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February 14, 2008

Will the new Competition Act slowdown M&As?

Businessworld has a cover story on the issue.
What India Inc. seems to agree on is that the most retrograde aspect of the law is its view on mergers and acquisitions (M&As). Except for some notable exceptions, such as Rajiv Kumar, chief executive officer of the Indian Council for Research on International Economic Relations (ICRIER), and Subir Gokarn, chief economist with Standard & Poor Asia Pacific, most CEOs say the Act would deter M&A activity.

Under the law, which was drafted by the Ministry of Corporate Affairs, all M&As in India with a combined turnover of Rs 3,000 crore, or assets in excess of Rs 1,000 crore, will have to be mandatorily reported to the CCI, which will then decide whether to clear them. More significantly, there is also a separate threshold for group turnover (Rs 12,000 crore) and assets (Rs 4,000 crore) specified by the Act.

...The biggest flaw in the Act is that it regulates M&As solely on the basis of the asset size and revenue of the parties involved, not the size of the deal, says Sunil Mittal, chairman and managing director of Bharti Airtel and President of CII. Mohandas Pai, director, human resources at Infosys Technologies Ltd, agrees, “A revenue threshold does not make any sense. The transaction size too should be looked at.” Executives also point to the US’s Hart-Scott-Rodino Act, which uses a two-step test to judge mergers — the size of the transaction and the size of the companies making the deal. This also serves as a filtering device by excluding small transactions from the regulator’s review.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.