Competition & Good Biz

Every need got an ego to feed 
Every need got an ego to feed
 — Pimper’s Paradise/Bob Marley 

TIME was when dominant shareholders of large companies knew how to be economical with the truth. When faced with pesky reporters asking pointed questions about the next big M&A deal, they would look the journalist straight in the eye and lie unabashedly. Without blinking. These days they have a more sophisticated response — “The company does not wish to respond to market speculation,” or some such. On a more charitable note, they didn’t have a choice but prevaricate, since giving the news away could push up their cost of acquisition. Today, they also have to field some embarrassing questions from the securities market regulator.

They should get prepared for some more awkward questions, this time from a new regulator called the Competition Commission. According to recent reports, this newly minted commission is planning to draft rules that will require companies to inform the commission about its M&A plans. Failure to do so will invite penalties. But there is a crucial difference here: they can inform this new body after they’ve informed the stock exchange about their intentions. The commission will then take about a year to figure out whether the merger or acquisition is in the interest of competition in the system, as well as assess whether it compromises welfare of consumers.

Certain NGOs have been lobbying that companies should have to reveal their marriage intentions before the deed is done, as is mandatory in certain countries. That it’s the other way around is a big relief. Otherwise, it would have been an utter disaster. Here’s why. Some years ago, when private equity was still not a fashionable term, one of India’s oldest private equity players had major gripes about the FIPB rule. It required the private equity investor to seek FIPB clearance before investing in any company, listed or otherwise, since the fund was bringing in foreign investment. But the problem usually arose when the company was listed – if the PE wanted to invest in the company at Rs 100 per share, by the time the FIPB clearance would come, the price would jump to Rs 150. This would start a whole new round of negotiations and the transaction economics would have to be invariably reworked. The curious bit here was this: FIPB had wind of this investment deal even before the company’s shareholders. And, what’s even more curious, news of the impending deal would always leak out to the market.

The regulator’s hunger for price-sensitive information does not end here.

Another regulator was offended when a foreign player in its jurisdiction invested a large-ish chunk in a local player. Reason? The foreign player decided to inform the watchdog only after seeking the target’s board approval. In this case, the regulator’s ego was hurt since it was not informed of the transaction ex ante. Is it proper for a regulator to have prior knowledge of a price-sensitive information, before it is properly disclosed to all shareholders? This is a debate that pits the regulator’s ego against the private sector vulnerability.

The Competition Commission, however, might be justified in its role as a protector of competitive systems and consumer welfare. A long debate about how to avoid the pitfalls of the erstwhile Monopolies and Restrictive Trade Practices Act prefaced the founding of the commission. Also, about a year ago, Vinod Dhall (a member with the commission) wrote in a signed piece in this newspaper: “Experience shows that almost 90-95% of the mergers are not objected to by competition authorities. Only a small proportion of mergers face scrutiny and could be prohibited after due inquiry.” That should be of some respite to worried corporates. But a larger worry looms. Experience worldwide shows that most cases linger on for years.

Example: In 1984, Coca-Cola Bottling Company of the Southwest acquired the Dr Pepper and Canada Dry carbonated soft drink franchises for the San Antonio, Texas area, from the San Antonio Dr Pepper Bottling Company, a wholly-owned subsidiary of the parent Dr Pepper concentrate company. The Federal Trade Commission found the deal would impact competition in the soft drinks industry. The company duly challenged this in a court of law. It won the case and the commission finally dropped its proceedings against the company in 1996 – 12 years after the original deal! Sure this is an isolated case, but given the litigious nature of Indians, this pattern has a strong likelihood of repeating itself here. That will be unfortunate and has the potential to bog down the commission’s genuine intentions.

It leaves another large question unanswered: who is to monitor the uncompetitive and monopolistic ways of PSUs and government bureaucrats? Or, stop the administrative apparatus from misusing price-sensitive data?

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