact competition in multiple countries at once. Recognizing this, the Competition Act, 2002 provides for the regulation of cross-border combinations to safeguard Indian markets from anti-competitive effects of foreign mergers or acquisitions.
The Act explicitly grants extraterritorial jurisdiction under Section 32, which empowers the Competition Commission of India (CCI) to examine mergers or acquisitions that take place entirely outside India but may still affect competition within India. This means that even if two foreign companies merge abroad, if the resulting entity impacts Indian consumers or businesses, the CCI can investigate and regulate such transactions.
Even when enterprises are incorporated abroad, they must notify the CCI if their merger or acquisition meets the Indian asset and turnover thresholds and is likely to influence the Indian market. This ensures that Indian competition laws remain effective in preventing global monopolies from harming domestic consumers.
Cross-border mergers often involve multinational corporations in sectors like aviation, technology, and pharmaceuticals, which have a direct bearing on Indian consumers. Without regulatory oversight, such global deals could lead to reduced competition, higher prices, or limited choices for Indian customers. Regulation by the CCI ensures that India remains a fair and competitive marketplace despite global consolidations.
F Conclusion
The regulation of combinations
under the Competition Act, 2002 plays a vital role in maintaining a fair and
competitive market environment in India. By setting asset and turnover thresholds, the Act ensures that only large
and potentially impactful mergers and acquisitions come under scrutiny. The use
of concepts like the relevant product
market and relevant geographical
market allows the Competition Commission of India (CCI) to carefully analyze the scope of competition and detect risks of market
dominance. Moreover, the Act’s extraterritorial
reach ensures that even cross-border transactions are monitored if
they affect Indian consumers.
Overall, the framework does not discourage mergers or acquisitions but seeks to strike a balance between promoting business efficiency and protecting consumer welfare. By preventing combinations that cause an Appreciable Adverse Effect on Competition (AAEC), the CCI ensures that consolidation benefits such as innovation, growth, and efficiency do not come at the cost of consumer choice, fair pricing, and healthy competition.