[The
following guest post is contributed by Tarun
Mathur, who is a Manager at Ernst & Young, LLP (Mumbai) and has earlier
worked with the Competition Commission of India in its Combination Division.
Views are personal]
following guest post is contributed by Tarun
Mathur, who is a Manager at Ernst & Young, LLP (Mumbai) and has earlier
worked with the Competition Commission of India in its Combination Division.
Views are personal]
In an order
(Notice given by PVR Limited (PVR) (C-2015/07/288)) dated May 4, 2016
the Competition Commission of India (CCI),
by majority, conditionally approved the proposed combination between PVR and
DLF Utilities Limited (DLF) under
the provisions of the Competition Act, 2002 (Competition Act) and the Competition Commission of India (Procedure
in regard to the transaction of business relating to combinations) Regulations,
2011 (Combination Regulations) (CCI Order). The proposed combination
was in relation to acquisition by PVR of DLF’s film exhibition business
comprising of 39 screens in the respective relevant markets of Delhi, Gurgaon
and Noida (described below).
(Notice given by PVR Limited (PVR) (C-2015/07/288)) dated May 4, 2016
the Competition Commission of India (CCI),
by majority, conditionally approved the proposed combination between PVR and
DLF Utilities Limited (DLF) under
the provisions of the Competition Act, 2002 (Competition Act) and the Competition Commission of India (Procedure
in regard to the transaction of business relating to combinations) Regulations,
2011 (Combination Regulations) (CCI Order). The proposed combination
was in relation to acquisition by PVR of DLF’s film exhibition business
comprising of 39 screens in the respective relevant markets of Delhi, Gurgaon
and Noida (described below).
In terms of the CCI Order, among other commitments,
PVR was:
– required
to terminate its agreements in the relevant markets of Noida and Gurgaon and
DLF (costing it around 22 screens);
to terminate its agreements in the relevant markets of Noida and Gurgaon and
DLF (costing it around 22 screens);
– submit
an certificate that, it will not expand organically or inorganically in Noida and
Gurgaon (for next three years) and in South Delhi (for next five years); and
an certificate that, it will not expand organically or inorganically in Noida and
Gurgaon (for next three years) and in South Delhi (for next five years); and
– submit
a certificate that, for the next five years it will not acquire directly or
indirectly any interest in the properties in which it is terminating the
agreement
a certificate that, for the next five years it will not acquire directly or
indirectly any interest in the properties in which it is terminating the
agreement
DLF was required to submit an undertaking that it will
either continue to operate for a period of five years or sell/ lease or
transfer some of the assets in the relevant market of South Delhi (of 7 theatre
screens) to an effective and viable competitor of PVR
either continue to operate for a period of five years or sell/ lease or
transfer some of the assets in the relevant market of South Delhi (of 7 theatre
screens) to an effective and viable competitor of PVR
The competition assessment process took the CCI three
hundred and two days (as against the maximum of two hundred and ten days
prescribed under Section 6(2A) of the Competition Act) to approve the proposed
combination. This post seeks to highlight some of the salient features of the CCI
Order.
hundred and two days (as against the maximum of two hundred and ten days
prescribed under Section 6(2A) of the Competition Act) to approve the proposed
combination. This post seeks to highlight some of the salient features of the CCI
Order.
Determination of
relevant market
relevant market
The delineation or defining of relevant market (comprising
of relevant product market and relevant geographic market) in a combination
transaction is the backbone for any merger analysis. In the instant case, the
CCI has taken the purposive and pragmatic interpretation of the term ‘relevant
market’ (in line with its decisional practice in the matter of Carnival Cinemas/ Big Cinemas
(C-2015/01/236) and has defined the relevant product market as market for
exhibition of films in multiplex theatres (in Gurgaon, Noida and Chandigarh)
and at some geographies such as South Delhi and North, West & Central Delhi
it also includes high-end single screen theatres.
of relevant product market and relevant geographic market) in a combination
transaction is the backbone for any merger analysis. In the instant case, the
CCI has taken the purposive and pragmatic interpretation of the term ‘relevant
market’ (in line with its decisional practice in the matter of Carnival Cinemas/ Big Cinemas
(C-2015/01/236) and has defined the relevant product market as market for
exhibition of films in multiplex theatres (in Gurgaon, Noida and Chandigarh)
and at some geographies such as South Delhi and North, West & Central Delhi
it also includes high-end single screen theatres.
Assessment of appreciable
adverse effect on competition (AAEC)
adverse effect on competition (AAEC)
– Market concentration (determination by Herfindahl Hirschman
Index (HHI)): HHI
is calculated by summing the squares of the market shares of all the firms
active in the market. Both the absolute
level of the HHI and the change in HHI as a result of merger can provide an
indication of whether a merger is likely to raise competition concerns.
Index (HHI)): HHI
is calculated by summing the squares of the market shares of all the firms
active in the market. Both the absolute
level of the HHI and the change in HHI as a result of merger can provide an
indication of whether a merger is likely to raise competition concerns.
It may so happen that the entire market share
(because not all players market share is known) is not known. In that event, it
would be appropriate to calculate delta of HHI (i.e., difference between HHI
pre and post-merger). Delta is also
calculated as 2ab, where ‘a’ and ‘b’ denotes the market share of the respective
firms.
(because not all players market share is known) is not known. In that event, it
would be appropriate to calculate delta of HHI (i.e., difference between HHI
pre and post-merger). Delta is also
calculated as 2ab, where ‘a’ and ‘b’ denotes the market share of the respective
firms.
In the instant case, the CCI has for the first
time come out with guidance as to the absolute HHI and delta HHI, which
provides for a safe harbour to the parties to a combination for assessment under
the Competition Act and Combination Regulations.
time come out with guidance as to the absolute HHI and delta HHI, which
provides for a safe harbour to the parties to a combination for assessment under
the Competition Act and Combination Regulations.
The CCI has categorically mentioned that:
“Keeping in view the thresholds
used in the advanced jurisdictions, it is observed that the markets with
post-merger HHI more than 2000 are considered as highly concentrated and
markets with post-merger HHI between 1000 and 2000 as moderately concentrated,
with the indication of concern of an adverse effect on competition in the
market, if: (a) the post-merger HHI is above 2000 and increase in HHI is 150 or
more; or (b) the post-merger HHI is between 1000 and 2000 and increase in HHI
is 250 or more”.
used in the advanced jurisdictions, it is observed that the markets with
post-merger HHI more than 2000 are considered as highly concentrated and
markets with post-merger HHI between 1000 and 2000 as moderately concentrated,
with the indication of concern of an adverse effect on competition in the
market, if: (a) the post-merger HHI is above 2000 and increase in HHI is 150 or
more; or (b) the post-merger HHI is between 1000 and 2000 and increase in HHI
is 250 or more”.
– Efficiency: The parties (in
relation to relevant market in Noida and South Delhi) stated that the proposed
combination is expected to bring operational and organizational efficiency by
pooling resources together and utilizing them optimally, reducing overheads
etc.
relation to relevant market in Noida and South Delhi) stated that the proposed
combination is expected to bring operational and organizational efficiency by
pooling resources together and utilizing them optimally, reducing overheads
etc.
However,
the CCI observed:
the CCI observed:
“The
efficiencies are not combination specific; and
efficiencies are not combination specific; and
No
evidence has been provided as regards the efficiencies translating into lower
prices or better quality foe customers on a lasting basis”.
evidence has been provided as regards the efficiencies translating into lower
prices or better quality foe customers on a lasting basis”.
It may
be mentioned that, proving efficiencies in combination cases is often very
difficult and competition authorities around the world including the CCI
require a high evidentiary standard to prove such a case. Further, the
quantification of combination specific efficiencies is also challenging and is
perhaps one of the most speculative single element of combination review.
be mentioned that, proving efficiencies in combination cases is often very
difficult and competition authorities around the world including the CCI
require a high evidentiary standard to prove such a case. Further, the
quantification of combination specific efficiencies is also challenging and is
perhaps one of the most speculative single element of combination review.
– Non-compete and Non-Solicitation Agreement:
Like in several previous cases, the CCI
was concerned about the period and geography of the non-compete clause entered ubti
between PVR and DLF.
Like in several previous cases, the CCI
was concerned about the period and geography of the non-compete clause entered ubti
between PVR and DLF.
In the
instant case, PVR amended the non-compete and non-solicitation agreement to
reduce the terms from five years to three years and geographical extent from
India to Delhi-NCR and Chandigarh.
instant case, PVR amended the non-compete and non-solicitation agreement to
reduce the terms from five years to three years and geographical extent from
India to Delhi-NCR and Chandigarh.
Concept of ‘merger
remedies’ explained
remedies’ explained
Under the competition law domain, there are two kinds of
remedies for combination cases, namely, (a) structural remedies, and (b)
behavioural remedies. Under the structural remedy, the competition authority
orders or at times the parties to combination voluntarily submits to divest
certain assets or undertakings and for cases involving behavioural remedy, the
competition authority orders or the parties offers for certain commitments
(such as altering the business plan, amending the agreements such as
non-compete/ non-solicitation, price caps, quality commitments etc.) for a
specific period of time for a specific defined relevant market.
remedies for combination cases, namely, (a) structural remedies, and (b)
behavioural remedies. Under the structural remedy, the competition authority
orders or at times the parties to combination voluntarily submits to divest
certain assets or undertakings and for cases involving behavioural remedy, the
competition authority orders or the parties offers for certain commitments
(such as altering the business plan, amending the agreements such as
non-compete/ non-solicitation, price caps, quality commitments etc.) for a
specific period of time for a specific defined relevant market.
The CCI has dealt with the concept of merger remedies in
quite a few orders, now including ordering of divestiture in atleast two
cases.
quite a few orders, now including ordering of divestiture in atleast two
cases.
While explaining about merger remedies, in the context of
the present case, the CCI mentioned:
the present case, the CCI mentioned:
“The
purpose of remedies is to preserve to the extent possible the pre-combination
level of competition by recreating as far as possible the competitive status
quo in the affected markets…Behavioural commitments (such as price caps and
quality commitments offered by PVR) would not effectively alleviate the
competition concerns in the relevant market for exhibition of films in
multiplex theatres…apart from the fact that behavioural commitments would be
difficult to formulate, implement and monitor and run the risk of creating
market distortions. This is in line with international best practices wherein
structural remedies as they directly address the cause of competitive
harm arising from the elimination of a vigorous competitor and have durable
impact by way of creating an effective competitor to the combined entity,
are preferred to behavioural remedies for horizontal combinations.”
purpose of remedies is to preserve to the extent possible the pre-combination
level of competition by recreating as far as possible the competitive status
quo in the affected markets…Behavioural commitments (such as price caps and
quality commitments offered by PVR) would not effectively alleviate the
competition concerns in the relevant market for exhibition of films in
multiplex theatres…apart from the fact that behavioural commitments would be
difficult to formulate, implement and monitor and run the risk of creating
market distortions. This is in line with international best practices wherein
structural remedies as they directly address the cause of competitive
harm arising from the elimination of a vigorous competitor and have durable
impact by way of creating an effective competitor to the combined entity,
are preferred to behavioural remedies for horizontal combinations.”
It further noted:
“In
case of divestiture, there would be no need for ongoing oversight or
intervention. It is also noted that international best practices suggest that in
the absence of a suitable remedy, such as when divestiture is not possible,
in a case where a structural remedy is required to address AAEC, the
only alternative may be to direct that the proposed combination shall not take
effect”
case of divestiture, there would be no need for ongoing oversight or
intervention. It is also noted that international best practices suggest that in
the absence of a suitable remedy, such as when divestiture is not possible,
in a case where a structural remedy is required to address AAEC, the
only alternative may be to direct that the proposed combination shall not take
effect”
The CCI appears to be of the view that in a highly
concentrated market where post-transaction the market share of the parties is very
high (for e.g., more than 75% as was the situation in this case), then the
behavioural remedy may not be the solution and the only option left is
divestment or structural remedy. And, in a situation where divestment is not possible,
then the only alternative the CCI has is to block the combination transaction.
concentrated market where post-transaction the market share of the parties is very
high (for e.g., more than 75% as was the situation in this case), then the
behavioural remedy may not be the solution and the only option left is
divestment or structural remedy. And, in a situation where divestment is not possible,
then the only alternative the CCI has is to block the combination transaction.
Keeping out divestiture
process under the Competition Act
process under the Competition Act
In this instant case, in its proposal for modification
under Section 31(3) of the Competition Act, the CCI suggested for divestment of
assets in relevant market of South Delhi and provided for aspects for
appointment of MA, divestiture agency etc.
under Section 31(3) of the Competition Act, the CCI suggested for divestment of
assets in relevant market of South Delhi and provided for aspects for
appointment of MA, divestiture agency etc.
Regulation 27 of the Combination Regulations mandates the
CCI to appoint a monitoring agency (MA) in case the CCI orders for
certain structural remedies. This is in contrast to the practice followed in
some of the major jurisdictions such as EU and US, where the parties to
combination transaction appoint the MA.
CCI to appoint a monitoring agency (MA) in case the CCI orders for
certain structural remedies. This is in contrast to the practice followed in
some of the major jurisdictions such as EU and US, where the parties to
combination transaction appoint the MA.
There are no guidelines/ stated parameters for selection/
appointment of MA, however, in practice the CCI appoints the MA on the basis of
RFP floated by it to a select consultancy firms and basis certain criteria such
as independence, conflict etc., it select the MA on the basis of two bid system
process (technical bid and financial bid). This process typically takes 2-3
weeks to complete and is often burdensome for parties to combination as it
involves payment to MA along with some legal costs.
appointment of MA, however, in practice the CCI appoints the MA on the basis of
RFP floated by it to a select consultancy firms and basis certain criteria such
as independence, conflict etc., it select the MA on the basis of two bid system
process (technical bid and financial bid). This process typically takes 2-3
weeks to complete and is often burdensome for parties to combination as it
involves payment to MA along with some legal costs.
PVR seems to have taken a pragmatic approach based on
the learning of the past cases (i.e., divestiture in the matter of Sun Pharma Industries Limited/ Ranbaxy Laboratories
Limited (C-2014/05/170) and Holcim
Limited/ Lafarge SA (C-2014/07/190), which involved appointment of MA, were
mired with legal proceedings before the courts and took a lot of time for
consummation / closing of the transaction) by requesting the CCI that it
prefers the mechanism of amending the respective transaction documents to
exclude certain theatres of DLF over acquiring the theatres and thereafter
divesting (as proposed by the CCI). This request was accepted by the CCI.
the learning of the past cases (i.e., divestiture in the matter of Sun Pharma Industries Limited/ Ranbaxy Laboratories
Limited (C-2014/05/170) and Holcim
Limited/ Lafarge SA (C-2014/07/190), which involved appointment of MA, were
mired with legal proceedings before the courts and took a lot of time for
consummation / closing of the transaction) by requesting the CCI that it
prefers the mechanism of amending the respective transaction documents to
exclude certain theatres of DLF over acquiring the theatres and thereafter
divesting (as proposed by the CCI). This request was accepted by the CCI.
Based
on the above request, among other things, the CCI has sought for undertaking
from (a) PVR to amend its agreement with DLF in relation to acquisition of
theatre screens, and (b) DLF to provide effective competition to PVR in the
relevant market in South Delhi by continuing the operations itself or
transferring/ selling the assets to the effective and viable competitor,
independent of PVR.
on the above request, among other things, the CCI has sought for undertaking
from (a) PVR to amend its agreement with DLF in relation to acquisition of
theatre screens, and (b) DLF to provide effective competition to PVR in the
relevant market in South Delhi by continuing the operations itself or
transferring/ selling the assets to the effective and viable competitor,
independent of PVR.
Epilogue
PVR and DLF had to re-work on the terms of the
original deal which perhaps was not envisaged by them when they had signed the
term-sheet for the transaction. In my humble opinion, PVR should have
challenged the proposal of modification or the refusal of the CCI to accept the
terms of hybrid proposal, proposed by it as the competition assessment issues
such as threat of substitutes, threat of new entrants, industry rivalry,
bargaining power of distributors and buyers was not extensively discussed
(these issues were also mentioned in the minority order), which should have
clarified some of the concepts under the Indian competition law jurisprudence.
However, I understand that the main motive of the parties (after ten months of
deliberations with the CCI) in the best interest of business was to close the
transaction and move ahead with the integration process rather than prolonging
the legal battle.
original deal which perhaps was not envisaged by them when they had signed the
term-sheet for the transaction. In my humble opinion, PVR should have
challenged the proposal of modification or the refusal of the CCI to accept the
terms of hybrid proposal, proposed by it as the competition assessment issues
such as threat of substitutes, threat of new entrants, industry rivalry,
bargaining power of distributors and buyers was not extensively discussed
(these issues were also mentioned in the minority order), which should have
clarified some of the concepts under the Indian competition law jurisprudence.
However, I understand that the main motive of the parties (after ten months of
deliberations with the CCI) in the best interest of business was to close the
transaction and move ahead with the integration process rather than prolonging
the legal battle.
– Tarun Mathur
