Section 5 of India’s Competition Act, 2002 is a key part of the law that helps ensure businesses compete fairly in the Indian market. It focuses on regulating large business transactions, such as mergers, acquisitions, and amalgamations (when companies combine to form a new entity). These transactions, called "combinations," are reviewed to prevent them from harming competition, which could lead to higher prices, fewer choices for consumers, or unfair market control by a few companies. This section works hand-in-hand with Section 6, which requires businesses to notify the Competition Commission of India (CCI) about these transactions if they meet certain financial limits, allowing the CCI to review them before they take effect.
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Section 5 of Competition Act, 2002: Types of Combinations and Thresholds
Section 5 focuses on large business transactions that could lead to one company or group controlling too much of a market, which might reduce competition. These transactions are called "combinations" and include things like one company buying another, merging with another, or gaining control over another business. To decide which transactions need to be reviewed, the law sets specific financial limits based on the value of assets (like property, equipment, or intellectual property) or turnover (the revenue a company earns).
There are three main types of combinations under Section 5, each with its own financial limits to determine if it needs CCI approval. These limits apply both in India and globally to ensure that even international deals affecting India’s market are reviewed.
Acquiring Control, Shares, Voting Rights, or Assets
This category covers situations where one or more people or companies gain control over another company, buy its shares, acquire voting rights, or purchase its assets (like factories or intellectual property).
Financial Limits (Thresholds):
In India: The combined assets of the buyer (acquirer) and the company being bought (target) must be more than ₹1,000 crores (about $120 million), OR their combined turnover must be more than ₹3,000 crores (about $360 million).
Globally: The combined assets must be more than $500 million, with at least ₹500 crores (about $60 million) in India, OR the combined turnover must be more than $1,500 million, with at least ₹1,500 crores (about $180 million) in India.
If the company being acquired becomes part of a larger group (a collection of companies under common control), higher group-level limits apply:
In India: The group’s total assets must be more than ₹4,000 crores, OR its turnover must be more than ₹12,000 crores.
Globally: The group’s total assets must be more than $2 billion, with at least ₹500 crores in India, OR its turnover must be more than $6 billion, with at least ₹1,500 crores in India.
This ensures that big deals, especially those involving large corporate groups, are closely examined for their impact on competition.
Acquiring Control Over a Similar Business
This applies when someone who already controls a company in a specific industry (for example, producing or selling similar products or services) gains control over another company in the same industry. This is important because it could lead to one company dominating that industry.
Financial Limits (Thresholds): The same as above:
In India: Combined assets of more than ₹1,000 crores OR combined turnover of more than ₹3,000 crores.
Globally: Combined assets of more than $500 million (with at least ₹500 crores in India) OR combined turnover of more than $1,500 million (with at least ₹1,500 crores in India).
This rule helps prevent companies from consolidating too much power in a single industry, which could harm competition.
Mergers or Amalgamations
This category covers situations where two or more companies merge to form one company or combine to create a new entity (amalgamation).
Financial Limits (Thresholds):
In India: The new company must have assets worth more than ₹1,000 crores OR turnover of more than ₹3,000 crores.
Globally: The new company’s assets must be worth more than $500 million (with at least ₹500 crores in India) OR turnover of more than $1,500 million (with at least ₹1,500 crores in India).
If the new company becomes part of a larger group, the group-level limits apply:
In India: Group assets of more than ₹4,000 crores OR turnover of more than ₹12,000 crores.
Globally: Group assets of more than $2 billion (with at least ₹500 crores in India) OR turnover of more than $6 billion (with at least ₹1,500 crores in India).
These limits ensure that mergers creating large companies or groups are reviewed to avoid negative effects on competition.
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Key Terms and How Values Are Calculated
To apply Section 5 correctly, the law defines important terms and explains how to calculate the value of assets and turnover. These definitions ensure clarity and consistency when deciding if a transaction needs CCI review.
Control: This means having significant influence over a company’s decisions, such as its management, operations or business strategy. Control can come from owning shares, voting rights, or other means, and multiple companies or groups can have control over one business. This broad definition ensures that all forms of influence are considered.
Group: A group is a set of two or more companies where one can:
Hold 26% or more of the voting rights in another company,
Appoint more than half of the board of directors, or
Control the management or key decisions of the other company. This definition helps identify when a transaction involves a larger network of companies that together have significant market power.
Value of Assets: The value of a company’s assets is based on its audited financial statements from the previous year, minus depreciation. Assets include not just physical items like buildings or equipment but also intangible assets like brand value, goodwill, copyrights, patents, and other commercial rights. Including intangible assets ensures that the law accounts for modern businesses where things like brand reputation or intellectual property are major competitive factors.
Turnover: This is the revenue a company earns, based on its most recent audited financial statements. It excludes sales between companies in the same group, indirect taxes, trade discounts, and revenue earned outside India. This focuses the calculation on the company’s economic activity within India, which is what matters for competition in the Indian market.
De Minimis Exemption: A Break for Smaller Deals
Section 5 includes a "de minimis" exemption, which means smaller transactions don’t need CCI review, even if they involve acquisitions, mergers, or amalgamations. This exemption reduces unnecessary regulation for smaller businesses.
A transaction is exempt if the company being acquired, controlled, merged, or amalgamated has:
Assets in India worth less than ₹350 crores (about $42 million), OR
Turnover in India less than ₹1,000 crores (about $120 million).
This exemption, set by the Ministry of Corporate Affairs, ensures that only transactions with a significant impact on competition are reviewed, allowing smaller businesses to operate without excessive regulatory hurdles.
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Why Section 5 Matters: Implications and Context
Section 5 of the Competition Act, 2002 plays a critical role in maintaining fair competition in India by regulating large-scale business transactions that could harm the market. Here’s why it’s important and how it works in practice:
Protecting Competition: The financial limits and definitions in Section 5 help the CCI identify transactions that could lead to excessive market control, such as mergers creating monopolies or acquisitions that give one company too much power. By reviewing these deals, the CCI ensures consumers have access to fair prices, quality products and diverse choices.
Global Reach: The inclusion of global financial limits reflects India’s growing role in the world economy. It ensures that international transactions with a significant impact on India’s market are also reviewed, protecting the domestic market from foreign deals that could reduce competition.
Valuing Modern Assets: By including intangible assets like brand value and intellectual property in asset calculations, Section 5 recognizes that these are often key competitive factors in today’s economy, particularly in industries like technology and pharmaceuticals.
Balancing Regulation and Growth: The de minimis exemption for smaller deals prevents the CCI from overburdening small businesses with unnecessary reviews. This encourages innovation and growth among smaller companies while focusing regulatory efforts on transactions with major market implications.
In practice, the CCI uses Section 5 to review deals like large corporate mergers or acquisitions in industries such as telecommunications, pharmaceuticals or retail, ensuring they don’t harm competition. For example, a merger between two major telecom companies would likely trigger a review if their combined assets or turnover exceed the thresholds.
Summary
Section 5 of Competition Act, 2002 is designed to regulate large business transactions, acquisitions, mergers and amalgamations that could harm competition in India. By setting clear financial limits, defining key terms like "control" & "group" and providing exemptions for smaller deals, it balances the need for oversight with economic efficiency. This section ensures that the CCI can review significant transactions to protect consumers, maintain fair competition, and promote a healthy market environment in India.
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Section 5 of Competition Act, 2002: FAQs
Q1. What is a "combination" under Section 5 of the Competition Act, 2002?
A combination is a large business transaction, such as an acquisition, merger, or amalgamation, that meets specific financial limits and could affect competition in India. These transactions require CCI approval to ensure they don’t harm the market.
Q2. What types of transactions does Section 5 cover?
Section 5 covers three types of transactions:
Acquiring control, shares, voting rights, or assets of a company.
Gaining control over a company in the same industry by someone who already controls a similar business.
Mergers or amalgamations where companies combine to form a new entity.
Q3. What happens if a transaction doesn’t meet the financial limits?
If a transaction’s assets or turnover fall below the specified limits, it’s not considered a combination under Section 5 and doesn’t require CCI approval, unless other parts of the Act apply.
Q4. What is the "de minimis" exemption?
The de minimis exemption means that transactions involving companies with assets in India less than ₹350 crores or turnover less than ₹1,000 crores are not considered combinations and don’t need CCI review. This reduces regulatory burdens on smaller businesses.
