FINANCIAL INSTITUTIONS' Merger should not be exempt Under the New Competition Law

Nagendra Goel*

A n interesting area of debate
is the role, competition law and policy should have in the banking and finance sectors. In some countries there is very little, if any, competition at all– interest rates, fees, commissions and other matters may be directly determined by the State or State-owned banks. Complex regulatory rules are common, and competition law may not be applicable to the sector. However this is not inevitable, and there is a growing recognition that the benefits competition can bring ( e.g. lower prices, greater efficiency, a better allocation of resources, improved products) can apply to banking and finance, just as much as to other sectors.

The Government of India is considering, exempting the amalgamation and merger of financial institutions such as banks, insurance companies or pension funds out of the purview of Competition Commission of India, when ordered by the respective sectoral regulators, in public interest.

A high level committee of the Finance Ministry was to meet, to decide whether the Government could exempt financial institutions, from reporting their mergers to the Competition Commission.

The argument put forward by the banking fraternity is that in certain cases, decision about merger may have to be taken at ‘a breakneck speed in public interest' , and any uncertainty about the fate of merger or acquisition for up-to seven months, could have a serious and destabilizing impact on the business of the parties involved, as well as interests of the public.

The concern of the industry, that it may take too long to enable them to go through their mergers and acquisitions, with a time gap of 210 days to clear merger proposals by the Competition Commission, has been a thoughtful and valid issue raised by the industry. The Competition Commission has taken heed to the concerns of the industry, and has addressed this issue through the draft regulations, which has put in place a regime that provides that every merger will be cleared within 30 days. It further states that if it is not cleared within 30 days, it shall be deemed to be cleared.

However, the Commission has clarified that a small portion of mergers will need to be investigated in detail, and the 210 days time gap would apply to them. These mergers will have to be investigated thoroughly where there is likely to be ‘an appreciable adverse effect on competition' . It is worth noting here that there cannot be any arbitrary investigation by the Commission, as a show-cause notice to the merging parties stating ‘as to why the Commission feels this can have an adverse effect on competition' needs to be issued.

Also the concerns of the industry, that the threshold limit is low, and that a large number of deals are going to be reported to the Competition Commission of India, is incorrect and wrongly presented. The thresholds provided in the Act are amongst the highest thresholds in the world, and are double that of the thresholds in United Kingdom , and several multiples of the thresholds in America .

Though the Act states that the merged entity should have a domestic nexus with the Indian markets, the regulation has gone a step further, and states that the two merging parties must have a certain domestic nexus with the Indian markets, i.e. at least a minimum turnover or assets in India – about a turnover of Rs. 600 crore, which is a de-minimis provision and is a very reasonable provision.

One might argue that there should be no reporting of mergers of entities, which are already being regulated by their sectoral regulators, as it would lead to overlapping regulations and cumbersome compliances. A study of the competition law of countries across the world, as far as regulated sectors are concerned, shows that mergers whether the sector is regulated or not are investigated from the competition perspective, and it is the competition authority that assesses those mergers, and applies uniform rules and uniform norms across all sectors. Even in the advanced and highly competitive markets in countries like the US , or countries in the European Union, the mergers of entities go through the Competition Commission in spite of sectoral regulators.

What competition law usually addresses is the need to prevent or modify mergers between independent undertakings, which would substantially lessen competition in the market. The purpose of competition policy is to prevent firms, with market power from restricting output and raising prices, above the level that would prevail in a competitive market. It is obviously sensible to provide competition authorities, with the opportunity to review transactions that lead, or would lead, to a change in the market structure.

* The writer is a Supreme Court Advocate and also a qualified Chartered Accountant.