[Suyash Bhamore is a 3rd Year B.A. LL.B. (Hons.) student, NLIU Bhopal]
Background and Context
Economics, more specifically, tools of economic analysis have always been accorded paramount importance when conducting competition analysis. The Herfindahl-Hirschman Index (HHI) is one such econometric tool, which is widely accepted by various competition regulators as a measure of market concentration, with India being one of them.
HHI is used to gauge market concentration in an industry. Computing HHI is a fairly easy task. One simply needs to take out the sum of the squares of market shares of all the entities operating in the relevant market. This will result in a number ranging between (close to) zero, indicating the presence of a large number of firms with each having approximately 0% market share denoting perfect competition, and 10,000 signaling existence of a sole firm capturing complete 100% of the market i.e. a monopoly.
| HHI = S12 + S22 + …‥ + Sn2 where ‘n’ is the number of firms present in the market |
The Competition Commission of India (CCI) typically weighs the market shares along with the market concentration level in evaluating proposed mergers. The aim of such an evaluation is to ascertain if sanctioning the proposed merger would result in an appreciable adverse effect on competition (AAEC) or not. This is where HHI proves its utility. HHI finds a mention in Form II (the Form) under Schedule II of the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations). The Form prescribes the information to be provided for by the parties for gaining CCI’s approval. Clause 11.6 of the Form instructs the parties to determine and showcase the change in concentration levels in the market that the proposed combination, if given a go-ahead, would actuate. The Form even pronounces the trust that CCI reposes in HHI as a measure of market concentration, by overtly directing the parties to provide an estimate HHI in the Form.
Jurisdictional Practice in India
This section analyzes CCI’s jurisdictional practice and takes stock of its checkered outlook in employing HHI while appraising mergers and acquisitions.
Assessing the merger between Grasim Industries Limited and Aditya Birla Chemicals (India) Limited (Grasim Industries Case), the CCI implicitly banked on the HHI thresholds demarcated by US Department of Justice (US DOJ) in the Horizontal Merger Guidelines. In another order, the CCI categorizes the market for, firstly, fungicides for grapes, and secondly, MAH grafted polyethylene as moderately concentrated on the basis of findings of HHI. In the merger between Airtel and Telenor India, the CCI ascertained a 243-point HHI increase in the retail mobile telephony services, with Gujarat being the relevant geographic market as significant. However, the CCI in the preceding orders never adduces any framework or a schema as its guiding lodestar for navigating through HHI valuations. Further, in a scheme of arrangement notice filed by Aircel Limited, the CCI declared an increase in HHI of 300 in a moderately concentrated market (1800 HHI) not significant enough to cause AAEC, without elucidating upon from where it arrives at such a conclusion.
In the Grasim Industries case, the CCI held post combination HHI and consequent increase in HHI beyond the levels of ‘regulatory tolerance’, but it failed to expand upon what regulatory tolerance standard it is referring to. The point made being is: what guiding principles does the CCI refer to in demarcating markets as moderately concentrated, highly concentrated or whatever the case may be? The CCI being the primary forum of resolving anti-trust issues in India cannot take decisions by leaning on conjectures. This brings into focus the important question of whether the conclusions arrived at by relying on HHI should be attributed to the regulator’s wisdom or a pure exercise of discretion.
Table 1: The motley trends of HHI application in India
| S.no. | Parties | HHI | Demarcation |
| 1. | Airtel, Tata Teleservices Limited and Tata Teleservices (Maharashtra) Limited | Greater than 2000 (for the relevant market) | Highly concentrated |
| 2. | Dow Chemical Company, E. I. du Pont de Nemours and Company, DowDuPont Inc., Diamond Merger Sub Inc., and Orion Merger Sub Inc. | 2070-2075 (for the relevant market) | Moderately concentrated |
| 3. | Grasim Industries Limited and Aditya Birla Chemicals (India) Limited | Greater than 2300 and 2400 (for the relevant products respectively) | Moderately concentrated |
| 4. | Soda ash cartel (India) under the umbrella of Alkali Manufacturers Association of India | 2538.67 | Highly concentrated |
The foregoing discussion sheds light on the CCI’s polychromatic character when it comes to drawing inferences from HHI. Seemingly, the CCI has placed reliance on HHI on numerous instances, but it never came close to advocating a benchmark of thresholds to be adhered to for construing HHI. It is evident that the CCI had assumed to itself a lot of discretion in interpreting HHI on the pretext of taking hints from developed competition law jurisdictions, but never attempting to expatiate on the same.[1]
This changed in 2016 when the CCI in the acquisition of DLF Utilities Limited by PVR Limited (DLF Acquisition case), consciously laid down an outline of HHI thresholds to be administered in India. The order categorizes markets with a post-merger HHI of below 1000 as un-concentrated; between 1000 and 2000 as moderately concentrated; and above 2000 as highly concentrated. In conjunction with the absolute post-merger HHI, the magnitude of increment in HHI holds great utility as well. A HHI increment of more than 150 and 250 in moderately concentrated and highly concentrated market respectively raises a likelihood of AAEC.
The thresholds laid down in the DLF Acquisition Case concur with stipulations specified in European Commission Guidelines on the assessment of horizontal mergers. It appears the US DOJ has subscribed to a more lenient delineation, according to which a HHI of more than 2500 is required to result in a highly concentrated market, in contrast to a lower-rung 2000 followed in European Union and India. The aforesaid discussion evinces the CCI’s transformation from a body applying HHI haphazardly into a body having a coherent scheme of its in place.
Apprehensions Concerning HHI – Cause for Alarm?
Even though HHI is a highly trusted concentration index, it is not devoid of certain beleaguering issues, which are often cited by critics of HHI. Some flagrant apprehensions relating to the validity of HHI as a concentration index, pertinent to both India and regulators worldwide, have been presented below:
(i) The fundamental assumption underlying the idea of HHI, i.e. that the bigger the firm the more likely it is to engage in anticompetitive conduct, is inadmissible. Such an extrapolation is subject to challenge, as each dominant entity does not indulge in anti-competitive activities. Creation of dominant position is not questionable, only the abuse of such dominance is.
(ii) A database of precise market shares of even the smallest of firms is critical to arriving at a true and fair HHI. Gathering accurate data when it comes to minuscule firms is subject to errors and omissions, which obstructs meticulous calculation of HHI. Similarly, a minor fault in determining the market shares of eminent firms can also lead to a highly distorted HHI.
(iii) The numerical thresholds guiding application of HHI are unsubstantiated and bereft of an economic or mathematical sanction. There even lies uncertainty as to why the shares are always squared and not cubed when calculating HHI. This divests HHI of its authenticity as a tool of economic scrutiny.
(iv) HHI places sole reliance on numerical values in disregard of the qualitative aspects of markets. Important peripherals like entry barriers, operating costs, geographical dispersion of the undertakings and economies of scale are not accounted for, rendering HHI nugatory after a point in time.
Undermining the usefulness of HHI on the basis of few shortcomings, which are applicable to virtually every measurement index in existence, would be similar to throwing out the champagne with the cork. It needs to be realized that HHI is to be conceived only as the first filter regarding the character of the proposed combination and not be-all and end-all of the merger evaluation process. Such a line of thought has been advocated by the CCI in its still-afresh order on Ultratech’s acquisition of Jaiprakash Associates Limited and its subsidiary Jaypee Cement Corporation Limited. Therein, even after assessing a post-merger HHI of 5588 with a considerable increment of 400, CCI decided against finding dissemination of AAEC in the market. This came in light of, firstly, the underutilization of Baga Cement Plant’s capacity owing to lack of environmental clearances; and secondly, the countervailing increased economic efficiency in cement production. This is indicative of CCI’s progressive outlook in defining the contours of HHI by aligning HHI with other relevant elements and not solely relying on HHI.
Regardless of the infirmities experienced by HHI, it is a convenient index, often hailed as the successor to the four-firm concentration ratio and an ideal measure of market power. There is a greater need to supplement HHI with qualitative data, like information on the entry barriers existing in the market, to reinforce HHI’s position as a dependable tool of competition analysis.
– Suyash Bhamore
[1] Suo-Moto Case No.01 of 2012 In Re: Manufacturers of Asbestos Cement Products. Available at https://www.cci.gov.in/sites/default/files/012012suomoto_0.pdf