On April 18, 2019, CCI approved the notice submitted by Schneider Electric India Private Limited (‘SEIPL/Schneider’) and MacRitchie Investments Pte. Limited (‘MacRitchie’). The Notice was filed pursuant to a Business Transfer Agreement (‘BTA’) and a Share Subscription Agreement (‘SSA’). SEIPL proposed to acquire the electrical and automation business (‘Target Business’) of Larsen & Toubro Limited (‘L&T’), as a going concern, on a slump sale basis. After the acquisition, MacRitchie would acquire 35% of the shareholding in SEIPL (‘Proposed Combination’). SEIPL and MacRitchie are referred to as the ‘Acquirers’ while SEIPL, MacRitchie and L&T are referred to as the ‘Parties’.
On a preliminary assessment of the market position of the Parties, on the basis of their market share, concentration levels, entry conditions, nature of distribution network and innovation, etc., CCI was of the prima facie view that the Proposed Combination is likely to result in competition harm. The Acquirers had initially proposed certain remedies to cure the harm to competition expressed by CCI, but CCI noted that the behavioural commitments proposed by the Acquirers were insufficient to address the concerns raised by the CCI.
Assessment by CCI
The Proposed Combination primarily related to the broad relevant market of low voltage (‘LV’) switchgears comprising various electrical products and solutions. Among products / solutions offered by Schneider and the Target Business in India, the Acquirers identified 29 products / solutions as competing with each other. CCI observed that each of these competing products are not used on a standalone basis and are complementary or supplementary to the other products that are used in the switchboard. Therefore, one can group the competing products under one or more clusters based on their choice as a portfolio / cluster, their functionality and utility. With regard to the relevant geographic market, in view of insignificant transportation costs and availability of the overlapping products across India, the entire territory of India was considered as the relevant geographic market.
Concentration Level and Entry of Competitors
CCI observed that the Proposed Combination would increase concentration significantly in 15 product / solutions which could confer the combined entity a dominant market position in several of the relevant markets. CCI also observed that since the Parties are major competitors, the combined entity would thus have the ability and incentive to discontinue the offerings of L&T as well as increase the price, affecting effective and vigorous competition in the relevant markets.
Given that there was a strong consumer preference for use of the same brand of products across an LV panel, a big player offering the complete portfolio of components would have an inherent advantage. Specifically for two of the products, the Parties were considered to be undisputed market leaders with a combined market share of 55-60%, followed by ABB (four times smaller). CCI also noted that in comparison the market shares of the competitors had remained static over a period of time. There was also no likelihood of an entry that would act as a competitive constraint. Additionally, CCI also observed that the combined entity would have inherent advantage in terms of its distribution network, which would be the largest in the country.
Harm to Competition
The Proposed Combination was likely to cause competition concerns due to the following:
i. the Proposed Combination would confer the combined entity the ability to increase price in the relevant markets. Further, the extent of competitive constraint that would remain in the market would be insufficient to address the anti-competitive incentives of the combined entity;
ii. the Proposed Combination was likely to eliminate one of the most competitive option/ economic choice to the consumers;
iii. L&T being a prominent brand in India with maximum installations, any discontinuation of its offering would lead to increase in the cost of replacement;
iv. the extent of integration at different levels of supply chain post the Proposed Combination would create a significant barrier to entry for other competitors;
v. degree of contestability in markets for LV switchgears market(s) in India is low and there is no likeliness of an entry that would be timely and sufficient in scope so as to act as a competitive constraint to the resultant entity of the Proposed Combination; and
vi. the cost of the rivals to compete and increase their presence in the market would be much higher than the present market scenario.
Modifications Recommended by CCI
While CCI recommended the divestment of L&T’s business in relation to six LV switchgear products having high market shares as well as two plants of L&T, the Acquirers submitted an alternate remedies proposal which was accepted by CCI. Among the remedies proposed by the Acquirers, the major remedies included:
i. White Labelling: The Parties offered to strengthen existing LV manufacturers (except Siemens and ABB) by offering them products under a white labelling arrangement for a period of five years from the date of closing of the Proposed Combination;
ii. Transfer of Technology on a Non Exclusive Basis: At the end of the five year term of the white labelling remedy, SEIPL would provide a mutually acceptable, non-transferable, non-sub licensable, royalty bearing non-exclusive technology license for a period of five years to a single third party that had availed white-labelling; and
iii. Removing Exclusivity of Distribution Network: SEIPL undertook to amend the distributorship agreement and commercial policy to remove any barriers which encourage de facto exclusivity (i.e., deletion of termination clause, discontinuation of loyalty rebates).
The Proposed Combination was approved subject to the compliance of the abovementioned modifications and other modifications offered by the Acquirers that were aimed at alleviating competition concerns.