QUESTION
Kanzra Kysco, a company incorporated and listed in South Korea, is inter-alia engaged in the business of manufacturing and sale of steel products, automotive parts and fuel cell systems. Kanzra Kysco present in India through its subsidiaries, i.e. Kanzra Kysco India Private Limited.
Kanzra Kysco India Private Limited a company incorporated in India, is engaged in the business of supply/distribution of processed steel sheets to automobile original equipment manufacturers (OEMs), or their vendors. Kanzra Steel, a company incorporated and listed in South Korea, is an integrated iron and steel mining company inter-alia engaged in manufacture and sale of various steel products such as steel bars, steel beams, hot and cold rolled steel and plates.
Kanzra Steel's presence in India is largely limited to the supply of certain raw materials to Kanzra Kysco India Private Limited. Kanzra Kysco and Kanzra Steel contemplates a merger.
The proposed combination under Section 5 of the Competition Act, 2002 relates to the merger of Kanzra Kysco into Kanzra Steel as a result of which Kanzra Kysco would cease to exist and Kanzra Steel will be the surviving company. Both Kanzra Kysco and
Kanzra Steel belong to the Kanzra Automobiles Group of South Korea.
Based on the above fact, answer the following:
(a) As Company Secretary of Kanzra Kysco India Private Limited, advise the Chairman of your Company, who is seeking your advice, regarding threshold of combination as prescribed under Competition Act, 2002.
(b) Merger notice under Section 6(2) of the Competition Act, 2002 has been received by Competition Commission of India. Assuming yourself as the Chairman of Competition Commission of India, state the factors that need to be considered while determining the above combination whether such merger is likely or not likely to have an appreciable adverse effect on competition in India?
LET'S CONSIDER APPLICABLE PROVISIONS
SECTION 5 IN THE COMPETITION ACT, 2002
Combination.- The acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises, if-
(a) any acquisition where-
(i) the parties to the acquisition, being the acquirer and the enterprise, whose control, shares, voting rights or assets have been acquired or are being acquired jointly have,-
(A) either, in India, the assets of the value of more than rupees one thousand crore or turnover more than rupees three thousand crore; or
(B) in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars or turnover of more than fifteen hundred million US dollars; or
(ii) the group, to which the enterprise whose control, shares, assets or voting rights have been acquired or are being acquired, would belong after the acquisition, jointly have or would jointly have,-
(A) either in India, the assets of the value of more than rupees four thousand crore or turnover of more than rupees twelve thousand crore; or
(B) in India or outside India, in aggregate, the assets of the value of more than two billion US dollars or turnover of more than six billion US dollars; or
(b) acquiring of control by a person over an enterprise when such person has already direct or indirect control over another enterprise engaged in production, distribution or trading of a similar or identical or substitutable goods or provision of a similar or identical or substitutable service, if-
(i) the enterprise over which control has been acquired along with the enterprise over which the acquirer already has direct or indirect control jointly have,-
(A) either in India, the assets of the value of more than rupees one thousand crore or turnover of more than rupees three thousand crore; or
(B) in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars or turnover more than fifteen hundred million US dollars; or
(ii) the group, to which enterprise whose control has been acquired, or is being acquired would belong after the acquisition, jointly have or would jointly have,-
(A) either in India, the assets of the value of more than rupees four thousand crore or turnover of more than rupees twelve thousand crore; or
(B) in India or outside India, in aggregate, the assets of the value of more than two billion US dollars or turnover of more than six billion US dollars; or
(c) any merger or amalgamation in which-
(i) the enterprise remaining after merger or the enterprise created as a result of the amalgamation, as the case may be, have,-
(A) either in India, the assets of the value of more than rupees one thousand crore or turnover of more than rupees three thousand crore; or
(B) in India or outside India, in aggregate, the assets of the value of more than five hundred million US dollars or turnover of more than fifteen hundred million US dollars; or
(ii) the group, to which the enterprise remaining after the merger or the enterprise created as a result of the amalgamation, would belong after the merger or the amalgamation, as the case may be, have or would have,-
(A) either in India, the assets of the value of more than rupees four thousand crore or turnover of more than rupees twelve thousand crore; or
(B) in India or outside India, the assets of the value of more than two billion US dollars or turnover of more than six billion US dollars.
Explanation.- For the purposes of this section,-
(a) "control" includes controlling the affairs or management by-
(i) one or more enterprises, either jointly or singly, over another enterprise or group;
(ii) one or more groups, either jointly or singly, over another group or enterprise;
(b) "group" means two or more enterprises which, directly or indirectly, are in a position to-
(i) exercise twenty-six per cent. or more of the voting rights in the other enterprise; or
(ii) appoint more than fifty per cent. of the members of the board of directors in the other enterprise; or
(iii) control the management or affairs of the other enterprise;
(c) the value of assets shall be determined by taking the book value of the assets as shown, in the audited books of account of the enterprise, in the financial year immediately preceding the financial year in which the date of proposed merger falls, as reduced by any depreciation, and the value of assets shall include the brand value, value of goodwill, or value of copyright, patent, permitted use, collective mark, registered proprietor, registered trade mark, registered user, homonymous geographical indication, geographical indications, design or layout-design or similar other commercial rights, if any, referred to in sub-section (5) of section 3.
SECTION 6(2) IN THE COMPETITION ACT, 2002
(2) Subject to the provisions contained in sub-section (1), any person or enterprise, who or which proposes to enter into a combination, may, at his or its option, give notice to the Commission, in the form as may be specified, and the fee which may be determined, by regulations, disclosing the details of the proposed combination, within seven days of-
(a) approval of the proposal relating to merger or amalgamation, referred to in clause (c) of section 5, by the board of directors of the enterprises concerned with such merger or amalgamation, as the case may be;
(b) execution of any agreement or other document for acquisition referred to in clause (a) of section 5 or acquiring of control referred to in clause (b) of that section.
SECTION 6(5) IN THE COMPETITION ACT, 2002
The public financial institution, foreign institutional investor, bank or venture capital fund, referred to in sub-section (4), shall, within seven days from the date of the acquisition, file, in the form as may be specified by regulations, with the Commission the details of the acquisition including the details of control, the circumstances for exercise of such control and the consequences of default arising out of such loan agreement or investment agreement, as the case may be.
Explanation.- For the purposes of this section, the expression-
(a) "foreign institutional investor" has the same meaning as assigned to it in clause (a) of the Explanation to section 115AD of the Income-tax Act, 1961 (43 of 1961);
(b) "venture capital fund" has the same meaning as assigned to it in clause (b) of the Explanation to clause (23FB) of section 10 of the Income-tax Act, 1961 (43 of 1961).
ANSWER
(a) The thresholds for the combined assets/turnover of the parties to a combination prescribed under the Competition Act, 2002 are as follows:
At Enterprise level: The value of combined assets of the combining enterprises exceeds INR 2,000 crores or the combined turnover of the combining enterprise exceeds INR 6,000 crores, in India.
In case either or both of the combining enterprises have assets / turnover outside India also, then the combined assets of the combining enterprises value exceeds US$ 1000 million, including at least INR 1000 crores in India, or combined turnover exceeds US$ 3000 million, including at least INR 3000 crores in India.
At Group level: The group to which the combining enterprise whose control, shares, assets or voting rights are being acquired, would belong after the acquisition, or the group to which the combining enterprise remaining after the merger or amalgamation, would belong has either assets of value of more than INR 8000 crores in India or turnover more than INR 24000 crores in India. Where the group has presence in India as well as outside India then the group has assets more than US$ 4 billion including at least INR 1000 crores in India or turnover more than US$ 12 billion including at least INR 3000 crores in India.
The term 'Group' has been explained in the Act. Two enterprises belong to a "Group" if one is in position to exercise at least 26 per cent voting rights or appoint at least 50 per cent of the directors or controls the management or affairs in the other.
(b) The Competition Act, 2002 envisages appreciable adverse effect on competition in the relevant market in India as the criterion for regulation of combinations. In order to evaluate appreciable adverse effect on competition, the Act empowers the Commission to evaluate the effect of Combination on the basis of factors mentioned in Section 20(4) of the Competition Act, 2002.
Factors to be considered by the Competition Commission of India while evaluating appreciable adverse effect of Combinations on competition in the relevant market, are as under:
(a) Actual and potential level of competition through imports in the market;
(b) Extent of barriers to entry into the market;
(c) Level of concentration in the market;
(d) Degree of countervailing power in the market;
(e) Likelihood that the combination would result in the parties to the combination being able to significantly and sustainably increase prices or profit margins;
(f) Extent of effective competition likely to sustain in a market;
(g) Extent to which substitutes are available or are likely to be available in the market;
(h) Market share, in the relevant market, of the persons or enterprise in a combination, individually and as a combination;
(i) Likelihood that the combination would result in the removal of a vigorous and effective competitor or competitors in the market;
(j) Nature and extent of vertical integration in the market;
(k) Possibility of a failing business;
(l) Nature and extent of innovation;
(m) Relative advantage, by way of the contribution to the economic development, by any combination having or likely to have appreciable adverse effect on competition;
(n) Whether the benefits of the combination outweigh the adverse impact of the combination, if any
SECTION 20(4) IN THE COMPETITION ACT, 2002
For the purposes of determining whether a combination would have the effect of or is likely to have an appreciable adverse effect on competition in the relevant market, the Commission shall have due regard to all or any of the following factors, namely:-
(a) actual and potential level of competition through imports in the market;
(b) extent of barriers to entry into the market;
(c) level of combination in the market;
(d) degree of countervailing power in the market;
(e) likelihood that the combination would result in the parties to the combination being able to significantly and sustainably increase prices or profit margins;
(f) extent of effective competition likely to sustain in a market;
(g) extent to which substitutes are available or are likely to be available in the market;
(h) market share, in the relevant market, of the persons or enterprise in a combination, individually and as a combination;
(i) likelihood that the combination would result in the removal of a vigorous and effective competitor or competitors in the market;
(j) nature and extent of vertical integration in the market;
(k) possibility of a failing business;
(l) nature and extent of innovation;
(m) relative advantage, by way of the contribution to the economic development, by any combination having or likely to have appreciable adverse effect on competition;
(n) whether the benefits of the combination outweigh the adverse impact of the combination, if any.
CONCLUSION
The Preamble of Competition Act, 2002 provides that "An Act to provide, keeping in view of the economic development of the country, for the establishment of a Commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets, in India, and for matters connected therewith or incidental thereto. The Act, requires certain combinations to be reported to the commission. The threshold limit will be calculated on the basis of their asset value /turnover. This is necessary to protect , improve competition and economic development of our country.
DISCLAIMER: The case law presented here is only for sharing knowledge and information with readers. The views are personal. In case of necessity do consult with professionals for better understanding and clarity on subject matter.
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