The authors would like to thank Tom Ross for helpful comments on an earlier draft. This paper is an expanded and amended version of an article that appeared in Economic Times, April 8, 2008.
Manish Agarwal (manish.agarwal@unisa. edu.au) is a PhD candidate at the University of South Australia; Aditya Bhattacharjea (aditya@econdse.org) is at the Delhi School of Economics.
COMMENTARYEconomic & Political Weekly EPW june 28, 200811In this article we focus on the modified domestic nexus test because this category can be subjected to an economic analysis. We begin by summarising the key points from the submissions made to the CCI on the draft regulations, followed by our analysis.In a refreshing change from the usual government practice of arbitrary notifi-cation, the CCI had put out the draft regu-lations for consultation on its web site.3 It received nine submissions: five from busi-nesses and their chambers; three from pro-fessionals and a comment from the United States Federal Trade Commission (FTC). These submissions have also been posted on the CCI’s web site, which suggests that the watchdog is adopting good governance tools in its working. Some of these submis-sions have even questioned the legal com-petence of the CCI to notify certain cate-gories of transactions as benign. It has been argued that the power to exempt under the Act resides with the central government and there is no enabling provision em-powering the CCI to identify ex ante cate-gories of transactions that are not likely to raise competition concerns. As economists we prefer to leave this issue to legal experts and focus our analysis on an issue which neither the CCI nor its critics seem to have recognised. The basic premise underlying the modified domestic nexus test remains unaddressed so far, i e, is it true that combi-nations where both merging parties do not have a certain minimum level of operations in India are not likely to raise competition concerns? Whereas the CCI thinks so, we identify two scenarios where this is not the case.Potential CompetitionOur first scenario involves foreclosure of potential competition. In simple words, a merger between two firms (say, A and T) producing similar products and operating hitherto in separate geographic markets can injure competition if it is designed to pre-empt either A’s entry into T’s market or T’s entry into A’s market and thereby eliminate future competition. This may be an issue when an overseas firm acquires a domestic firm (foreign direct investment inflows in the form ofM&A) or when a domestic firm acquires an overseas firm (outward foreign direct investment –FDI in the form ofM&A). The fact that the parties have no business in each other’s markets at the time of the merger, so that the merger leaves domestic market shares unaltered, results in a permissive attitude by competition agencies. But such an atti-tude may ignore the impact on potential competition which would have occurred if the merging parties had entered into each other’s market. According to a recent pa-per by García-Gallego et al (2006)the as-sessment of cross-border mergers based on the traditional pre-merger/post-merger analysis is flawed because it does not take account of the undesirable consequences of mergers between firms that are poten-tial competitors. The relevant benchmark should instead be a comparison of the post-merger situation with the scenario resulting from the entry of the potential competitor. García-Gallego et al (2006) use this benchmark to review several merger cases assessed by the European Commission (EC) during 1997-2002, in which merging parties operated in differ-ent geographic markets and were poten-tial entrants in each other’s markets. They conclude that many of these mergers were undertaken to prevent entry and future competition, a factor ignored by the EC.The role of potential competition is tak-en more seriously in the US, including at least one case of cross-border merger. In 1990, the USFTC took action in the acqui-sition of Connaught of Canada by Institut Merieux of France, although neither party maintained production facilities in the US. Merieux was the dominant supplier of ra-bies vaccines in theUS; Connaught was developing a rabies vaccine, and was thus a potential competitor. The FTC was con-cerned that Merieux’s dominance would remain unchallenged, and forced Merieux to lease Connaught’s rabies vaccine manu-facturing business and know-how to an-other firm [FTC 1990].4Canada’s Competition Act also allows its competition tribunal to take action when a firm acquires a potential competitor with-out affecting current competition but possibly reducing it below what it would have been “but for” the merger. In their recent study comparing the Indian and Canadian competition acts (written prior to the CCI regulations), Ghosh and Ross (2008) find no reason why India cannot do the same.We may add that at least three of the criteria for merger evaluation listed in section 20(4) of our Act are phrasedina manner that takes into account potential competition5 but the stricter domestic nexus test in the regulations means that the CCI will be turning a blind eye to them where cross-border mergers are concerned.We believe that cases involving poten-tial foreign competitors are quite possible in India. Foreign firms with no current business in India may enter the Indian market after the dismantling of trade or regulatory barriers following the consum-mation of the free trade and economic co-operation agreements, which India is ne-gotiating with various countries. Pre-em-ptive mergers with their Indian competi-tors can foreclose potential competition in India but would escape scrutiny because of the two-firm domestic nexus test in the regulations. Recall that acquisition was the preferred mode of entry by foreign firms after the commencement of economic re-forms – including the deletion of merger controls from the MRTP Act – in the 1990s [Basant 2000; Kumar 2000]. The likeli-hood of these concerns arising in India is also corroborated by a submission of the Indian government to a working group of the World Trade Organisation, arguing that FDI inflows in the form of M&A have, in general, been of poor quality in terms of their potential to augment domestic capital and enhance competition.6TheABA/IBA memoranda quote exten-sively from the recommended practices of the International Competition Network (ICN), a consultative forum of national competition agencies but ignore its recog-nition of potential competition. This issue was pointed out by the representatives of Denmark and Israel who highlighted the competition concerns that could arise from combinations involving a dominant domestic firm and its overseas potential competitor with little or no sales in a coun-try.7 Their suggestion resulted in the in-sertion of a comment in the ICN recom-mended practices on domestic nexus that recognises the issue of potential competi-tion, though in a half-hearted manner.8Maverick FirmsOur second scenario applies to situations in which both parties to a merger already have operations in India and is best illustrated 
http://www.ibanet. org/legalpractice/AntitrustWGIndia.cfm; for the ABA letter, http://www.abanet.org/antitrust/atcomments/2007/11-07/Comments-IndianCompetition. pdf. Both associations recently organised a conference in Delhi in collaboration with the Confederation of Indian Industry to mobilise opinion against the regulations.
3 www.competitioncommission.gov.in
4 Apart from the potential competition dimension, this case illustrates another important point. Many Indian critics of merger regulation perhaps fear a return of the MRTP regime under which merger proposals were approved or denied, usually on extraneous grounds. The Connaught case shows that a divestiture of factories or licensing of intellectual property can meet competition concerns while allowing the merger to proceed. Section 31(3) of India’s Competition Act allows the CCI to require modification of proposed combinations.
5 Viz, 20(4)(a): ‘actual and potential level of competition through imports in the market’; (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’ (emphases added).
6 Communication from India, Working Group on the Relationship between Trade and Investment, WT/ WGTI/W/105, June 26, 2001.
7 Eleanor M Fox, “A Report on the First Annual Conference of the International Competition Network”, available on ICN’s web site (http://www.internationalcompetitionnetwork.org/media/library/ conference_1st_naples_2002/icn_naples_report. pdf), pp 6-7.
8 International Competition Network, “Recommended Practices for Merger Notification Procedures” (http://www.internationalcompetitionnetwork. org/media/archive0611/mnprecpractices.pdf ). See Comment 4, p 2.
References
Basant, Rakesh (2000): ‘Corporate Response to Economic Reforms’, Economic & Political Weekly, Vol 35, No 10, pp 813-22
Bhattacharjea, A (2003): ‘India’s Competition Policy: An Assessment’, Economic & Political Weekly, Vol 38, No 34, pp 3561-74.
– (2006): ‘Amending India’s Competition Act’, Economic & Political Weekly, Vol 41, No 41, pp 4314-17.
Federal Trade Commission (1990): Annual Report, accessible at http://www.ftc.gov/os/annualreports/ ar1990.pdf.
García-Gallego A, N Georgantzís, M J Gil-Moltó and V Orts (2006): ‘Game-theoretic Aspects of International Mergers: Theory and Case Studies’, International Review of Law and Economics, Vol 26, pp 395-409.
Ghosh, Subhadip and Thomas Ross (2008): ‘India’s New Competition Law: A Canadian Perspective’, Canadian Competition Record, Vol 23, pp 23-40.
Kumar, Nagesh (2000): ‘Mergers and Acquisitions by MNEs’, Economic & Political Weekly, Vol 35, No 32, pp 2852-58.
Standing Committee on Finance (2006): ‘Competition (Amendment) Bill, 2006’ (available at http://164.100.24.207/committeereports/ Finance/44rep.pdf)
