JVs and competition law: Uncertain times ahead

By Pallavi Shroff and Harman Singh Sandhu, Amarchand & Mangaldas & Suresh A Shroff & Co
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The Competition Act, 2002, aims to promote competition and to prevent practices that adversely affect competition. The Competition Commission of India (CCI) is the statutory body created to enforce the act.

Pallavi Shroff Partner Amarchand & Mangaldas & Suresh A Shroff & Co
Pallavi Shroff
Partner
Amarchand &
Mangaldas &
Suresh A Shroff & Co

Sections 3 and 4 of the act, which came into force on 20 May 2009, aim to prohibit anti-competitive agreements and abuse of dominance respectively. Sections 5 and 6 (analogous to “merger control” laws in other jurisdictions) have not yet come into effect. When they do, they will regulate combinations (mergers and acquisitions of enterprises which meet the specified thresholds).

The substantive test under the act is whether an agreement or practice or conduct causes, or is likely to cause, an appreciable adverse effect on competition in India. Joint ventures (JVs), though not specifically defined under the act, may be examined under section 3 as horizontal arrangements, or under section 6 as combinations, and so raise issues for corporates that want to proceed with one.

Horizontal agreements

Horizontal agreements are struck between enterprises that trade in similar or identical goods or provide competing services. Horizontal agreements which fix prices, divide markets, restrict output or manipulate bids tend to deprive consumers of choice. So, under the act, they are presumed to have an appreciable adverse effect on competition. Thus, if the parent partners of a joint venture operate in the same or similar field, section 3(3) may become applicable and the CCI can investigate the anti-competitive effects of the joint venture.

Combinations

JVs are established by acquiring shares, voting rights or control of either an existing Indian company or a new Indian company. A JV formed by buying into an existing Indian company would, provided it meets the thresholds under the act, qualify as a combination. Hence, such a JV must be cleared by the CCI before it can go ahead.

Issues

One issue relating to JVs is the lack of classification of the different types of JVs. So, every JV which qualifies as a combination must be scrutinized by the CCI, irrespective of its impact on the market.

This is in contrast to the position in other key jurisdictions. In the European Union (EU) JVs are classified as either “full function joint ventures” or “non-full function joint ventures”. The former are created as long lasting, independent entities in a particular market, with the possibility they could change the market structure permanently. The latter are formed with the intention that only a particular function (e.g. R&D) is to be performed by them and they do not exist independently in the market. So there is no lasting structural change in the market because of them.

Full function joint ventures are analysed under European merger control laws and must be notified to the European Commission. In contrast, non-full function joint ventures are examined only under laws relating to anti-competitive agreements, and do not need to be notified to the European Commission.

Harman Singh Sandhu Senior associate Amarchand & Mangaldas & Suresh A Shroff & Co
Harman Singh Sandhu
Senior associate
Amarchand &
Mangaldas &
Suresh A Shroff & Co

A similar classification of JVs in India would help differentiate their impact on competition and clarify their expected treatment under the act. This would not only enable parties to assess the impact of the act on their JV, but also reduce the CCI’s administrative burden.

A second issue is the ambiguous definition of “enterprise”. Are sections 5 and 6 of the act applicable to a joint venture formed by incorporating a new company? There is some uncertainty about this, as the term “enterprise” is defined under the act as: “a person … who or which is, or has been, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services …”.

As a newly incorporated company cannot be described as one that “is, or has been, engaged in any activity” it is arguably not an enterprise. Hence it appears that a joint venture established by the incorporation of a new company may not qualify as a combination.

Third, there is the issue of simultaneous application of sections 3 and 6? The act provides no clarity as to whether approval of a JV notified to the CCI under section 6 would effectively shield it from inquiry under section 3. Consequently, JV partners cannot be certain that their investment or collaboration is risk free from adverse action by the CCI or penalties under the act.

Clarity is vital

The assessment of JVs is significant for meaningful implementation of the act. As Indian businesses look to expand by entering into value-enhancing partnerships and collaborations, greater clarity from the government and the CCI regarding treatment of JVs under the act is vital.

Pallavi Shroff is a partner and Harman Singh Sandhu is a senior associate-designate at Amarchand & Mangaldas & Suresh A Shroff Co. Nandita Govind, a senior associate at the firm, assisted with this article. The views expressed are those of the authors and do not reflect the official policy or position of Amarchand Mangaldas.

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