Fear of dominance and creation of oligopolies strong in this segment
The acquisition of stressed steel assets by their healthier peers under insolvency auction could land companies under the lens of the Competition Commission of India (CCI), experts have said.
Sources said that the government has not yet given a clear signal whether troubled companies being auctioned under the provisions of Insolvency and Bankruptcy Code (IBC) would get complete CCI waiver. This would mean that if CCI finds that a certain acquisition has significantly altered market dynamics leading to development of monopolies or oligopolies or development of dominant player with potential for market cartelisation, it could suggest alterations in the way acquired companies are structured, post auction or put a price cap on the products where the acquirer gets a dominant position.
“CCI clearance could be an impediment for resolution of stressed assets as the buyers would like to get a clear picture about the liabilities post an acquisition. We are hopeful CCI exemptions allowed under the Board for Industrial and Financial Reconstruction and Sick Industrial Companies (Special Provisions) Act is also extended to IBC cases,” said an official familiar with the subject.
In the absence of a waiver, all cases of mergers and acquisitions (M&A) under insolvency provisions would be taken to CCI for approval by both the acquirer and the Committee of Creditors (CoC) approving a deal.
Based on its assessment, sources said, CCI could either suggest behavioural or structural remedy. The formal would address the issue of market dominance by putting price caps on products where there are chances of cartelisation.
In case of the latter, CCI could ask CoC to reconstruct a deal in such a way that the element resulting in market dominance is kept out. “While there are fears that insolvency auctions could face a setback from CCI clearance, the fact is that the information is already available to all the acquirers who could structure their resolution plan in a way that does not attract CCI restrictions,” said an industry expert involved in the auction process, asking not to be named.
The fear of market dominance and creation of oligopolies is stronger in the steel sector where two companies — JSW Steel and Tata Steel — have emerged successful bidders for big ticket stressed steel entities such as Bhushan Steel, Bhushan Steel and Power, Electrosteel and Monnet Ispat.
If all these companies are taken over by the two, JSW could end up increasing is steel production capacity from the present 18 million tonnes (mt) to about 28.6 mt after taking control of Monnet (1.5 mr), Bhushan Steel (5.6 mr) and Bhushan Power (3.5 mt). Tata Steel’s domestic capacity would go up from present 13 mt to 15.5 mt post acquisition of Electrosteel.
Together, these two companies would have a steel capacity of about 44 mt. This would imply that only two players, resulting in price cartelisation and market do?minance, would control mo?re than 50 per cent of the market. While consolidation aids the steel sector in terms of pricing power, it may potentially trigger issues of unfair competition, experts said. That could attract the attention of the CCI.
The bid for some of the steel companies, including Essar Steel, has come and a final call on it would be taken soon. Already issues of related party is coming up in the case of some acquisitions such as that of JSW taking over Monnet Ispat. These could delay the pro?cess. Legal experts are of the view that regulatory challenges, including approval from CCI, may weigh heavy on the outcome of insolvency resolution processes in some sectors unless there are further changes in the law.