Relationship between Merger, Acquisitions and Competition Law

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Abstract

Mergers and acquisitions are regular and necessary phenomena of the business world and is the bone of contention with respect to the competition law which is studied in this very paper. Mergers and acquisitions have their own advantages such as they help to achieve economies of scale, operating efficiencies, management efficiencies. Mergers and Acquisitions are the modes of corporate restructuring and the synergy is the foremost incentive for it. Synergy is generated by strategic integration of two entities ensuing economies of scale, cost cutting, spreading risk, tax sops, elimination of competition, gaining access to new technology and expanding product of service offerings etc.

Mergers and acquisition are methods of corporate expansion. However there is a continuous debate on the subject matter with respect to competition in the market. There are two sets of arguments one is that mergers increase power of reducing competition or swallowing the business competitor, this type of merger is known as horizontal merger. Merger also increases bargaining power of a company. However other argues that mergers and acquisitions are integrations which help companies in diversification of business areas and exploring new vistas in new sectors etc. Therefore an effort has been made to analyze mergers and acquisition as to whether there are adverse effects of corporate mergers and acquisitions, which leads to monopolies and to what extent mergers and acquisitions should be controlled and its interplay with the competition law in India i.e. how and to what extent Indian Competition Law helps in striking a balance between corporate consolidation and protection of economic interests of the society.

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In nutshell it is aimed to find advantages and disadvantages of mergers and acquisition with respect to competition in the market and whether competition law plays a complementary role in the process of corporate consolidation. Mergers and acquisition are advantages for the organization as a tool of corporate restructuring and for the market also, and competition law plays a complimentary role in the furtherance of merger and acquisition and does not unnecessarily act as an impediment in the way of mergers and acquisition.

Introduction

Mergers & Acquisitions (combinations) mean any situation in which the ownership of two or more enterprises is joined together. In business world joining of ownership may take many different forms, and may be either amicable and consensual, or unwelcome and hostile. In India Mergers are regulated under the Companies Act and also under the SEBI Act. With the enactment of the Competition Act in 2002, mergers also come within the ambit of this legislation. Does it not appear that too much of legislations on one topic? It does appear so yet there is necessity for having different legislations to regulate mergers differently. In the Companies Act mergers between companies inter alia essentially tries to protect the interests of the secured creditors and in the SEBI Act it tries to protect the interests of the investors. Apart from protecting the interests of private parties, the objective of them is different or mutually exclusive. In the Competition Act the objective is much broader. It aims at protecting the appreciable adverse effect on trade-related competition in the relevant market in India (AAEC).

Let us consider an illustration. Air India and Indian (erstwhile Indian Airlines) have combined. Consequent upon that, the market share of the combined entity has increased considerably. The enhanced market share may cause:

  • i) barriers to entry to other competitors; (competitors may not have market to trade)
  • ii) rise in passenger fares;
  • iii) poor quality of service

On the contrary, it may not cause any concern at all if we look at the following factual issues: i) passengers have wider choice (Jet Airways, Spicejet, Kingfisher, Air Deccan, Indigo, Go Air, foreign airlines etc.); ii) with wider choice, the combined entity may not be able to create entry barriers; iii) in order to maintain an optimal passenger base (for successful and viable business venture) the combined entity may have to provide competitive level price for tickets and maintain highest or at least similar levels of quality of services that its competitors would extend. So, in Companies Act and SEBI Act, though both are mutually exclusive yet aim to protect the interests of private individuals. Whereas, in the Competition Act, the impact of combinations directly affects the market and the players in the market including the consumers. We may, therefore, safely say that apart from the fact that all these legislations are mutually exclusive, the Companies Act and the SEBI Act are the sub-sets of Competition Act in so far as legal scrutiny of mergers are concerned.

Background and Evolution of Competition Law in India

Monopoly imposes heavy costs in every society. It is a conspiracy against the public to raise prices. It hates competition because competition lowers prices to a level which is fair, honest and earned under competitive environment. Adam Smith spoke of ‘the wretched spirit of monopoly’, the ‘mean rapacity, the monopolising spirit’ in which ‘the oppression of the poor must establish the monopoly of rich.’ Monopoly is exercised through market shares gained by buying up or bullying the present competitors out of, and the potential from, the market. The purpose is to earn maximum profit at the cost of consumers and rival competitors, more than the natural profit which the fair and free competition endures. It also destroys efficiency and discourages innovation. On the other hand, competition enhances consumer choice and promotes competitive prices, with the result society as a whole benefits from the best possible allocation of resources. That’s why most countries in the world have enacted competition laws to protect there free market economies-an economic system in which the allocation of resources is determined solely by supply and demand.

The competition law of India was previously contained in the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act). This Act was formed as a result of ‘command and control’ policies adopted by Indian government after independence. The government intervention and control pervaded almost all areas of economic activity in the country as India followed the strategy of planned economic development. The companies needed license for everything from setting up an industrial understanding, to its expansion or layoff of workers and closing it down. The era was also known as ‘License-Raj.’ The out come of the ‘License-Raj’ system was restriction of freedom to entry into industry which ultimately resulted in concentration of power into few individuals or groups.5 Thus, MRTP Act came into existence in 1969 to control such monopolies. The word ‘socialist’ in the Preamble to the Constitution of India has been embodied with a high object. The principal aim of a socialist state is to eliminate inequality in income, status and standard of life.6 The genesis of this Act is traceable to the Preamble of our Constitution and Article 38 and 39 of the Directive Principles of State Policy.

Mergers under The Competition Act:

The term Merger has been used broadly in the competition act as to include amalgamation and acquisition of shares and control over the assets and the voting rights of an enterprise. Merger is a kind of event which brings tremendous change in the management of the affairs of one enterprise by another enterprise. Through merger one enterprise is entitled to exercise control over the significant part of the assets and the decision making power of the other enterprise. Merger is an ordinary activity which takes place between the business entities in order to expand their business. Merger is considered to be a significant activity for the enterprise as it provides the enterprises to run their business on a large scale.

But there are certain mergers which are considered detrimental and adversely affect the competition. The most negative impact of merger is that it leads to the reduction of competition in the market by reducing the number of entities in the market. Merger between entities also leads to the increase in price of the goods and services which prejudicially affects the interest of consumers as the merged enterprises exercises full control over the market and restrain the entry of new players in the market which confers on them the advantage of limiting the output and restricting market access.

Kinds of Merger

  • Ø Horizontal merger –This type of merger takes place between the enterprises that are engaged in the trading of similar goods and services. It mainly takes place to improve the market share and to carry out the operations of the enterprises on a large scale. This kind of merger has an adverse affect on the competition as it creates collaboration between the enterprises pertaining to pricing of the good and limiting the output.
  • Ø Vertical Merger -Vertical merger is a kind of merger in which enterprises are engaged in different stages or levels of production chain in different markets, in respect of production, supply, distribution, storage, sale or price of, or trade in goods or provision of services.
  • Ø Conglomerate Merger - Conglomerate merger is a kind of merger where two enterprises that merge together are involved in different kind of business.

The significance of conglomerate merger is that it helps the merging companies to enhance their activities and strengthen their financial position. There are two kinds of conglomerate merger, the first one is known as pure conglomerate merger which basically takes place between the companies who are doing business which is not related to each other. The other kind of conglomerate merger is known as mixed merger which is a kind of merger in which the main object of the enterprises are to expand their business and to gain market access and to increase the range of their products.

Reason Behind Mergers And Acquisitions

In the recent years mergers between the enterprises has rapidly increased. The point listed below discusses the main reason behind increased mergers taking place:

  • i) Market share- Companies amalgamate to reduce competition and to gain dominant position in the market. The increase in the market share helps the enterprises in exercising their will and limiting the production and increasing the prices.
  • ii) Large economy- One of the most important significance of merger is that the scales of the business entities are enlarged and they carry operations on a large scale which in turn leads to the generation of huge amount of revenue.
  • iii) Diversification- Diversification leads to the increase in the trust of the consumers as diversification yields fruitful earnings for the companies.
  • iv) Tax consequences- Companies amalgamate to evade tax. So it is one of the major factors which are considered while granting the order to merge as tax evasion creates loss of revenue to the government and prejudicially affects the economic development of the country.

Merger Control in India

Though the competition act came into force in the year 2003 but the provisions pertaining to anti-competitive agreements, abuse of dominant position came into effect in the year 2009. In the year 2011 proposal for the amendment to the provisions to the merger control was made by cci after consulting law firms, business entities and the stake holders.

In India Merger as a part of the combinations has been defined in section 5 of the competition act and the provisions relating to the regulation of the combination is defined in section 6 of the Act. Merger is an ordinary practice in the business world. It has several advantages like increasing efficiency and economy but there are several detrimental effects of merger. The effects are so severe that there was need felt to control merger. Any merger is considered to be prejudicial if it causes “Appreciable Adverse Effect” on competition. The term appreciable adverse effect has not been defined in the Competition act but any kind of merger having this effect is prohibited under the competition act. Section 20(4) of the Competition Act, 2002 provides the substantive test whether the combination has or is likely to have ―appreciable adverse effect on combination -. The substantive test encompasses examination of certain factors incorporated in the above section.

Some of the factors are:

  • a) Restraining entry of new players in the market
  • b) Advantage of the combination to the economy of the country
  • c) Extent of elimination of competition from the market.
  • d) The availability of substitutes in the market.
  • e) Whether the benefits of combination outweighs the adverse effect on competition.

Analysis of The Role of Competition Commission

Competition commission of India is a significant body of the Government of India. It is accountable for the enforcement of the competition act, 2002. Competition Commission plays an imperative role in preventing adverse effect on competition in India. Competition commission acts as a market regulator of all the sectors and primarily draws focus on curbing the anti-competitive practices which is detrimental to the competition. Competition Commission of Indiais empowered to take cognizance of the anti-competitive practices prevailing in the Indian market.

The Competition commission was established on 14 October and came into effect on May 2009.

Duties of Competition Commission

Competition commission has been entrusted with several duties under the competition act 2002. The primary duties of the competition commission are:

  • To eliminate practices having appreciable adverse affect on competition
  • To maintain competition in the market.
  • To promote freedom of trade and eliminate any constraints in the entry in the market.
  • To protect the interest of the consumers and to eliminate all the practices prejudicially affecting the interest of the consumers.

To persuade new entities to enter in the market for producing better quality of good and delivering better services. Competition commission is also required to give its opinions on vital matters affecting competition or any reference made to it by the statutory authority. It is also the duty of the competition commission to create consciousness among the public and impart training facilities on competition issues.

Section 18 of the competition act deals with the duties of the competition commission of India.

Conclusion

Combinations whether in the form of mergers, amalgamations or acquisitions are very important for a developing country like India. They provide numerous advantages to an economy like India in the form of diversification of business, increased synergy, accelerated growth, tax benefits, improved profitability etc. They enable foreign collaboration through cross-border mergers and enable companies to withstand global competition. But on the other hand, they may lead to monopoly or create barriers to entry and similar anti- competitive practices. Therefore, they need regulation. The need to swiftly permit such mergers which are beneficial to the economy and prohibit anticompetitive ones has led to the formulation of merger control regime all over the world. In India, mergers were regulated under the MRTP Act, 1969. But the Act had become obsolete in the light of international economic developments and was replaced by the Competition Act, 2002. The provisions relating to combinations came into force recently on 1 June 2011. The CCI also notified the implementing combination regulations effective from the same date.

The Act and the Regulations together constitute the merger control regime. The gradual succession from the MRTP Act to Competition Act is one of the most important milestones as far as economic reforms in the field of competition law in the country are concerned. By shifting the focus from the stage of merely ‘curbing monopolies’ in the domestic market to ‘promoting competition’ the competition regime in India has attained recognition for its progressive ways.

It provides for pre-merger notification, review and remedies in the form of modifications which if applied effectively can play a crucial role in regulating mergers. The merger control provisions are designed in such a way to prevent mergers that are likely to have an appreciable adverse impact on competition.

With the FDI policies becoming more liberalized, Mergers, Acquisitions and alliance talks are heating up in India and are growing with an ever increasing cadence. They are no more limited to one particular type of business. The list of past and anticipated mergers covers every size and variety of business -- mergers are on the increase over the whole marketplace, providing platforms for the small companies being acquired by bigger ones. The basic reason behind mergers and acquisitions is that organizations merge and form a single entity to achieve economies of scale, widen their reach, acquire strategic skills, and gain competitive advantage. In simple terminology, mergers are considered as an important tool by companies for purpose of expanding their operation and increasing their profits, which in façade depends on the kind of companies being merged. Indian markets have witnessed burgeoning trend in mergers which may be due to business consolidation by large industrial houses, consolidation of business by multinationals operating in India, increasing competition against imports and acquisition activities. Therefore, it is ripe time for business houses and corporates to watch the Indian market, and grab the opportunity.

References

  1. Agarwal, M. and Bhattacharjea, A. (2006), “Mergers in India: a response to regulatory shocks”, Emerging Markets Finance and Trade, Vol. 42 No. 3, pp. 46-65.
  2. Ahluwalia, M.S. (2002), “Economic reforms in India since 1991: has gradualism worked?”, Journal of Economic Perspectives, Vol. 16 No. 3, pp. 67-88.
  3. Akbulut, M.E. and Matsusaka, J.G. (2010), “50+ years of diversification announcements”, Financial Review, Vol. 45 No. 2, pp. 231-62.
  4. Alguacil, M., Cuadros, A. and Orts, V. (2011), “Inward FDI and growth: the role of macroeconomic and institutional environment”, Journal of Policy Modeling, Vol. 33 No. 3, pp. 481-96.
  5. Armour, J. and Lele, P. (2008), “Law, finance, and politics: the case of India”, Working paper no. 107/2008, European Corporate Governance Institute.
  6. Athreye, S. and Kapur, S. (2009), “Introduction: the internationalization of Chinese and Indian firms–trends, motivations and strategy”, Industrial and Corporate Change, Vol. 18 No. 2, pp. 209-21.
  7. Banerjee, P., Banerjee, P., De, S., Jindra, J. and Mukhopadhyay, J. (2014), “Acquisition pricing in India during 1995–2011: have Indian acquirers really beaten the odds?”, Journal of Banking & Finance, Vol. 38 No. 1, pp. 14-30.
  8. Barbopoulos, L., Paudyal, K. and Pescetto, G. (2012), “Legal systems and gains from crossborder acquisitions”, Journal of Business Research, Vol. 65 No. 9, pp. 1301-12.
  9. Beardsley, S.C. and Farrell, D. (2005), “Regulation that’s good for competition”, The McKinsey Quarterly, Vol. 2, pp. 49-59.
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Relationship between Merger, Acquisitions and Competition Law. (2022, July 08). Edubirdie. Retrieved July 23, 2024, from https://edubirdie.com/examples/relationship-between-merger-acquisitions-and-competition-law/
“Relationship between Merger, Acquisitions and Competition Law.” Edubirdie, 08 Jul. 2022, edubirdie.com/examples/relationship-between-merger-acquisitions-and-competition-law/
Relationship between Merger, Acquisitions and Competition Law. [online]. Available at: <https://edubirdie.com/examples/relationship-between-merger-acquisitions-and-competition-law/> [Accessed 23 Jul. 2024].
Relationship between Merger, Acquisitions and Competition Law [Internet]. Edubirdie. 2022 Jul 08 [cited 2024 Jul 23]. Available from: https://edubirdie.com/examples/relationship-between-merger-acquisitions-and-competition-law/
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