Wednesday, 27 November 2013

TRAI releases Recommendations on ‘Monopoly/Market dominance in cable TV services

The Telecom Regulatory Authority of India (TRAI) has released on 26 November its recommendations on ‘Monopoly/Market dominance in Cable TV services’.
In order to break the cable monopolies that have cropped up in several states, the Telecom Regulatory Authority of India (TRAI) has recommended that no multi-system operator (MSO) can have more than 50 per cent market share in any state and any merger & acquisition (M&A) activity will require the sector regulator’s prior approval. 

The single entity MSO which has an existing market share of over 50 per cent in a state, however, will not need to cut down its majority control. But it will not be permitted to merge or acquire the control of any other MSO or local cable operator (LCO) in that market. Also, TRAI will closely monitor its must carry provisions and quality of service (QoS) for any anti-competitive practices. 
An MSO which holds more than 50 per cent market share in a state will have to bring down its excess holding within a period of 12 months market. 
As part of its comprehensive recommendations, TRAI has suggested that the state should be considered as the relevant market for assessing monopoly/ market dominance of MSOs in TV channel distribution market. The percentage of share includes only the cable TV market in that state. 
The market dominance will be determined based on market share in terms of number of active subscribers of MSOs in the relevant market. For measuring the level of competition or market concentration in a relevant market, the Herfindahl–Hirschman Index (HHI) should be used. 
HHI is calculated based on the market shares of different firms operating in the relevant market. It reflects both the distribution of the market shares of the top firms and the composition of the market outside the top firms. 
The TRAI recommendations on measures to check cable TV monopolies will need the government approval to come into effect. 
Earlier, TRAI had issued consultation paper titled ‘Monopoly/Market Dominance in Cable TV Services’ on 30 June 2013 to seek stakeholder’s views on ways to tackle market dominance of cable TV services by a handful of operators. 
In order to ensure a minimum of three MSOs of comparable size operate in a relevant market, the authority has restricted the building up of market share up to 50 per cent, which corresponds to individual contribution of 2500 to market HHI, by any individual/ ‘group’ entity through M&A/ ‘control’ of an entity over many MSOs/ LCOs. 
In cases where any group’s contribution to market HHI is more than 2500 or more than 50 per cent market in a relevant market as on the date of issue of guidelines, such legal entity/ ‘group’ will have to take necessary remedial measures, within 12 months from the date of issue of guidelines, so as to limit its ‘control’ in various MSO(s)/ LCO(s) in such a way that the contribution to market HHI of that ‘group’ reduces to less than or equal to 2500. 
The authority further recommended that any MSO who by itself contributes to more than 2500 HHI in a relevant market should not be permitted to merge with or acquire the ‘control’ of any other MSO/ LCO in that relevant market. 
Further, any M&A among MSO(s) or between an MSO and LCO in a relevant market will require the prior approval of the regulator. Any arrangement that results in ‘control’ of MSO(s)/ LCO(s) in a relevant market by an entity shall require the prior approval of the regulator. 
The decision on any proposal, complete in all aspects, will have to be conveyed within 90 working days, the authority said. 
The M&A proposals will only be approved provided the following two conditions are satisfied: 1) Post-M&A the contribution of resultant entity to the market HHI does not exceed 2500, and 2) Depending on the value of the post-M&A market HHI, any one of the following conditions are met: (i) either the post-M&A HHI of that market is less than 2000, or (ii) in cases where the post-M&A market HHI is between 2000 and 3300, the proposed M&A does not result in an increase in market HHI (delta) by more than 250 points, or (iii) in cases where the post-M&A market HHI is beyond 3300, the proposed M&A does not result in an increase in market HHI (delta) by more than 100 points. 
For calculating the increase in HHI (delta) as a result of the M&A among MSO(s) or between an MSO and LCO in the relevant market, the difference of the market HHI pre-M&A and post-M&A will be taken, the authority stated. The combined market share of MSOs of a ‘group’ in the relevant market would be considered for calculating the HHI. 
Defining ‘control’, the authority said that an entity is said to ‘control’ an MSO/ LCO and the business decisions thereby taken, if the entity, directly or indirectly through associate companies, subsidiaries and/or relatives: 
(a) Owns at least twenty per cent of total share capital of that MSO/ LCO. In case of indirect shareholding by an entity in MSO(s), extent of ownership would be calculated using the multiplicative rule. For example, an entity who owns, say, 30 per cent equity in Company A, which in turn owns 20 per cent equity in Company B, then the entity’s indirect holding in Company B is calculated as 30 per cent of 20 per cent, which is 6 per cent.; Or 
(b) Exercises de jure control by means of: (i) having not less than fifty per cent of voting rights in the MSO/ LCO; Or (ii) appointing more than fifty per cent of the members of the board of directors in the MSO/ LCO; Or (iii) controlling the management or affairs through decision- making in strategic affairs of the MSO/ LCO and appointment of key managerial personnel; Or 
(c) Exercises de facto control by means of being a party to agreements, contracts and/or understandings, overtly or covertly drafted, whether legally binding or not, that enable the entity to control the business decisions taken in the MSO/ LCO. 
The definition of associated company, subsidiary and relatives are as given in the Companies Act 2013, the authority stated. While an ‘entity’ means individuals, group of individuals, companies, firms, trusts, societies and undertakings. 
If an entity controls many MSOs/ LCOs simultaneously in the relevant market, these MSOs/ LCOs shall be treated as interconnected entities and shall be treated as a single ‘group’, the authority explained. 
The authority has also recommended that MSOs must disclose their ownership pattern including foreign investment/ joint venture details, list of MSO(s)/LCOs, who are part of the ‘group’ in the relevant market, details of Chairman, Directors in the Board, CEO and CFO and state-wise geographical area coverage details on their website.

 2.13 The Following information shall be provided by the MSOs annually to MIB and TRAI: 
(a) Share-holding pattern including foreign investment/ joint venture details as per instructions issued from time to time. Changes, if any, in the share-holding pattern during the reporting period, shall be reported within 30 days of such changes; 
(b) Copy of shareholders agreements, loan agreements, contracts and/or understandings (once and subsequently for the changes); 
(c) The details of MSO(s)/LCOs who are part of the ‘group’; 
(d) Interests of the entity(ies) which controls the ‘group’ of MSOs/ LCOs in the relevant market; 
(e) Details of Chairman, Directors in the Board, CEO and CFO; 
(f) State-wise (as given in table 1.2) geographical area coverage details. 
The MSOs also have to provide state-wise number of active subscribers to MIB and TRAI on quarterly basis. 
The authority stated that the Cable TV Networks Rules may be amended to incorporate the rules on M&A/ acquisition of control, to be framed to prevent monopolies/accumulation of interest in the cable TV services and also to make it mandatory for MSOs to comply with the same.


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