“ Discussion on the subject led by Menaka Doshi of CNBC-TV18, with Legal & Corporate Law Experts – Sohail Nathani of ELP and Farhad Sorabjee of JSA, on “ The Firm ” t.v program..”
Deal street has been busy this month and just this week saw some big ticket consolidation in the multiplex business. PVR Cinemas will buy a 69.3% stake in Cinemax – a multiplex chain owned by the Kanakia Group.
The deal will give PVR market leadership – with 351 screens. Inox Fame – the number two player is far behind – with 256 screens. Big Cinemas with 254 comes in at number 3. But despite the PVR-Cinemax transaction leading to a market leadership position – it will fly under the radar of the Competition Act. In simple English, that means ‘PVR is not doing an pre-filing under merger control guidelines as the transaction does not meet the thresholds laid down by the Competition Act’.
So says the PVR CFO. Well PVR may not have to inform CCI but will CCI come calling nonetheless ? To answer that I am joined by Sohail Nathani of ELP and Farhad Sorabjee of JSA.
PVR + CINEMAX = DOMINANCE ?
PVR + Cinemax – 351 screens
Inox + Fame – 256 screens
Big Cinemas – 254 screens
Doshi: Sohail, I will start with you first. I get that this transaction does not meet any of the thresholds laid down and hence there is no pre-merger filing required under the merger guidelines, but do you think that since the transaction results in a market leadership position for PVR and one that has a considerable lead over the number two player, it may cause CCI to come knocking at the doors of this transaction ?
Nathani: Two issues in that question. First, there is a Statute, which prescribes the limit at which the CCI can come knocking at somebody’s door that is clear, it remains for two years. Two, even if you were to just go beyond that what would the CCI look at- the question here is how do you define the market, is it only multiplex, is it cinemas, is it broader. So the answer to my mind right now, they are flying below the radar based on Statute and they are perfectly within the framework of the law.
Doshi: Farhad, do you agree with that as well that there would be a little reason for CCI to ask or to take suo moto, if I may use that phrase, scrutiny of this transaction just because it results in a market leadership position ?
Sorabjee: Actually, at the moment I don’t think it has the power. Basically, the government deliberately has chosen extremely high thresholds. It has chosen to issue an exemption notification. You have to just look at the figures- if you are beneath those figures and you do not meet any of the thresholds, you do not need to make a filing, it is as simple as that and what they have done is absolutely follow the law. So, there is no filing required, no real issue arises. Now whether the CCI can go after them at this point? They haven’t done anything, which is contrary to the provisions of the Act. There is nothing that the CCI can really do at this moment or operate on a suo moto-basis on, it can, if it, post the acquisition finds that the merged entity or the acquired entity together with the two entities, basically indulges in practices, which may amount to an abuse of a huge market share; that’s a different issue.
Doshi: But just dominance in itself Farhad would not raise an alarm at CCI; though of course one may dispute that this transaction has resulted in any dominance, I know that the CFO of PVR, Nitin Sood took great effort in trying to explain to me that they did acquire or are acquiring a position of strength, but not one of dominance because he laid out that there are 10,000 screens in India of which multiplexes have between 1600-1800 screens of which PVR will have only 351. He also pointed out that as a result of this transaction they will acquire a market leadership position, but they will not acquire the majority of multiplex screens in any geographical area and he pointed out to me that the total size of the Indian box office is estimated at Rs 8,000 crore, whereas PVR and Cinemax combined will have about box office collections of upto Rs 800 crore- that’s a 10 percent or less of the market. So, he went to great effort to point out to me that this is not a dominant position. But even if it were a dominant position Farhad, you are saying the CCI would have very little to do with that, they would only be interested, concerned, or empowered to act if there was an abuse of dominance ?
Sorabjee: Let us be very clear here. The law is very simple. There is nothing wrong with being a dominant undertaking or a dominant entity. The problem arises when you actually abuse that dominant position. So, the question of whether or not they will abuse it in future or not that’s something which the CCI can always look at if the occasion arises. Another point is that you mentioned various figures regarding the market shares. Definition of the market can be very difficult, it can be broken down – Hindi films, geographically English films all sorts of things- there are many ways to look at dominance, so there is no per se level at which you can say this is a dominant player and we had a subjective rule in that for that; there is no objective parameter.
Doshi: So, it is difficult to define relevant market Sohail, plus the regulator would look out for abuse of dominance and not be perturbed by dominance in itself- tell me if this transaction had crossed the thresholds of size, then would there been any remedial measures suggested by the CCI because this transaction results in a market leadership position and one with a considerable lead over the number two player.
Nathani: Look at it from a regulation perspective. There are two aspects of the law – one is a combination control, which is the merger control and the other behavioral. What does the combination control seek to do ? Today what it does is it tries to predict in the future what your conduct will be post the acquisition. The other sections that Farhad spoke of, 3 or 4 are behavioral, so therefore there would have to be some behavior on which the Competition Commission should act. Now the answer to your question is should there be any remedial measure assuming they were to file, it all depends on how you were to define the market. In a particular metro, the combination has a disproportionately large number of screens. There could be an order for divestiture in that particular region and that’s something that has been done globally. I am aware of at least two acquisitions of multiplexes- one in Poland and one in UK -where the acquisitions were approved conditional upon certain areas not being acquired.
Doshi: So PVR says they don’t achieve any such dominant position that could cause for any such remedial measures. Nonetheless if hypothetically any such dominant position was to have occurred due to this transaction, that could have been remedied only if there was a filing. In this case there is no filing. So, now the regulator has to wait and watch to see if there is any behavioral issue for it to take any action under Section 3 or 4, I am correct to understand that Sohail ?
Nathani: Yes. That is correct because that’s the way the law is that below a particular threshold; you don’t need to file.
Doshi: PVR may run into no trouble with the CCI, but it is going to hit an anomaly of the Takeover Code i.e. after purchasing 69 percent, PVR -if it gets full subscription to the 26 percent mandatory open offer- will hit 95 percent ownership of Cinemax and hence breach the 75 percent promoter holding limit, which means it has 12 months thereafter to sell down to the 75 percent level and that cannot be much fun.