[The following guest post is contributed by Tarun Mathur, who is a Manager at Ernst & Young, LLP (Mumbai) and has earlier worked with the Competition Commission of India in its Combination Division. Views are personal]
In an order (Notice given by PVR Limited (PVR) (C-2015/07/288)) dated May 4, 2016 the Competition Commission of India (CCI), by majority, conditionally approved the proposed combination between PVR and DLF Utilities Limited (DLF) under the provisions of the Competition Act, 2002 (Competition Act) and the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations) (CCI Order). The proposed combination was in relation to acquisition by PVR of DLF’s film exhibition business comprising of 39 screens in the respective relevant markets of Delhi, Gurgaon and Noida (described below).
In terms of the CCI Order, among other commitments,
- required to terminate its agreements in the relevant markets of Noida and Gurgaon and DLF (costing it around 22 screens);
- submit an certificate that, it will not expand organically or inorganically in Noida and Gurgaon (for next three years) and in South Delhi (for next five years); and
- submit a certificate that, for the next five years it will not acquire directly or indirectly any interest in the properties in which it is terminating the agreement
DLF was required to submit an undertaking that it will either continue to operate for a period of five years or sell/ lease or transfer some of the assets in the relevant market of South Delhi (of 7 theatre screens) to an effective and viable competitor of PVR
The competition assessment process took the CCI three hundred and two days (as against the maximum of two hundred and ten days prescribed under Section 6(2A) of the Competition Act) to approve the proposed combination. This post seeks to highlight some of the salient features of the CCI Order.
Determination of relevant market
The delineation or defining of relevant market (comprising of relevant product market and relevant geographic market) in a combination transaction is the backbone for any merger analysis. In the instant case, the CCI has taken the purposive and pragmatic interpretation of the term ‘relevant market’ (in line with its decisional practice in the matter of Carnival Cinemas/ Big Cinemas (C-2015/01/236) and has defined the relevant product market as market for exhibition of films in multiplex theatres (in Gurgaon, Noida and Chandigarh) and at some geographies such as South Delhi and North, West & Central Delhi it also includes high-end single screen theatres.
Assessment of appreciable adverse effect on competition (AAEC)
- Market concentration (determination by Herfindahl Hirschman Index (HHI)): HHI is calculated by summing the squares of the market shares of all the firms active in the market. Both the absolute level of the HHI and the change in HHI as a result of merger can provide an indication of whether a merger is likely to raise competition concerns.
It may so happen that the entire market share (because not all players market share is known) is not known. In that event, it would be appropriate to calculate delta of HHI (i.e., difference between HHI pre and post-merger). Delta is also calculated as 2ab, where ‘a’ and ‘b’ denotes the market share of the respective firms.
In the instant case, the CCI has for the first time come out with guidance as to the absolute HHI and delta HHI, which provides for a safe harbour to the parties to a combination for assessment under the Competition Act and Combination Regulations.
The CCI has categorically mentioned that:
“Keeping in view the thresholds used in the advanced jurisdictions, it is observed that the markets with post-merger HHI more than 2000 are considered as highly concentrated and markets with post-merger HHI between 1000 and 2000 as moderately concentrated, with the indication of concern of an adverse effect on competition in the market, if: (a) the post-merger HHI is above 2000 and increase in HHI is 150 or more; or (b) the post-merger HHI is between 1000 and 2000 and increase in HHI is 250 or more”.
- Efficiency: The parties (in relation to relevant market in Noida and South Delhi) stated that the proposed combination is expected to bring operational and organizational efficiency by pooling resources together and utilizing them optimally, reducing overheads etc.
However, the CCI observed:
“The efficiencies are not combination specific; and
No evidence has been provided as regards the efficiencies translating into lower prices or better quality foe customers on a lasting basis”.
It may be mentioned that, proving efficiencies in combination cases is often very difficult and competition authorities around the world including the CCI require a high evidentiary standard to prove such a case. Further, the quantification of combination specific efficiencies is also challenging and is perhaps one of the most speculative single element of combination review.
- Non-compete and Non-Solicitation Agreement: Like in several previous cases, the CCI was concerned about the period and geography of the non-compete clause entered ubti between PVR and DLF.
In the instant case, PVR amended the non-compete and non-solicitation agreement to reduce the terms from five years to three years and geographical extent from India to Delhi-NCR and Chandigarh.
Concept of ‘merger remedies’ explained
Under the competition law domain, there are two kinds of remedies for combination cases, namely, (a) structural remedies, and (b) behavioural remedies. Under the structural remedy, the competition authority orders or at times the parties to combination voluntarily submits to divest certain assets or undertakings and for cases involving behavioural remedy, the competition authority orders or the parties offers for certain commitments (such as altering the business plan, amending the agreements such as non-compete/ non-solicitation, price caps, quality commitments etc.) for a specific period of time for a specific defined relevant market.
The CCI has dealt with the concept of merger remedies in quite a few orders, now including ordering of divestiture in atleast two cases.
While explaining about merger remedies, in the context of the present case, the CCI mentioned:
“The purpose of remedies is to preserve to the extent possible the pre-combination level of competition by recreating as far as possible the competitive status quo in the affected markets…Behavioural commitments (such as price caps and quality commitments offered by PVR) would not effectively alleviate the competition concerns in the relevant market for exhibition of films in multiplex theatres…apart from the fact that behavioural commitments would be difficult to formulate, implement and monitor and run the risk of creating market distortions. This is in line with international best practices wherein structural remedies as they directly address the cause of competitive harm arising from the elimination of a vigorous competitor and have durable impact by way of creating an effective competitor to the combined entity, are preferred to behavioural remedies for horizontal combinations.”
It further noted:
“In case of divestiture, there would be no need for ongoing oversight or intervention. It is also noted that international best practices suggest that in the absence of a suitable remedy, such as when divestiture is not possible, in a case where a structural remedy is required to address AAEC, the only alternative may be to direct that the proposed combination shall not take effect”
The CCI appears to be of the view that in a highly concentrated market where post-transaction the market share of the parties is very high (for e.g., more than 75% as was the situation in this case), then the behavioural remedy may not be the solution and the only option left is divestment or structural remedy. And, in a situation where divestment is not possible, then the only alternative the CCI has is to block the combination transaction.
Keeping out divestiture process under the Competition Act
In this instant case, in its proposal for modification under Section 31(3) of the Competition Act, the CCI suggested for divestment of assets in relevant market of South Delhi and provided for aspects for appointment of MA, divestiture agency etc.
Regulation 27 of the Combination Regulations mandates the CCI to appoint a monitoring agency (MA) in case the CCI orders for certain structural remedies. This is in contrast to the practice followed in some of the major jurisdictions such as EU and US, where the parties to combination transaction appoint the MA.
There are no guidelines/ stated parameters for selection/ appointment of MA, however, in practice the CCI appoints the MA on the basis of RFP floated by it to a select consultancy firms and basis certain criteria such as independence, conflict etc., it select the MA on the basis of two bid system process (technical bid and financial bid). This process typically takes 2-3 weeks to complete and is often burdensome for parties to combination as it involves payment to MA along with some legal costs.
PVR seems to have taken a pragmatic approach based on the learning of the past cases (i.e., divestiture in the matter of Sun Pharma Industries Limited/ Ranbaxy Laboratories Limited (C-2014/05/170) and Holcim Limited/ Lafarge SA (C-2014/07/190), which involved appointment of MA, were mired with legal proceedings before the courts and took a lot of time for consummation / closing of the transaction) by requesting the CCI that it prefers the mechanism of amending the respective transaction documents to exclude certain theatres of DLF over acquiring the theatres and thereafter divesting (as proposed by the CCI). This request was accepted by the CCI.
Based on the above request, among other things, the CCI has sought for undertaking from (a) PVR to amend its agreement with DLF in relation to acquisition of theatre screens, and (b) DLF to provide effective competition to PVR in the relevant market in South Delhi by continuing the operations itself or transferring/ selling the assets to the effective and viable competitor, independent of PVR.
PVR and DLF had to re-work on the terms of the original deal which perhaps was not envisaged by them when they had signed the term-sheet for the transaction. In my humble opinion, PVR should have challenged the proposal of modification or the refusal of the CCI to accept the terms of hybrid proposal, proposed by it as the competition assessment issues such as threat of substitutes, threat of new entrants, industry rivalry, bargaining power of distributors and buyers was not extensively discussed (these issues were also mentioned in the minority order), which should have clarified some of the concepts under the Indian competition law jurisprudence. However, I understand that the main motive of the parties (after ten months of deliberations with the CCI) in the best interest of business was to close the transaction and move ahead with the integration process rather than prolonging the legal battle.
- Tarun Mathur