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Let’s make a deal

12 October 2012
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The Financial Express

The Arun Maira Committee, which was inter alia constituted to consider the nature and effects of mergers and acquisitions of Indian pharma companies by foreign MNCs, advised a lowering of the merger scrutiny threshold especially for the pharma sector. As per the committee, there are around 10,000 pharma companies (as of 2009) but only 10-12 fall under the prescribed notification criterion. This article takes the suggestion of the Maira committee as a starting point to set out justifications and safeguards for choosing a non-unitary threshold for merger scrutiny.

In the merger analysis, all competition regimes have a threshold requirement that decides which combinations or concentrations will be scrutinised for their potential anti-competitive effects. In principle, all concentrations may have some effect on competition. The purpose of the notification threshold is to screen out those transactions that do not have any appreciable adverse effect on competition. The idea behind a threshold, therefore, is to minimise the cost and resources of investigation into mergers. Consequently, a threshold is merely a trigger to scrutiny and should be set at that level, which minimises the number of transactions that are notified to the party, but at the same time captures those transactions that may have an anti-competitive effect.

The International Competition Network (ICN) paper on merger thresholds suggests that there are two ways to devise a merger threshold: either by taking into account total domestic revenue of certain industries (taking the aggregate of certain industries and then deciding the threshold accordingly) or by considering a particular domestic market to assess the threshold. One way to follow the latter approach is to lower the threshold in a specific market.

India is not the first country to contemplate lowering the threshold in a particular sector. The Netherlands Competition Authority is competent to scrutinise mergers only when the combined turnover of the undertakings exceeds 113 million euros in the preceding calendar year, of which at least 30 million euros were realised in the Netherlands by at least two of the undertakings involved. Arguing that the geographic markets for healthcare were small, the authorities lowered the merger threshold for healthcare markets. The new threshold warrants a scrutiny when the combined turnover exceeds 55 million euros in the preceding calendar year, of which at least 10 million euros were realised in the Netherlands by at least two of the undertakings involved. The motivation in this case was to safeguard the emerging competition in the healthcare system. The Netherlands economic affairs ministry is also empowered to lower the threshold in a particular sector. Bringing down the threshold with respect to a specific sector has one important benefit: all the sectors of an economy may be different in terms of revenue but they are all important, thus warranting different screening criterion.

However, if the threshold is lowered in a particular sector, there should be an economic justification in doing so; the agency should have the resources and skills to efficiently process new notifications appropriately, as the number of mergers warranting scrutiny will increase.

Lowering the threshold in India’s pharma sector has an economic justification. Exercising its power under Section 54(a) of the Competition Act, the central government exempted from merger scrutiny those cases where the size of the acquired enterprise in India (the target company) based on turnover is below R750 crore ($166 million) and assets are below R250 crore ($55 million).

The success of any agency depends upon its resources, management, skills and the determination to achieve its objectives. Against the sanctioned 156 seats, just 81 vacancies were filled as per data available up to October 2011. Also, structural flaws in the CCI are reflected in the quantity of orders passed by the CCI since February 2010 (up till August 2011). The CCI has taken up 82 cases, but has pronounced judgment in just three. Further, if the government lowers the threshold in the pharma sector, the Commission will have a very high number of merger regulation cases. With its scant resources and inadequately developed skills, it will fail to function as per the expectations.

No merger regime is perfect, and all regimes have to make a policy choice between Type I errors (where a merger that should have been cleared is prohibited ) or Type II errors (where a merger that should have been prohibited is cleared ), depending upon competition and sometimes non-competition goals. Since the Indian government has decided to choose a Type I regime in terms of subjecting potentially harmless concentrations to a legal assessment, it will have to bear a huge administrative cost. Thus, it must be ensured that the CCI has enough resources in terms of staff and finances.

Another problem with a lower threshold is a high opportunity cost for competition authorities with limited resources. Too many merger cases will not permit the agencies to focus on other more important areas such as cartel enforcement. Across the world, it is recognised that cartels should be the first enforcement priority. A case in point is South Africa, which faced similar problems when it introduced merger control.

While it is true that a lower threshold will give rise to a large number of cases, this increased number can be reduced by placing minimal requirements in terms of initial information from the parties because it will then take comparatively lesser time to process the decision and filter potentially anti-competitive mergers. Canada, Germany, Norway and the US use such a system to attenuate the escalated administrative burden. Also, this system is market-friendly and will not dissuade investors from brownfield investments in terms of M&As.

The author teaches Competition Law at the Jindal Global Law School