Competition Law Policy in the Banking Sector by Hemant K Batra

Antitrust laws or more commonly known as competition laws, are laws which prohibit anti-competitive behavior and unfair business practices. These laws declare as illegal certain practices deemed to hurt businesses or consumers or both or those practices which generally violate standards of ethical behavior including monopolization of the market. Government agencies known as competition regulators regulate antitrust laws, and may also be responsible for regulating related laws dealing with consumer protection.

The term "antitrust" find its origin in the U.S. laws dealing with anti-competition regime, which was originally formulated to combat "business trusts", now more commonly known as 'cartels'. Other countries like India use the term "competition law". Many countries around the world nowadays have formulated one or the other form of antitrust or competition laws to combat such acts which are deemed as unfair or unethical in commerce.

For foreign investors the existence of a competition policy indicates some commitment by the government to ensure a level playing field among domestic and foreign investors, and adds transparency to the commercial environment. Relaxing foreign participation requirements can generally be expected to contribute to increased competition in the host economy. Competition policy is therefore complementary to other policies, and liberalization and privatization policies cannot be expected to automatically contribute to economic growth if competition policy and its related institutional infrastructure are lacking.

The rapid consolidation of players in the Indian banking industry especially with regard to mergers and acquisitions post the financial reforms of 1991 has made it not only pertinent but also imperative to scrutinize and dissect the reasonableness or viability of anti-trust law policies in the context of today's liberal scenario.


Diverse economic and strategic factors have caused banking institutions to merge over the past several years. These factors include:

Greater efficiency. Banks often are able to operate more cost effectively by increasing their size, as the costs of many functions are not directly proportional to the scale of operations. As a result, mergers are one way to keep costs and prices down.
Accessing technology. Banks and their customers have become increasingly accustomed to the advantages of new and expensive technologies. Mergers are often necessary to allow banks to introduce and maintain the technologies, which are in demand by spreading costs over a large number of customers.
Diversification. One effective method of controlling risks inherent in bank lending is to diversify operations across different geographic regions and different types of customers. Mergers can help diversify such risks.
Broader array of products. Mergers may give banking institutions an opportunity to offer a broader array of services as a merger of two banks with different expertise can result in a combination, which offers more variety to customers.
India, not to be left behind, has been witness to this growing trend of combinations starting with the acquisition of AZB Grindlays bank (Middle East & South Asia operations) by the Standard Chartered Bank in the year 2000 followed by the acquisition of the Indian operations of the Sumitomo Mitsui Banking Corporation in 2004 and the Bank of Bahrain and Kuwait in 2006.[2]

Competition policy aims at enhancing consumers' freedom of choice and firms' freedom to trade and to access markets. For example, trade barriers, barriers to foreign direct investment, and licensing requirements can influence the extent of competitive pressures in markets and so can be appropriate concerns of competition policy. In India, the preamble of the new competition law refers to the objectives of preventing practices having adverse effects on competition, promoting and sustaining competition in markets, protecting the interests of consumers, and ensuring freedom of trade carried on by other participants in markets in the country[3]

To regulate the policies of various concerns regarding competition, the Government of India set up a committee in the year 1999 to suggest reforms in the existing Monopolies & Restrictive Trade Practices (MRTP) Act, 1969 which focussed more on curbing monopolies as opposed to fostering competition; and pursuant to the committees recommendations the Competition Act, 2002 got to be formulated and enacted on the 13th of January 2003. However all the provisions of this statute have not yet been notified and the MRTP Act, 1969 continues to be in operation and consequently even the MRTP commission has not been dissolved.

The preamble to the Competition Act 2002 envisages the changing approach towards competition policy in India. It reads as follows:

"An Act to provide, keeping in view the economic development of the country, for the establishment of a commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interest of consumers and to ensure freedom of trade, carried on by other participants in markets, in India, and for matters connected therewith or incidental thereto."[4]

Accordingly, the new Act seeks to prevent anti-competitive agreement by prohibiting abuse of dominance and regulating combinations through a process of enquiry.

Dominance refers to a position of strength, which enables a dominant firm to operate independently of competitive forces or to affect its competitors or consumers or the market in its favour. Abuse of dominant position impedes fair competition between firms, exploits consumers and makes it difficult for the other players to compete with the dominant undertaking on merit. Abuse of dominant position includes imposing unfair conditions or price, predatory pricing, limiting production/market, creating barriers to entry and applying dissimilar conditions to similar transactions.

On the other hand, Combination includes acquisition of shares, acquisition of control by the enterprise over another and amalgamation between or amongst enterprises. The Commission can scrutinize combinations, which exceed the threshold limits specified in the Act in terms of assets or turnover, which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India. In case of combination the threshold limits are-



1. For acquisition ?



? Combined assets of the firms more than Rs 1000 crores or turnover more than Rs 3000 crores (these limits are US$ 500 millions and 1500 millions in case one of the firms is situated outside India).



? The limits are more than Rs 4000 crores or Rs 12000 crores and US$ 2 billion and 6 billions in case acquirer is a group in India or outside India respectively.





2. For merger/amalgamation ?



? Assets of the merged/amalgamated entity is more than Rs 1000 crores or turnover is more than Rs 3000 crores (these limits are US$ 500 millions and 1500 millions in case one of the firms is situated outside India).



? The limits are more than Rs 4000 crores or Rs 12000 crores and US$ 2 billion and 6 billions in case merged/amalgamated entity belongs to a group in India or outside India respectively.[5]



Further as recent developments suggest, banks will have to gear up to meet stringent prudential capital adequacy norms under Basel-II norms as they compete with banks with greater financial strength.

In the past, regulators to protect the interest of depositors of weak banks initiated mergers. But it is now expected that market led mergers may gain momentum in the coming years. The smaller banks with firm financials as well as the large ones with weak income statements would be the obvious targets for the larger and better run banks. The pressures on capital structure in particular are expected to trigger a phase of consolidation in the banking industry and the pace would be swifter than can be presently imagined.

The Indian Banks' Association in its vision 2010 report[6] has envisaged a lot of changes in the focus of the banking industry. De-regulation of interest rates and moving away from issuing operational prescriptions have been important changes and signifies that the focus has clearly shifted from micro monitoring to macro management. Supervisory role is also shifting more towards off-site surveillance rather than on-site inspections. The focus of inspection is also shifting from transaction-based exercises to risk-based supervision. However, the report also states that in such a totally de-regulated and globalised banking scenario, a strong regulatory framework would be needed and therefore measures have to be taken to ensure good corporate governance, adoption of best practices in areas like risk management, credit-policy etc.

Although some deliberations regarding the implementation of the Competition Act 2002 still persists in the context of the Indian banking sector in particular, a competition law policy with regulatory mechanisms would be appropriate as the local banking sector is still gearing up to meet the challenges posed by bigger players from the developed countries. However alongwith regulatory mechanisms it is also important to inculcate the use of better technological innovations as well as adequate risk management policies so as to be able to compete with and ultimately benefit the final recipient of all forms of banking services-the consumer.

© Hemant K Batra

[2] http://www.profitera.com

[3] www.asiandevbank.org/Documents/EDRC/Policy_Briefs/PB039.pdf

[4] Gazette of India, 14th January, 2003

[5] http://www.competition-commission-india.nic.in/

[6] http://www.iba.org.in/ibavisn.doc

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