INTRODUCTION
The COVID-19 pandemic presented numerous challenges to various industries in the world. Among those significantly impacted by the pandemic and ensuing lockdown measures was India’s entertainment and cinema exhibition sector. With the potential consumers being home-bodied and proportionately giving rise to a shift in the medium of consumption of content to Over-the-top (OTT) platforms. From an economic viewpoint, a basic differentiation of profit in theatrical versus OTT releases suggested that the former yields higher revenue owing to a physical presence catapulting the food and beverages subsect of such industries generating substantial profitability. However, the accessibility and convenience provided by OTT platforms could pose a threat to the theatrical exhibition industry as consumer behaviour is visibly tossing between convenience and experience. The final stage of taking such a decision lies on the cost-effectiveness options offered by either of the industries leading the consumers’ psychology to believe that a pocket-friendly option is directly proportionate to the industry showcasing care towards their investment of time in their choice of respective mode of recreation.
To recover from pandemic-induced losses, address challenges posed by the rise of OTT platforms, and revive the profitability of the business by enhancing financial stability and creating value for all stakeholders, two major Indian multiplex operators of India, INOX and PVR, issued a joint statement on 27 March 2022, declaring their merger. This strategic move aims to streamline operations, optimize costs, leverage combined resources, and capitalize on economies of scale to generate synergies in costs and revenues for mutual benefit.
RISE OF THE MERGING ENTITIES
INOX, a prominent player in the Indian multiplex industry, in a pivotal move during 2007 and 2008 absorbed Calcutta Cine Private Limited and Prime Skyline Developers Private Limited into its fold through mergers, augmenting its market presence. Subsequently, in the fiscal years 2014-2015, INOX solidified its standing by acquiring 100% equity shares of Satyam Cineplexes Limited (“SCL”), thereby integrating SCL as a wholly owned subsidiary.
On the other hand, PVR, renowned for its commitment to showcasing movies of exceptional quality, holds the distinction of pioneering the multiplex cinema concept in India whilst activities revolving around cinema coupled with offerings in food and beverages, movie distribution and related allied services. Furthermore, PVR ventured into collaboration with Gyan Enterprises Private Limited to establish food courts, facilitated through a vehicle, Lite Bite Foods Pvt. Ltd., bolstering its offerings to the overall cinema-going experience for patrons. Moreover, in 2008, as part of its diversification strategy, PVR partnered with Major Cineplex Group to establish PVR bluo Entertainment Limited, a subsidiary geared towards the establishment and operation of karaoke, bowling etc., across India. This move broadened PVR’s spectrum of leisure offerings, catering to a diverse audience. Therefore, PVR has consistently expanded its footprint across the country to augment its reach and influence amongst its audience.
Hence, the subsequent merger of the two giants, in February 2023, is bound to have an edge over the other players in the market, particularly because of the swarm of screens across the country amounting to 1,550 screens owned by PVR and INOX, together as on date.
SCRUTINY UNDER COMPETITION LAW: PATH TO DOMINANCE
Upon scrutiny through the lens of competition in the market, the multiplex exhibition sector will witness a notable consolidation, leaving only a handful of players like Carnival, Cinepolis, and Miraj holding around 700 screens combined in contrast to the resultant entity, PVR INOX PICTURES. In the contemporary market landscape, the prevalence of duopolies, wherein two dominant firms hold substantial control over an industry, is a recurrent phenomenon. Consequently, such dominance creates a divided investment landscape, where investors are drawn to the pre-conceived stability of established incumbents while carefully examining emerging competitors for their potential to disrupt the market to create a space for their existence.
In Consumer Unity & Trust Society Vs. PVR Ltd. case., the informant applied to the Competition Commission of India (CCI) to investigate the merging entities under Section 19(1) (a), based on an apprehension that such merger would cause the new entity to become dominant as per Section 4 of the Act which would lead to an Appreciable Adverse Effect on Competition (AAEC) causing a substantial detriment to the relevant market due to its enormity in the Indian Exhibition Industry.
The Commission reiterated the decision of Vikas Verma v. Adani Ports and Special Economic Zone Ltd. CCI order, under Section 26(2) of the Act stating that “it was immaterial to notify CCI of the transaction as the alleged entity did not meet the required threshold under the law”. Further, CCI also observed that “the mere presence of dominance, devoid of any abusive conduct as outlined in Section 4 of the Act, cannot serve as grounds for initiating an investigation’. Similarly, in Satyen Narendra Bajaj v PayU Payments Pvt. Ltd., the Commission observed that:
“While the Act prohibits enterprises from abusing a dominant position, merely holding a dominant position does not, in itself, constitute anticompetitive behaviour under the Act. For intervention to be warranted, a prima facie case of abuse must be established through clear evidence, going beyond the mere existence or potential attainment of market dominance.”
Therefore, in the present merger CCI observed that, for Section 3(1) to get activated, an agreement between more than one party is to exist, which should be of the nature resulting in an AAEC or a likelihood therefrom. “A case of investigation is barred from being initiated merely on an apprehension that such agreement may give rise to abuse of dominant position in the future”. Section 3 of the Act entails assessing the probability of AAEC resulting from conduct specified within an agreement, rather than evaluating the likelihood of the conduct itself. Subsequently, if any instance of abusive behaviour under the Act’s provisions is brought to the attention of the CCI, it will be duly examined according to the stipulations of the Act. “The Tribunal further observed that while market dominance itself does not amount to anticompetitive behaviour, any abusive conduct arising from such dominance may warrant investigation if reported to the Commission.”
Under Section 7 of the Competition Act, 2002, a combination fulfilling such criteria under Section 5 of the Act, requires it to give notice to the CCI, disclosing the details of the proposed combination. In principle, mergers of this scale undergo scrutiny by the CCI, which assesses the likelihood of any significant adverse impact on competition within the relevant sector. “If the deal had not occurred during the pandemic, it is likely that the CCI would have approved the merger with specific conditions or modifications, similar to previous cases like PVR’s acquisition of DT Cinemas.”. However, in this case, PVR and INOX were not required to notify the CCI of their merger because their respective revenues fell below the threshold outlined in the notification issued by the Ministry of Corporate Affairs (MCA). Further, the MCA, vide its notification dated 16 March 2022, has extended the De Minimis Exemption till 28 March 2027 i.e., from 5 years to 10 years in effect.
CONCLUSION
The merger between PVR and INOX, forming a multiplex behemoth, signifies a significant consolidation in the Indian entertainment industry. The transaction could be subject to review should any abuse of dominance arise, highlighting the ongoing importance of regulatory oversight in maintaining fair competition within the multiplex exhibition sector. Further, despite the transaction resulting in significant consolidation of market share between PVR and INOX, it qualified for the application of the Previous De Minimis Exemption and, consequently, was not notified to the Competition Commission of India. This exemption was applicable as the respective turnovers of PVR and Inox did not exceed the specified thresholds under the Previous De Minimis Exemption, primarily due to the substantial reduction in revenues attributable to the suspension of theatre operations during the pandemic-induced lockdowns.
The temporary decline in turnover due to pandemic-related disruptions does not negate the long-term competitive risks posed by such a merger, which may include reduced consumer choice and potential monopolistic practices which is inconsistent with the legislative intent of the Act. This highlights a potential lacuna in the regulatory framework, where short-term economic metrics undermine the need for substantive scrutiny of transactions that could substantially alter market structures leading to market to rightfully question its asymmetrical approach in the implementation of the provisions of law. A more nuanced approach towards the potential post-merger behaviour would align better with the overarching objectives of Competition Law.
Nevertheless, the legislative intent underpinning the Competition Act of 2002, must be acknowledged for its balanced approach in instilling economic growth and preventing anti-competitive conduct. The Act does not seek to inhibit the pursuit of growth but rather ensures that such pursuits do not culminate in the abuse of market dominance or stifle competition. By exempting certain transactions through the De Minimis Exemption, the Act recognizes the need to streamline regulatory processes and encourage corporate innovation and expansion without undue interference.
Author(s) Name: Aditi Yashasvi (Amity Law School, Noida, Uttar Pradesh)
