Policy Watch: Ringing In Competition

The government unveils a draft law on corporate competition. Industry complains that it is a throwback to the controls era.

Big isn't always beautiful. Ask the US Federal Trade Commission (FTC), which hasn't yet cleared the merger of Time Warner and America Online, or GE's acquisition of Honeywell. The FTC isn't satisfied that these alliances will not distort the market.

This could well happen in India a year or so from now. The government has unveiled a concept bill on competition. It's supposed to be a new, improved version of the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969. Says member of the drafting committee S. Chakravarty: "The MRTP Act, despite eight amendments, is not adequate to deal with the challenges thrown up by liberalisation and globalisation.''

THE DRAFT COMPETITION BILL

THE GOOD
ť Government departments and undertakings are brought under its purview
ť Strict time limits set for investigations and passing of orders

THE BAD
ť Threshold limit of Rs 500 crore assets for pre-merger notifications way too low
ť Joint venture agreements also brought under its scope

THE UGLY
ť Mandatory pre-merger notifications will deprive firms of operational flexibility
ť Penalties, which include imprisonment in some cases, are far too stiff

The monopolies section of the MRTP Act was scrapped in the first flush of liberalisation in 1991. Companies no longer needed the MRTP Commission's (MRTPC) nod for mergers and acquisitions (M&As) or other alliances. Since then, there was no law to ensure that companies were not abusing their dominance in a particular market. The MRTP Act did have a section on restrictive trade practices but it left undefined terms like cartels, collusion and price fixing, bid rigging, and predatory pricing. Companies used these loopholes to their advantage.

In line with what the Competition Policy unveiled in May had recommended, the concept bill proposes:

Says Chakravarty: "It plugs the loopholes of the MRTP Act without its intrusive provisions."

Corporate India, however, dubs the proposed legislation interventionist. Senior Advisor, Confederation of Indian Industries (CII), T.K. Bhaumik says the bill has tried to address every possible development that may occur in a free market. "But in the process," he rues, "the flexibility companies need to respond to a competitive environment has been taken away."

Most of India Inc.'s misgivings relate to the provisions relating to pre-merger notification and CCI's power to initiate suo moto investigations. The pre-merger notification is seen as a regressive step, a revival of the monopolies section of the MRTP Act. Laments FICCI president G.P. Goenka: "This will only hamper companies' efforts to achieve economies of scale through M&As."

Allowing the CCI to initiate suo moto investigations brings back memories of what happened during the HLL-Tomco merger in 1993. Even though it did not require the permission of the MRTPC, the Commission challenged it, arguing that it would lead to a monopoly.

Drafters of the bill pooh-pooh these fears. While the MRTPC vetoed M&As purely on the basis of size, they argue, the CCI will assess the likely impact on the market. Asserts Pallavi Shroff, lawyer and member of the drafting committee: "We will only look at the market scenario and not at how the company is going to operate."

Actually, nearly 50 countries, including Germany, Canada, and the US, have mandatory pre-merger notification. And only nine-among them Britain, Australia, and France-have voluntary notification. Soothing apprehensions of interference, Shroff points out that nearly 90 per cent of all big mergers in Britain are voluntarily disclosed to the Competition Commission. "No one wants to run the risk of de-merger later," she argues. And in the US, adds Chakravarty, the FTC has ordered only three de-mergers-that of AT&T, Bell Labs, and now Microsoft.

Fortunately, the government is seriously considering making the notification voluntary. The provision for suo moto investigation will, however, stay. The misuse under the MRTPC, Shroff points out, happened because the investigative arm of the Commission was given these powers. This time, the power will be given only to the CCI and not its investigation wing. Asserts Shroff: "The CCI will be a responsible body, it will not misuse this provision."

But the compulsory nature of pre-notification is not industry's only complaint. It also finds the threshold limits way too low. CII Deputy Director K.C. Ravi points out that there are over 490 listed companies, which have an asset base of more than Rs 500 crore. Equally puzzling, to both the industry and the members of the committee that drafted the Competition Policy, is the inclusion of joint ventures in the list of corporate combinations. Asserts Bhaumik: "This amounts to micro-management of corporate affairs." Counters Shroff: "What's wrong with looking at joint ventures in terms of how they distort the market?"

Significantly, the concept bill leaves room for turf battles between the CCI and various regulatory authorities. If any matter these authorities are considering has a bearing on competition in that sector, they must refer it to the CCI and wait for its opinion before passing an order. What's left unsaid is whether the CCI's opinion will override the sectoral regulators' order. Incidentally, in both the US and the UK, sectoral regulators are completely independent of the respective competition monitors.

But the concept bill is not the end of the story. The government has invited suggestions which, hopefully, will be incorporated. As Vijaya Sampath, Partner in law firm Jyoti Sagar & Associates, says: "The concept bill may not be perfect, but it is a step towards framing a competition law, without which there can be complete chaos in the market place." Now all that's needed is to ensure it's not a step backwards into the pre-1991 era.