Constitutional challenge to Competition Act, a word of caution for the Private Equity Industry, possible solution for the Thomas Cook problem, explanation to the Tesco surprise and the upset created by COMPAT’s DLF order- CCI Chairman Ashok Chawla spoke to CNBC-TV18’s Payaswini Upadhyay on all this and more.
The Competition Act is facing a constitutional challenge arising out of the auto parts case. The petitioners have challenged the co-location of investigative and enforcement functions within the CCI and also that members not present in the hearings end up signing the final order.
Chawla: The larger issue which is coming out in some of these things is that whether the Competition Commission - as it is structured today by the act of parliament - whether it is purely a body of experts or is it also doing enforcement in regulation which therefore makes it a sort of quasi-judicial body and the challenges to those functions given to the Commission by a parliament. If the regulation of the market is to done by the Competition Commission, then it is obvious that in the process of regulation where there are violations of the regulations there will be penalties; we will visit those enterprises and those companies. Therefore they will have to be an element of deciding whether a violation has taken place or not and what is the, therefore the penalty on those, that is the larger issue.
On the other issue which you mentioned whether members signed the orders or not- let me very clearly say that the way the Act is structured, all the members, as many members are in existence at a point in time and the Act provides for a maximum of Chairperson plus six; that is total seven persons- they all have to sit together to hear a matter and decide it. All those who have heard a matter and continue to be in the employment of the Commission sign those orders - whether they sign the majority order or they are free to write their notes of dissent. However, it is not as if somebody hears a matter and then chooses neither to be a part of the majority nor the part of the dissent; that is not the case. I do not think that is correct.
Due process apart, industry is also perturbed by the precedence being set by the CCI in its recent orders. One such is what came out in Kotak’s filing for a 15 percent non-controlling interest in MCX Stock Exchange. Competition experts questioned the need for filing for such a transaction in the first place and then CCI’s unclear order made matters worse. The Competition Act exempts a transaction from filing requirements if it doesn’t meets filing thresholds, there is no acquisition of control and the transaction is purely an investment or is in the ordinary course of business. Expert say that Kotak’s existing investment in Ahmedabad Commodity Exchange could have prompted the filing as a precautionary measure. However, the CCI order doesn’t say if this in fact was the reason why the filing exemption didn’t apply.
Chawla: The strategic investment yes, the regulations say that if it is purely a strategic investment, it is not necessary to file. However, what if and you referred to yourself to that particular case, what if a person makes strategic investment in three or four companies in the same sector. Will that enterprise making that investment be allowed the liberty of not notifying the transaction and not seeking prior approval because that strategic investment, it may be below 25 percent but that strategic investment of 15-20-24 percent in three or four companies in the same line of business could materially alter the competitive landscape.
Upadhyay: So what would your message to the private equity industry be that every time they make a fresh investment in a sector where there are already invested should they come to the CCI for filing because some would say that the filing fees itself are very high?
Chawla: We have this window as you may be aware of pre-filing consultations which are now also held on substantive issues. So when in doubt, consult the Commission. Despite all this, there will be certain border line case and what I would say is and what I would suggest to the enterprises concerned is it is better to err on the side of caution than to have the Competition Commission visit you with some kind of penalty for gun jumping.
Gun Jumping - CCI’s order in Thomas Cook’s case gave a new meaning to that term. Earlier this year Thomas Cook’s Board approved Sterling Holidays’ acquisition via a multi stage process. One transaction related to Thomas Cook’s market acquisition of Sterlings shares. Thomas Cook disclosed this transaction when it filed with the CCI for a scheme of arrangement approval. The regulator concluded that this market purchase made by Thomas Cook before the filing is a violation of Sec 43A of the Competition Act.
The Section allows the regulator to impose penalties if parties fail to notify a transaction and this caused Thomas Cook Rs 1 crore.
Upadhyay: Could you help me understand what should be the industry’s expectation from now on because if it is a market purchase it is difficult for the parties to come to the CCI prior to that actual purchase to seek the permission because there is a certain amount of urgency attached to that transaction.
Chawla: Not before they make the market acquisition. I am not saying that they should come to us before they make the market acquisition. However, the point is if it is in some manner linked to the overall sort of transaction or the overall acquisition of shares in another enterprise and lets say - I am not aware of case that you are mentioning or the details we won’t go in to that- but let us say the Board says that ok, we will acquire these many shares now and then we will do this later etc - then it is obviously a linked transaction.
I get your point - there is an issue that if the market purchase requires a certain amount of urgency, then whether they need to come prior to that or they need to come immediately thereafter and notify it as part of an integrated transaction etc we will look at those cases. We have also looked at some of the other jurisdictions where they provide for certain treatment for market purchases.
Upadhyay: What could that treatment be?
Chawla: This is something which has just been raised. What we will do, what we would not do I cannot say today.
Another recent order that took industry by surprise was CCI’s Rs 3 crore penalty order against TESCO. On December 17th last year TESCO applied for Foreign Investment Promotion Board (FIPB) approval to acquire a 51 percent stake in Trent hyper market. It filed with the CCI on March 31st 2014 - ten days after it signed the Joint Venture (JV) and Share Purchase Agreement (SPA) with Trent. CCI concluded this to be a late filing by TESCO and held the filing should have been made within 30 days of the FIPB application.
Chawla: I won’t go into individual cases and some of these are in appeal etc but be that as it may - the philosophy is that you have to come to the Commission within a certain numbers of days of having decided what you are going to do. If you have decided it and gone let say in this case to another regulator and filed your papers, then obviously that becomes a trigger because it cannot be that the same material information of a proposed combination cannot be given to the Commission.
Upadhyay: There are two concerns on this front - when I am making an application to the FIPB or any statutory regulator, I maybe well within the thresholds or exemption thresholds that the Competition Act allows me; that is one. Secondly, at this stage I may not even know what my definitive agreements looks like. Will the CCI waste its time looking at the transactions at different stages?
Chawla: Incase there are changes, as could happen. I quite appreciate the point that as you go long after the filing there could be some changes in terms of the scope, in terms of the extent, in terms of the numbers. Well the regulations provide that the parties can come back and say look we have filed this issues with you, there is a proposed change or there is a certain modification which has taken place which doesn’t materially alter the overall architecture or whatever it does and even if it does these are the details. So, we take that on record and that process goes on. So, the essential principle is that the time gap between your deciding to do something and you are coming to the Commission should be within that period which is prescribed by law and which is considered reasonable.
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