Competition Act, 2002 An Overview

February 2012 www.deloitte.com/in

Contents

Background Anti-Competitive Agreements Abuse of Dominant position Combination Overview of Combination Regulations Process ow of approval of a combination under the Cometition Act Conclusion

4 5 6 7 8 10 11

Competition Act, 2002 An Overview 3

Background

Government of India (GOI) had appointed a committee under the Chairmanship of Shri S.V.S. Raghavan in October, 1999 to examine The Monopolies and Restrictive Trade Practices Act, 1969 for shifting the focus of the law from curbing monopolies to promoting competition and to suggest a modern competition law. Competition Bill, 2001 was introduced in the Lok Sabha on 6 August, 2001 and was referred to Parliamentary Standing Committee for its recommendation. Pursuant to the recommendations of the committee, the Competition Act, 2002 [Competition Act] was enacted. GOI has issued notications from time to time to bring into force various provisions of the Competition Act as under: Section 3 Prohibition of anti-competitive agreements brought into force from 20 May 2009 Section 4 Prohibition of abuse of dominant position brought into force from 20 May 2009 Section 5 Combination brought into force from 1 June 2011

GOI had also brought into force other provisions of Competition Act i.e. sections 6 (relating to Regulations of Combination) and sections 20, 29, 30 and 31 (procedure relating to Combination) in force from 1 June 2011. GOI has also issued various regulations under the Competition Act from time to time one of the key being Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 [Combination Regulations] dealing with amalgamations, merger and acquisitions. The Combination Regulations came into force on 1 June 2011.

Anti-Competitive Agreements

Anti-competitive agreements per se are void. Enterprise / person or an association thereof is prohibited from entering into agreement for:  Production;  Supply;  Distribution;  Storage;  Acquisition of shares, voting rights or control over management / control over assets;  Control of goods or provision of services; which causes or is likely to cause an Appreciable Adverse Effect (AAE) on competition within India. Agreement includes any arrangement or understanding or action in concert whether or not formal or in writing or intended to be enforceable by legal proceedings. Factors relevant for determining whether an agreement has AAE on competition are  Accrual of benefits to consumers;  Foreclosure of competition by hindering entry into the market;  Improvement in production & distribution of goods or provisions of services;  Driving existing competitors out of the market;  Creation of barriers to new entrants in market; and  Promotion of technical, scientific and economic development by means of production or distribution of goods or provisions of services. Agreements / decisions [Horizontal agreements] including Cartel engaged in identical or similar trade of goods / services are presumed to have AAE on competition  Price - Directly or indirectly determining purchase or sale price;  Quantities - Limit / control production, supply, markets, technical development, investment or provision of services;

M  arket sharing - Sharing of market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way;  Bids Bid rigging or collusive tendering Vertical agreements could be considered, on facts, as having AAE on Competition:  Tie-in arrangement [Purchaser of goods X compulsorily required to purchase goods Y].  Exclusive supply agreement [Restricting the purchaser, in the course of its trade, from buying or dealing in any goods other than those of the Seller or any other person].  Exclusive distribution agreement [restriction on market, production etc. of goods].  Refusal to deal [refusal to sale or refusal to buy].  Resale price maintenance [Seller X to sell goods to buyer Y on condition that buyer Y to re-sale that goods at a price directed by X]. Exceptions to Anti-competitive agreements Joint venture agreement If agreement increases efciency in production, supply, distribution, storage, acquisition or control of goods or provision of services. Right of any person to restrain any infringement of / impose reasonable conditions for protecting any of his rights which have been or may be conferred upon him under Intellectual Property laws. Agreement for export of goods from India to the extent to which the agreement relates exclusively to the production, supply, distribution or control of goods or provision of services for such export.

Competition Act, 2002 An Overview 5

Abuse of Dominant position

No enterprise shall abuse its dominant position. Dominant position means a position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to  operate independently of competitive forces prevailing in the relevant market; or  affect its competitors or consumers or the relevant market in its favour. An enterprise is said to have abused dominant position if it  Directly or indirectly imposes unfair or discriminatory condition in purchase or sale of goods/ services or prices of goods/ services including predatory prices  Limits production, markets or technical or scientic development to the prejudice of the consumers  Indulges in practice resulting in denial of market access  Makes conclusion of contracts subject to acceptance by other party of supplementary obligations which have no connection with the subject of such contracts  Uses dominance in one relevant market to enter into or protect other market CCI (Determination of Cost of Production) Regulations, 2009 were notied on 20 August 2009 to determine the Cost average variable cost, as a proxy for marginal cost. In specic cases, CCI may, depending on the nature of the industry, market and technology used, consider other relevant cost like Avoidable Cost, Long Run Average Incremental Cost, Market Value. CCI shall also determine the relevant market (as dened) having regard to the relevant geographical market and relevant product market (as dened). CCI shall also consider factors like market share, size and resources, size and importance of competitors, economic power, vertical integration, dependence of consumer on enterprise, monopoly, entry barriers, market structure and size of market, social obligation and social cost etc. for determining dominant position of an enterprise.

Suo moto inquiry by CCI CCI may inquire into any anti-competitive agreements and abuse of dominant position on its own or receipt of a complaint from any person, consumer or their association or trade association or a reference made by the Central Government or a State Government or a statutory authority If CCI is of the opinion that there exists a prima-facie case, it shall direct Director General (DG) to cause an investigation. DG to submit report within specified time If CCI finds existence of anti-competitiveness or abuse of dominant position, it can pass orders to  Discontinue and not to re-enter such agreement or discontinue such abuse of dominant position  Impose penalty  <= 10% of the average of the turnover for the last 3 preceding financial years on each of such person or enterprises  In case of cartel for entering into agreement CCI may impose penalty on each producer / seller / distributor / trader / service provider higher of the following  3 times of profit made out of cartel; or  10% of average turnover for past 3 year of cartel  of the continuance of such agreement.  Award compensation  Direct suitable modification in the agreement  Recommend to the Central Government for the division of an enterprise enjoying dominant position  Pass such other order as it may deem fit.

Suo moto inquiry by CCI into anti-competitive agreements and abuse of dominant position

Combination

As per the Act, a Combination comprises of any of the following a  ny acquisition of control / shares / voting rights / assets of enterprises  acquiring of control by person over an enterprises, where such person already has direct / indirect control over another enterprise engaged in similar / competitive business  any merger or amalgamation between enterprises if it exceeds the monetary threshold of assets and or turnover as under: Person/ Enterprise Acquirer + Target ` In India Assets* > 15 billion Turnover > 45 billion Assets* USD > 750 mn Including at least ` 7.50 billion should be in India USD > 3 billion Including at least ` 7.50 billion should be in India USD / ` In or Outside India Turnover USD > 2.25 billion Including at least ` 22.50 billion should be in India USD > 9 billion Including at least ` 22.50 billion should be in India

^Group post acquisition

> 60 billion

> 180 billion

* Assets book value as per audited accounts and includes intangibles ^ Group means two or more enterprises, which directly or indirectly Exercise => 26% of voting rights in other enterprise Appoint > 50% of board members in other enterprise Control (#) the management or affairs of the other enterprise # Control include controlling the affairs or management, either singly or jointly: by one or more enterprises over another enterprise or group; or by one or more groups over another group or enterprise GOI has enhanced the monetary limit of assets and turnover under section 5 of the Act and the above table is after considering such enhancement. Exemptions from Section 5 of the Act: 1. An enterprise, whose control, shares, voting rights or assets are being acquired has assets of the value of not more than ` 2.50 billion or turnover of not more than ` 7.50 billion is exempted from the provisions of Section 5 of the Act for a period of 5 years from 4 March 2011. 2. A Group exercising less than 50% of voting rights in other enterprise is exempted from the provisions of Section 5 of the Act for a period of 5 years from 4 March 2011.

Competition Act, 2002 An Overview 7

Overview of Combination Regulations

A Combination cannot come into effect until a period of 210 days has passed from the day on which the notice was given to CCI or CCI has passed an order under Section 31 of the Act, whichever is earlier.
Section 6 of the Act inter alia provides that no person or enterprise shall enter into a Combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void. If any proposed Combination exceeds the threshold of assets and / or turnover specified in Section 5 of the Act (as aforesaid), the person / enterprise need to intimate the same to the CCI within 30 days of board approval / entering into of the agreement for Combination for approval. A Combination cannot come into effect until a period of 210 days has passed from the day on which the notice was given to CCI or CCI has passed an order under Section 31 of the Act, whichever is earlier. Above mentioned requirement of obtaining approval of CCI for the combination is not applicable to share subscription/ nancing facility or any acquisition by public financial institution, Foreign Institutional Investor, Venture Capital Fund, Bank pursuant to any covenant of a loan / investment agreement. Salient features of Combination Regulations Salient features of the Combinations Regulations are as under: 1. Exemption from filing intimation of Combination: Transactions that are ordinarily not likely to have an Appreciable Adverse Effect [AAE] on competition in India does not require ling of application with CCI as prescribed under the Act. Some of such transactions are as under:
8

Acquisition of shares or voting rights made, solely as an investment or in the ordinary course of business, such that the total shares or voting rights held by the acquirer directly or indirectly, does not exceed 15% of the total shares or voting rights of the company. Acquisition of shares or voting rights, where the acquirer, prior to acquisition, has 50% or more shares or voting rights in the target enterprise, except in the cases where the transaction results in transfer from joint control to sole control. Acquisition of assets, not directly related to the business activity of the party acquiring the asset or made solely as an investment or in the ordinary course of business and not leading to control of the target enterprise except where the assets being acquired represent substantial business operations in a particular location or for a particular product or service of the enterprise, of which assets are being acquired, irrespective of whether such assets are organized as a separate legal entity or not. Amended or renewed tender offer where a notice to CCI has been led by the party making the offer, prior to such amendment or renewal of the offer and that intimation of any change is duly made to CCI. Acquisition of stock-in-trade, raw materials, stores and spares in the ordinary course of business. Acquisition of shares or voting rights pursuant to a bonus issue or stock splits or consolidation of shares or subscription to rights issue to the extent of their entitled proportion, not leading to acquisition of control. Any acquisition of shares or voting rights by a person acting as underwriter or a registered stock broker on behalf of its clients.

 Acquisition of control or shares or voting rights or assets by one person or enterprise of another person or enterprise within the same group ; Acquisition of current assets in the ordinary course of business; Combination taking place entirely outside India with insignicant local nexus and effect on markets in India. 2. In cases of combinations which are not exempt from ling of notice, the parties to the combinations are required to le requisite information with CCI within 30 days of approval of the proposal by the Board of directors or execution of any agreement in the prescribed format with prescribed fees. 3. Failure in filing of notice: If parties to a combination fail to file notice of combination, CCI may on its own inquire whether the combination has any AAE. If CCI commence an inquiry, it shall apart from imposing any penalty or initiating any prosecution, direct the parties to le notice in the prescribed time and prescribed form along with requisite fees. 4. CCI shall form a prima facie opinion on the notice led within thirty days, as to whether the transaction can cause any AAE or not in India market.

5. Publication of details of Combination: If CCI is prima facie of the opinion that the combination has / is likely to cause AAE on competition within the relevant market in India, the direction of CCI shall be conveyed to the parties for taking prescribed actions. 6. Modication of proposed Combination: If CCI is of the opinion that the combination has / is likely to cause AAE on competition but such AAE can be eliminated by suitable modification to such combination, CCI may propose appropriate modication to the parties. If Parties accept the modification proposed by CCI, it shall carry out the modications to such combinations in accordance with directions issued by CCI. If parties fail to accept the modification, the combination is deemed to have AAE and shall be dealt with as per the Competition Act. 7. Co-operation with regulatory authorities: CCI may seek opinion of any other regulatory body / authority in relation to a combination.

Competition Act, 2002 An Overview 9

Process flow of approval of a combination under the Cometition Act

M&A Deal Analysis as Combination sec 5 of the Act Not Applicable Applicable Whether Exemption available Yes No

Proceed with Deal Closure

File notice with CCI

Short Form

To call for more details

Long Form

Approval of CCI Yes

No

Deal Reject*

No

Approval of CCI Yes

*  Grounds for rejection - If combination causes AAE or modifications to Combination sought by CCI are not carried out, etc.

Under section 31 of the Act, broadly if the CCI opines that the combination Does not or is not likely to have an appreciable adverse effect on competition, it would order approval of the combination. Is or is likely to have an appreciable adverse effect on competition, it would order that the combination shall not take effect. Is or is likely to have an appreciable adverse effect on competition but such an adverse effect can be eliminated by suitable modication of such combination, the CCI may suggest appropriate modication to the combination for approval by the parties. CCI, in such case would pass appropriate order based on response received from the parties to the Combination.

10

Conclusion

The provisions of Competition Act could have implications on the way business is carried out. The provisions relating to anti-competitive agreements and abuse of dominant position are for protection of consumer interest and enhancing competition in the market place. Similarly, the provisions relating to Combinations are to ensure that a Combination does not create an appreciable adverse effect on competition. It would be a necessity to understand applicability and implications of these provisions to ones business as the cost of non-compliance could be too steep and detrimental.

Competition Act, 2002 An Overview 11

Contacts

Mumbai 264-265, Vaswani Chambers, Dr. Annie Besant Road, Worli, Mumbai 400 030. Tel: + 91 (022) 6619 8600 Fax: + 91 (022) 6619 8401 Delhi/Gurgaon Building 10, Tower B, 7th Floor, DLF Cyber City, Gurgaon 122 002 Tel : +91 (0124) 679 2000 Fax : + 91 (0124) 679 2012 Bangalore Deloitte Centre, Anchorage II, 100/2, Richmond Road, Bangalore 560 025. Tel: +91 (080) 6627 6000 Fax: +91 (080) 6627 6409 Ahmedabad Heritage 3rd Floor, Near Gujarat Vidyapith, Off Ashram Road, Ahmedabad 380 014 Tel: + 91 (079) 2758 2542 Fax: + 91 (079) 2758 2551

Chennai No.52, Venkatanarayana Road, 7th Floor, ASV N Ramana Tower, T-Nagar, Chennai 600 017. Tel: +91 (044) 6688 5000 Fax: +91 (044) 6688 5019 Kolkata Bengal Intelligent Park Building, Alpha, 1st floor, Plot No A2, M2 & N2, Block EP & GP Sector V, Salt Lake Electronics Complex, Kolkata - 700 091. Tel : + 91 (033) 6612 1000 Fax : + 91 (033) 6612 1001 Vadodara Chandralok, 31, Nutan Bharat Society, Alkapuri, Vadodara 390 007 Tel: + 91 (0265) 233 3776 Fax: +91 (0265) 233 9729 Hyderabad 1-8-384 & 385, 3rd Floor, Gowra Grand S.P.Road, Begumpet, Secunderabad 500 003. Tel: +91 (040) 4031 2600 Fax:+91 (040) 4031 2714

Coimbatore "Shanmugha Manram" 41, Race Course, Coimbatore Tamil Nadu - 641018 Tel: + 91 (0422) 439 2801 Fax: +91 (0422) 221 8615 Pune 706, ICC Trade Tower, B Wing, 7th Floor, Senapati Bapat Road, Pune 411016. Tel : +91 (020) 6624 4600 Fax : + 91 (020) 6624 4605

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member rms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. This material and the information contained herein prepared by Deloitte Touche Tohmatsu India Private Limited (DTTIPL) is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subject(s). None of DTTIPL, Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the Deloitte Network) is, by means of this material, rendering professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal nances or business, you should consult a qualied professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this material. 2012 Deloitte Touche Tohmatsu India Private Limited. Member of Deloitte Touche Tohmatsu Limited