COMPETITION REGULATION IN INDIA:

A PERSPECTIVE

London : 14th May 2009J Sagar Associates

Regulatory & Policy Practice

CONTEXT & OVERVIEW

Pre-Independence Laws:PRIVATE CAPITAL

Constitution (1950); IDR Act (1951); IPR (1956);

MRTP Act, 1969; State OwnershipReserved Lists & Licensing

Post 1991 PRIVATE CAPITAL & PPP

• Private Ownership• Reasonable return on investt.• Economic regulation: TRAI Act, Electricity Act, Competition Act

• Level playing field• Single window approach:FIPB, NHAI Act, SEZ Act ..

Evolution of Governing Framework

Constitutional Foundation for Competition Regulation

• The Constitution secures to its citizens, Justice –social, political and economic

• Directive Principles of State Policies require State to

o Secure that ownership and control of material resources are distributed to sub-serve common good

o Secure that operation of economic system does not result in concentration of wealth and means of production to the common detriment [Old Regime : MRTP Act]

• Citizen’s fundamental right of freedom to carry on any occupation, trade or business subject to reasonable restrictions imposed by law including state monopoly

• Constitutional right to freedom of trade, commerce & intercourse within India subject to restrictions imposed by law

Constitution of India ALLOCATION OF POWERS

• POWER VESTED IN CENTRAL PARLIAMENT & GOVT

o Inter-state and international trade and commerce

o Laws enacted by Union Parliament and policies made/implemented by Govt. of India

• POWER VESTED IN STATE LEGISLATURE & GOVT

o Subject to Central and Concurrent List laws, State legislature may enact laws governing trade & commerce within a State, and production, supply and distribution of goods

o State has policy making and implementing powers too

Constitution of India …2 ALLOCATION OF POWERS

• CONCURRENT SUBJECTSo Subject to Central Subjects, laws can be enacted both by

Union Parliament and State legislature where -

§ Union Parliament can always override State laws

§ State legislature to enact law for that state on a field where a Parliamentary law exists requires Presidential assent (on advice of Union Government)

§ Formulation of policies & their implementation, unless preserved to Union by law – with States

o Economic & Social Planning

o Commercial & Industrial monopolies, combines & trusts

o Trade and commerce in, and the production, supply and distribution of specific products (including imports where Parliament so requires in public interest)

MRTP Act, 1969

• Mahalanobis Committee Report 1960 & Monopolies Inquiry Commission Report 1965 noted “growing economic disparities”

• MRTP Act was enacted :o To prevent concentration of wealth by private enterprises

o To ensure that economic activities do not prejudice public interest

o Established MRTP Commission – a quasi-judicial body

o Appeals directly to the Supreme Court of India

• Initially, the regime had its relevance and was focussed on :o Specific Restrictive & Monopolistic Trade Practices

o 1984 amendment brought in Unfair Trade Practices

MRTP Act, 1969 …2

• 1991 amendment restricted MTP (concentration of economic power) regulation to division of dominant undertakings : was never used

• The Act was found to be inadequate to keep pace with the changing global economic scenario qua -

o Promoting markets, competition and freedom of trade

o Preventing practices which had adverse effect on Competition

• Raghavan Committee Report 2000 led to enactment of Competition Act, 2002 drawing upon the EU, UK and US models of anti-trust regulation

Competition Act, 2002

• A modern economic regulatory statute enacted to:

o Prevent practices having adverse effect on competition

o Promote and sustain competition in markets

o Protect consumer interest

o Ensure freedom of trade carried on by the participants in markets in India

• Enshrines rule of reason based regulation based on concepts and economic factors like

– Relevant product/geographic markets

– Appreciable adverse effect on competition

– Abuse of dominance

– Cartels

Competition Act, 2002INSTITUTIONAL MECHANISM

• CCI (Chairperson + 2 to 6 members) o The Competition regulator : a body of experts

o Robust selection process with Security of tenure

o Accountability – Appeals before CAT; CAG audit; Reports before Parliament

o Powers of a civil court re. evidence, witnesses & experts

o Powers to inquire, direct investigation by DG, and pass interim & final orders following PNJ in a time bound manner

o Power to frame regulations

o Power to determine own procedure provided that principles of natural justice are honoured

o Chairperson’s power of superintendence over administration

o Cannot impose penalty for non-compliance or award compensation or enforce orders (magistrate or tax authority)

o Professionals may appear (Accountants, Co. Secretaries)

Competition Act, 2002INSTITUTIONAL MECHANISM …2

• Director General o The investigating arm of the Commissiono Acts on instructions/orders of Commission … unlike Director

OFT – no suo-moto powers o Obliged to written report with findings of any investigationo CCI to take a decision : not bound by DG’s report

• CAT (Chairperson + 2 members)o Quasi-judicial tribunal headed by a judge o Adjudicate upon appeals against Commission’s orders o Adjudicate upon compensation claimso Entertain class action in compensation claimso Can enforce own orders like a courto Cannot impose penalty for non-compliance or award

compensation or enforce orders (magistrate or tax authority)o Professionals may appear (Accountants, Co. Secretaries)

Competition CommissionFUNCTIONS & POWERS

•• CCI is obliged to achieve the objectives of the CCI is obliged to achieve the objectives of the Competition Act :Competition Act :o Eliminate practices having adverse effect on competition

o Promote and sustain competition

o Protect the interests of consumers

o Ensure freedom of trade in markets of India

• To perform these duties, CCI is vested with power to act as per the provisions of the Competition Act to :o Conduct an inquiry into anti-competitive agreements, abuse

of dominance and combinations

o Issue appropriate interim/final orders

• The Act provides statutory foundation to o Refer issues for opinion on sector issues by CCI to Sector

Regulators, & on competition issues by CCI to them

o Enter co-operation agreements with foreign authorities

CRITICAL PROVISIONS

Competition Act : Highlights

• Prohibition of Anti-competitive agreements :

[section 3 read with 19, 21,21A, 26, 27, 36]

• Prohibition of Abuse of Dominant Position :

[section 4 read with 19, 21, 21A, 26, 27, 28, 36]

• Regulations of Combinations (merger control) :

[sections 5 & 6 read with 20, 21, 21A, 29-31, 36]

• Competition Advocacy : [section 49]

Important Definitions

•• CartelCartel

o An association of producers, sellers, distributors, traders or service providers

o Who, by agreement amongst themselves,

o Limit, control or attempt to control the production, distribution, sale or price of, or trade in goods or provision of services

•• Bid riggingBid rigging

– Any agreement between enterprises or persons engaged in identical or similar production or trading of goods or provision of services

– Which has the effect of eliminating or reducing competition for bids or adversely affecting or manipulating the process for bidding

Statutory Factors : section 3section 3

Appreciable adverse effects on competitionAppreciable adverse effects on competitionPotentially risky• Creation of barriers to new entrants in the market• Driving existing competitors out of the market• Foreclosure of competition by hindering entry into

the marketGateways• Accrual of benefits to consumers• Improvements in production or distribution of goods

or provision of services; or• Promotion of technical, scientific and eco

development by means of production or distribution of goods or provision of services

Processes : For Sections 3 & 4

• Initiate inquiry on information filing as also suomotu

• Form a prima facie view based on “rule of reason”recorded in an order– Either close the matter

– Or send it to the DG for detailed investigation

• Power to issue interim orders

• Prima facie view & interim orders are appealable before CAT

• DG to submit investigation report to CCI

• CCI to consider but not bound by DG’s report

• CCI to pass final order – appealable to CAT

Important definitions

•• Dominant positionDominant position mmeans a position of strength enjoyed by an enterprise, in the relevant market which enables it to –– operate independently of competitive forces prevailing in the

relevant market or;– affect its competitors or consumers or the relevant market in

its favour[Note: Relevant market includes relevant product and/or [Note: Relevant market includes relevant product and/or geographic markets]geographic markets]

•• Predatory pricePredatory price mmeans the sale of goods or provision of services, – At a price below the cost of production of the goods or

provision of services– With a view to reduce competition or eliminate competitors

[Note: Does not talk about recouping losses after competitors [Note: Does not talk about recouping losses after competitors have been driven out of the market]have been driven out of the market]

Important definitions (contd.)

•• Relevant marketRelevant market – the market which may be determined by the commission with reference to the relevant product market or the relevant geographic market or with reference to both

•• Relevant geographic marketRelevant geographic market – the market comprising the area in which the conditions of competition of supply & demandsupply & demand of goods or provision of services are distinctly homogenous and can be distinguished from the conditions prevailing in the neighbouring areas

•• Relevant Product marketRelevant Product market – a market comprising all those products or services which are regarded as interchangable or substitutable by the consumer, by reason of characteristic of the products or services, their prices and intended use

Statutory factors: DOMINANCE

• Market share, size and resources of the enterprise• Size and importance of competitors• Economic power of enterprise incl. commercial advantages • Vertical integration• Dependence of consumers on enterprise• Entry barriers including regulatory barriers• Financial risk• High capital cost of entry• Marketing & Technical entry barriers• Economies of scale• High cost of substitutable products• Countervailing buying power• Market structure and size• Social obligation and social cost• Relative advantage qua anti-competitive harm with or without

dominance

Statutory FactorsABUSE OF DOMINANCE

• Directly or indirectly imposes unfair or discriminatory conditions of sale or purchase and price including predatory price

• Limits or restricts production of goods/services or market and technical/scientific development

• Indulges in practices which results in denial of market access in any manner

• Concludes contract by bundling supplementary obligations unconnected with principal contract

• Using dominant position of one relevant market into another

Combinations : REPORTING THRESHOLDS

•• Combinations Combinations –– Between Between Indian

enterprises, or Enterprises including one or more overseas

– Wherein the assets are valued at atleast Rs.500 crores of assets or annual turnover exceeds Rs.1500 crores

– If they cause or are likely to cause AAEC on competition in the relevant market in India shall be void

60002000120004000Group

150050030001000Parties

Combined

Turnover

Combined

Assets

Combined

Turnover

Combined

Assets

Worldwide

(USD Mn)

India

(Rs. Crore)

Combinations : REPORTING THRESHOLDS

• To avoid being declared void, the Act stipulates – Mandatory pre-merger (before takes effect) notification

to CCI

– With prescribed Filing Fee in prescribed forms

– Prescribed Waiting Period of 210 days within which CCI can approve, modify or reject it

• 30 days stage / filing

• 60 days stage / filing

• 210 days stage

– If the 210 days lapse without any order from CCI …deemed approval

Factors of analysisAPPRECIABLE ADVERSE EFFECTAPPRECIABLE ADVERSE EFFECT

• Actual & potential level of competition through imports in the market

• Extent of barriers to entry

• Level of competition in the market

• Degree of countervailing power

• Price increase and profit margins post combination

• Effective competition post combination

• Substitutes continue to be available

• Market share in relevant market

• Removal of vigorous and effective competitors

• Nature and extent of vertical integration

• Failing firm defence

• Effects of innovation

• Relative economic advantages etc.

Processes of investigation

• Parties to pay Filing Fee

• Shall notify within 30 days of agreement to combine

• Commission to form prima facie view to

– Allow the combination immediately after the said view

– Seek more information from parties

– Seek investigation report from DG

• Unless parties and the IO pray for additional time, the Commission shall pass final order within 210 days – beyond it – deemed approval

• The Commission may approve, modify or reject

Important definitions

•• TurnoverTurnover – value of sale of goods or services

•• Shares Shares – shares in the share capital of a company carrying voting rights & includes

– Any security which entitles the holder to receive shares with voting rights

– Stock except where a distinction between stock and share is expressed or implied

• Control includes controlling the affairs or management by

– One or more enterprises, either jointly or singly, over another enterprise or group

– One or more groups, either jointly or singly, over another group or enterprise

Important definitions

•• GroupGroup – 2 or more enterprises directly or indirectly in a position to – Exercise 26% or more voting rights in other enterprise

– Appoint more than 50% of members in the board of directors in the other

– Control management or affairs of the other

•• AssetsAssets – value of assets by taking the book value of the assets shown in the audited books of account in the financial year immediately preceding the financial year in which the date of proposed merger falls and include – Brand value

– Value of goodwill

– Value of IPR etc.

and excludes depreciation

Noteworthy exceptions

• Reasonable use of IPRs in case of section 3 inquires

• Agreement to export subject to effects doctrineeffects doctrine in destination of import

• Meeting competition defence against abuse of dominant position

• Acquisition by PFI, FII, Bank or VCF provided within 07 working days they inform the Commission

• Sovereign functions relatable to Atomic Energy, Space Research, Defence and Coins and Currency

• Lesser Penalty – to member of cartel who discloses true and vital information to the Commission and continues to cooperate till end of the proceedings

Enforcement• Sections 3/ 4 –

– Cease and desist– Penalty upto 10% turnover of previous 3 FYs– Penalty upto 10% of turnover of cartel or 3 times the profit

against each member for the same period whichever is higher– Division of dominant undertaking / interconnected dominant

undertakings– Modification of the agreement– Costs

• Section 6: approve, modify or reject the combination• For non-compliance with orders of CCI/CAT

– Imposition of further penalties and/or Civil imprisonment up to a period of 3 years as the Chief Metropolitan Magistrate, Delhi may decide

– In case of Companies – the officials responsible for the non-compliance shall be penalized individually

Appeals & Special provisions

• APPEALS

– Within 60 days from the date of communication of the order by the CCI to the CAT

– CAT to decide within 180 days

– Within 60 days from the date of communication of the order by the CAT to the Supreme Court of India

• SPECIAL PROVISIONS

– Functionaries with permission of the Commission may cause search and seizure of documents of parties

– With consent of parties and in accordance with the law, information of parties may be kept “confidential”

SOME CRITICAL ISSUES

Precedents in the New regime

• Indian Case-law under the MRTP Act

– Will have strong persuasive values in matters relating to “franchise agreement”, “rule of reason issues”, “consumer welfare measures qua anti-competitive harm”

– Once the Competition Act comes into effect,

• The cases pending before the MRTPC shall be continued to be disposed of by it for 2 years thereafter

• Others get transferred to CAT

• No new cases under the old Act, however, will be instituted

• Role of foreign judgements

– Shall have persuasive value with respect to laws which are paripari materiamateria with Indian Laws

– Supreme Court of India has relied upon such judgements

The CCI - What to Expect

• Heavily armed – a break with tradition• A new breed of regulator - e.g. SEBI • Relatively well-equipped • Empowered to act proactively • Potential to change market and business

philosophy• Some risks

– Bureaucracy– Big business– Ingrained economic philosophy – Lack of clarity – Lawyers and courts

Issues - Ongoing Instances

• Merger Control - An European acquisition of a listed Indian company.– Merger thresholds: ‘assets’ and ‘turnover’ inadequately

defined– S. 20 (1) proviso: merger control inquiry by CCI only

precluded after the expiry of one year the combination taking effect.

• Compulsory filing– if law made effective post signing but pre-closing?

– If law made effective within one year post closing?

Some Challenges• Existing Agreements and commercial arrangements

will need to be revisited to re-align – Re-align business practices – Confidentiality– Some statutory provisions have departed from the MRTP Act

and other laws whereon Supreme Court decisions exist– No block exemption provisions

• Waiting period for merger clearance : ‘deemed’clearance provisions may be eroded by the possibility of extending the 210 days period

• Impact on foreign mergers with minimal India effect • No market effect provisions for merger control

Some Challenges …2

• Need of expert professional staff with relevant experience in the early phase

• Absence of reliable market and economic data for Indian economy

• Need for greater clarity in definition of threshold calculation parameters

• Reopening of less than one year old combinations permissible

• Revision of thresholds every two years• Failure to notify shall impose a penalty to the tune

of 1% of turnover or assets whichever is higher