1 REGULATION OF VERTICAL MERGERS - MAJOR TAKEAWAYS FOR INDIA FROM THE EUROPEAN UNION Companies active in different levels of the supply chain may perceive it lucrative to integrate their businesses into a single entity. They may be motivated to do so owing to the expected efficiency gains, improvements in the quality of their products or increased variety and innovation. However, this may not be the sole reason for firms to merge vertically. A merged entity could be able and willing to foreclose access to supplies or markets for its rivals on account of its consolidated position. Such ‘anti-competitive’ effects may significantly impede the competition in the relevant markets and thereby, can lead to escalation of the prices to the detriment of customers. The competition authorities (the European Commission and the Competition Commission of India respectively) are primarily entrusted with the task of assessing the competitive effects of a proposed merger having a Union-wide dimension (territorial nexus for Indian system) and shall prohibit those proposed mergers which are not compatible with European competition law. In its merger assessment, the competition authorities must try to balance the competitive conditions that prevail prior to the proposed merger against the competitive conditions that would occur after the merger. This article tries to illustrate what lessons the Indian competition law needs to learn from the European Union for an efficient system. The competition law on the regulation of vertical mergers in India and the European Union have an identical mechanism and have various common characteristics as regards the different stages of the merger analysis and measures adopted by the respective competition authorities in this behalf. However, there are also considerable differences in the applicable provisions in the context of the definitions, the notification requirements, time limit for assessment of the pre-merger notifications by the competition authorities, and the substantive test applicable for the determination of the potential effects on effective competition. The European Commission has the task of evaluating the pro-competitive and anti-competitive effects of a proposed vertical merger. The Non-Horizontal Merger Guidelines provide an insight into the principles to be adopted during the assessment. The significant anti-competitive effects of a vertical integration could be either non-coordinated or the coordinated effects. The combining firms may adopt the strategy of foreclosure to the access of supplies or in some cases the foreclosure of customer. A vertical integration also facilitates the coordination between the market players which significantly impede effective competition in the market. The European Commission has to try and balance such anti-competitive impacts against the efficiencies which are generated by the proposed 2 vertical merger. Once the European Commission has established that the efficiencies brought about by the vertical merger in question overshadow the potential anti-competitive effects, the proposed merger is approved, sometimes subject to certain conditions. The Indian Competition Act, 2002, on the other hand, targets the protection and promotion of effective competition and not only disrupting or repressing monopolies and dominant positions. Thus, the merger control provisions are accordingly formulated to prohibit such vertical integrations which are likely to have an appreciable adverse effect on competition. The Competition Commission of India (CCI) also balances the positive and negative effects of the vertical merger. However, unlike the European Commission, in absence of a dedicated mechanism for assessment of vertical mergers, the challenges faced by the CCI are a bit more complex. The Indian Competition Act, 2002 has indeed stipulated certain factors and yardsticks to be followed by CCI during its evaluation. However, sometimes there is not much clarity about the extent and interpretation of such factors and it is left to the discretion of CCI as regards the applicability of such factors in different types of cases. The competition law in India is still in the stage of development and the competition law regime of the European Union could be of great guidance. Pre-merger notification requirement: Although following the regime of a mandatory notification puts more work burden on the European Commission, however, their system is more structured and well supported with other regulations for reducing the work load. Under the European Union competition law, there is a system of separate department dealing with different category of mergers. More significantly, the fears of Raghavan Committee (the Committee which drafted the Indian Competition Act, 2002) regarding delays due to bureaucratic interventions have become a reality under the Indian system. The Indian Competition Act, 2002 allows CCI to take a decision on the compatibility of a merger within a period of two hundred and ten days (210 days) which slows down the entire procedure and imposes hardships on the merging entities. The Indian law needs to take cue from their European counterparts where the European Commission expedites the process and in certain cases is obligated to give a decision within a period of thirty (30) days. Substantive analysis of vertical mergers: test and criteria for merger control: The Indian Competition Act, 2002 lacks in defining or elucidating the meaning of the expression ‘appreciable adverse effect’. This leads to uncertainty and non-uniformity as what could be considered as having appreciable adverse effect in one case may be adjudged otherwise in another. Unlike the European Commission, the CCI is tasked with an additional duty to define how large an effect would qualify as an appreciable adverse effect and whether this term would include any term above the de minimis. 3 The Indian system needs to take away European approach of explaining such key terms and not to merely enumerate various factors, all or any of which are to be taken into account to determine whether a proposed vertical merger has such an effect. There is a need of guideline or framework like the Non-Horizontal Merger Guidelines, in the Indian law. Criteria for assessment of the vertical mergers: The competition law authorities need to adopt several distinct criteria for the assessment of the impacts of proposed mergers on competition. The factors to be considered are decided on a case by case basis. However, the impacts of a particular transaction may not be limited only to a particular category and hence, the proposed combination has to evaluated for its various effects. Again, the European law is more developed in this regard and following are some of the criteria in which Indian law need to learn from the European Union competition law. Market share and market concentrations: The assessment of a vertical merger is much more complex than horizontal mergers and the same approach cannot be used to adjudge both the types of mergers. However, the Indian Competition Act, 2002, does not specify or describe the approach to be followed for the evaluation of vertical merger. The factors enlisted in the legislation are not effective in case of vertical mergers. On the contrary, the European Commission has been more elaborate in specifying the approaches which need to be adopted through its dedicated guidelines for non-horizontal mergers. In addition to this, the Indian legal system could also take help of the HHI approach (discussed in earlier sections) adopted by the European Commission for assessment of vertical mergers. The market share is not always reflective of the effect a vertical merger may have on the competition. Like the European Union, if there is a dedicated guideline in place, this will render the competition law in India a more definitive character. Also, the merging entities will be aware of the clearly set out parameters on the basis of which their mergers are going to be assessed. Another addition needed in the Indian legal system is the manner of collection of information about the market power of the merging entities. Currently, CCI mainly depends on the market research and the information furnished by the entities. The European Commission has a provision for seeking relevant information from different market players. Not only the merging entities have to submit the requested information, but the European Commission can also collect information from the competitors and the consumers of the market as well. Barriers to entry: The Indian Competition Act, 2002 has merely listed the factors but there is no description of how and to what extent such factors have to be considered for the evaluation. So it is left to the discretion and interpretation of CCI in every single case to understand the relevance of such factors. This leads to a lot of complexity and vagueness in the application of the parameters set for 4 evaluation. In European Union, this problem has been solved to a great extent by the enactment of the Non-Horizontal Merger Guidelines. The said guidelines explain the importance of each of these factors and provide a primer of how the European Commission acts in a given scenario. The guidelines also has a lot of illustrations and precedents which reflects the consistency with which European Commission treats a proposed vertical merger of similar type. The Indian Competition Act, 2002 shall also incorporate a framework of this sort, which will make the system more transparent. In addition to this, the current law in India does not recognize the critical nature of the noncoordinated effects of a vertical merger like foreclosure of access to inputs and the customer foreclosure. These are some serious impediments to an effective competition in the relevant market, but the Indian Competition Act, 2002 has no reference for assessing such significant effects. Welfare objectives and benefits to consumers: Once again it is the lack of clarity in the legislation itself which makes it difficult to understand the importance of consumer interest as a factor for allowing a vertical merger. It has been discussed above that in the European Union a vertical merger is likely to reduce the double mark-up factor for the profit margin, which in turn reduces the prices for the customers. This factor is a prominent criterion which the European Commission considers while balancing the anti-competitive effects of a vertical merger against its pro-competitive effects. The Indian Competition Act, 2002 needs to adopt this principle from the European Union. Giving prominence to consumer interests will be a crucial step for growth of the market and regulated prices, which in turn will foster an effective competition. Efficiency considerations: Unlike the European Union, the Indian law merely provides for consideration of the benefits arising out of a merger. However, there are two major differences from the European Union law. Firstly, the factor regarding efficiencies is generic in nature. There is no distinction for treating horizontal merger and vertical mergers in a different manner. The importance of a dedicated guiding principle for vertical mergers becomes all the more significant for the efficiencies consideration. A vertical merger affects both the upstream and the downstream market, so there is a possibility of impact in each of these markets. Secondly, there is no approach recommended for the CCI to adopt. In this regard, the Non-Horizontal Merger Guidelines serves as a sound foundation for the European Commission to systematically analyze the efficiencies conjured by the vertical merger. India too needs an approach similar to the three step test implemented in Europe. Further, sometimes, the doctrine of ‘failing firm’ is also invoked to allow a merger in order to save a ‘failing firm’, even though there will be less competition in the market after the merger than before. It is based on the premise that if a firm is likely to go out of business anyway, the consumer would not 5 be harmed if that firm were to be acquired by an existing competitor. In Indian law, this factor is rarely considered by the CCI. An analysis of the applicable provisions in the competition law system of India and the European Union highlights the importance of having an exclusive guidelines or framework for the assessment of vertical mergers. The Indian legal system could draw a lot of guidance from their European counterpart that will help in making the regulation of vertical merger effective and more efficient. However, there are certain issues that must be addressed in order that the law can effectively deal with mergers. Firstly, threshold limits have been prescribed on the basis of assets or turnover and the definition of ‘combinations’ includes these threshold limits and as a result the mergers below this threshold limit, are not scrutinized by the CCI, although even such mergers may have a negative impact on the competition. Secondly, in absence of a dedicated mechanism for regulation of vertical mergers, there are certain issues which have remains unaddressed or unclear. There is an urgent need for a framework to assist the CCI for regulation of vertical mergers. Thirdly, the biggest challenge regarding the regulation of vertical mergers is the time limits stipulated for the evaluation of merger notifications. The prescribed time period of two hundred and ten days (210 days) for making the final decision is significantly longer than that in the European Union. This sometimes poses undue hardships on the merging entities and eventually has an effect on the market itself. Hence, under all circumstances, the CCI will be well advised to use its discretionary powers judiciously and with the sole objective of promoting economic democracy. Finally, the mandatory pre‐notification mechanism is likely to appreciably increase the workload of CCI in this regard. Prompt steps are needed to be taken to ensure that the proposed merger notification are assessed and adjudged without any unreasonable delay. For a smooth and effective functioning of CCI the abovementioned issues should be resolved at an early stage. As George Bernard Shaw is credited to have said “We are made wise not by the recollection of our past, but by the responsibility for our future”, and the future of Indian competition law is indeed bright. - Article by Mrudul Dadhich, Associate, J. Sagar Associates.