India’s modern competition law, introduced by the Competition Act 2002 (the Competition Act), has had a long and often troubled period of gestation. Although the Competition Act was enacted by the Indian Parliament and published in 2003, it has been dormant over a number of years and seen a piecemeal implementation. Since 2005, India has had a dedicated competition regulator – the Competition Commission of India (“CCI”) – which began to build capacity even before its was vested with formal powers. It has been trying to make India’s markets more competitive by cracking down on restrictive practices in industries ranging from airlines, to films, financial services and real estate.
In May 2009, the legal provisions on anticompetitive agreements (section 3 of the Competition Act) and abuse of a dominant position (section 4 of the Competition Act) came into effect. With the implementation of mandatory merger control effective from 1 June 2011, India can claim to have joined the ranks of over 100 countries worldwide with modernised competition laws. The new package of laws significantly updates India’s existing competition law framework which was considered ‘lacking in teeth’. The Competition Act, largely modelled on EU law and influenced to some extent by similar legislation in the U.S., has to be assessed in terms of its adequacy for the specific challenges India faces as an expanding economy.
This article outlines the main developments to date and their impact on businesses in India and on operations in India now and in the near term. Rather than taking a static view of the law and practice, it seeks to identify areas where the law may be made more effective in the future.
Agreements and commercial practices
The Competition Act has brought about a sea change in the way competition law operates in India. Enterprises with operations in, or whose activities outside, have a nexus with India need to examine their existing and proposed commercial practices for compliance with the Competition Act.
The Competition Act regulates two main categories of commercial behaviour: agreements and abuse of market power.
Section 3 of the Competition Act prohibits two categories of agreements: horizontal agreements (between businesses at the same level in the supply chain such as two manufacturers); and vertical agreements (between businesses at different levels in the supply chain such as a manufacturer and retailer). The provisions are broadly analogous to the provisions on anticompetitive agreements under Article 101 of the Treaty on the Functioning of the European Union and section 1 of the Sherman Act in the U.S. The CCI has sufficiently wide jurisdiction to bring under its ambit agreements and arrangements taking place outside India, provided that they have an “appreciable adverse effect” (“AAE”) on competition in India.
There are some India-specific aspects to regulation of agreements. For example, horizontal arrangements relating to price, production, supply, or market sharing are presumed anticompetitive under the Competition Act. The scope to establish the legality of such arrangements would therefore appear limited. There are no general exemptions for defined categories of agreements that could be likened to the block exemptions that exist in the EU (essentially, group exemptions which automatically exempt certain categories of agreement falling within their terms). Such block exemptions assist companies to determine the legality of their agreements where certain conditions are met, including as to market share and the non-inclusion of certain hardcore restrictions such as resale price maintenance. Finally, there is only a very limited defence, i.e in the case of a joint venture improving efficiency – a concept which is yet untested.
Section 4 of the Competition Act prohibits companies with market power (a dominant position) from abusing that position. Market share is a starting point for determining dominance, but neither the Competition Act nor specific guidance from the CCI provides a ‘bright line’ market share test for determining when a company may be considered dominant for Indian competition law purposes. As in the EU, it is not the holding of a dominant position that is unlawful; only its abuse can be unlawful. Companies with a significant market position in India will therefore need to consider whether their commercial practices may be considered abusive. Examples of such abusive conduct include predatory (below cost) pricing, discriminatory pricing, denial or restriction of market access, and tying or bundling.
The CCI’s enforcement over the past two years indicates that it will not shy away from disallowing anticompetitive practices. In May 2011, the CCI found an infringement of section 3 of the Competition Act involving United Producers/Distributors Forum, The Association of Motion Pictures and TV Programme Producers. The three parties collectively comprise 27 film producing entities and were each fined INR 100,000 (approximately USD 2,000/Euro 1,500) after the CCI found that they had unlawfully engaged in anticompetitive agreements to collectively stop distribution of films thereby, depriving consumers of choice as new films were not released.
The first case involving a fine imposed for abuse of dominance was against the National Stock Exchange of India (“NSE”), which was fined 5 per cent of average turnover, equating to INR 55.5 million (approximately USD 1.1 million/Euro 820,000) for engaging in predatory pricing. The majority of members of the CCI considered that the zero pricing harmed competition and that NSE was leveraging its dominant position in other derivatives market segments to undercut competitors.
A second, and the most recent, case resulting in a fine for abuse of dominance represents the most substantial penalty to date, where the real estate company DLF Ltd was fined 7 per cent of average turnover, equating to INR 6.3 billion (approximately USD 126 million/Euro 94 million). The CCI received a complaint from real estate association Belaire Owner’s Association (“BOA”) against DLF. DLF was to build a new apartment block for BOA in the outskirts of New Delhi. According to the agreement, the building was to have 19 floors and be completed in 36 months. BOA alleged that DLF changed the terms of the agreement by building 29 floors which delayed completion. BOA alleged that the result of the delay was that hundreds of apartment allottees incurred financial losses since they had to wait indefinitely for occupation of their apartments. The CCI considered that DLF had abused its dominant position against a vulnerable section of consumers who had little ability to act against the abuse. An appeal against the CCI’s decision is pending before the Indian Competition Appellate Tribunal.
While the absolute level of fines may not be particularly significant by international or absolute comparisons, these cases suggest that the CCI is adopting a deterrent approach as in the DLF case the CCI came close to imposing the maximum level of fine of 10 per cent of turnover.
Mandatory notification and review of mergers and combinations
Companies contemplating or engaging in merger and acquisition activity will need to consider how the merger control process in India will affect the timing and likelihood of successful implementation of their transactions in all markets where they do business. Recent global deals , prior to the implementation of mandatory merger control in India on 1 June 2011 including transactions concerning Kraft and Cadbury and Tata Motors and Ford, have involved Indian operations but were not subject to competition law scrutiny in India. For example, U.S. food manufacturer Kraft’s acquisition of UK confectionary maker Cadbury included the acquisition of Cadbury India which was considered as a prize asset consistent with a decentralisation strategy and expansionary focus. In 2008, India’s largest motor vehicles manufacturer Tata Motors announced that it had purchased the Land Rover and Jaguar brands from Ford Motors for £2.3 million. Two leading luxury car brands were added to its portfolio of brands. In the future, mandatory merger control in India and the power of the CCI to prohibit transactions or accept remedies will give the CCI tools to deal with cross-border activity affecting its markets and to determine whether such transactions give rise to an AAE on competition in India.
The CCI has a set period of 30 days from a notification being accepted in which to conduct an assessment and deliver a “prima facie opinion” as to whether the combination will, or is likely to, have an AAE on competition in the relevant market in India. If the CCI raises initial concerns that cannot be resolved by remedies that the parties are able or willing to offer, an in-depth review may be launched. The CCI has to make an “endeavour” to clear transactions within 180 days.
The CCI completed its first merger review within two weeks. The CCI cleared Reliance Industries Ltd’s buyout of Bharti Enterprises’ interest in an insurance joint venture with French insurer AXA SA. Reliance Industries is a new entrant in the Indian insurance industry and does not have a presence in India’s general or life insurance markets. Businesses will take some comfort that this transaction was reviewed swiftly. However, this needs to be viewed in context, since the case did not raise material competition issues.
With less than a full year of operation of the Indian mandatory merger control regime, it would be premature to draw robust conclusions from the decisions to date; still less to consider that they are necessarily a predictor for the future. However, the publication of amendments to the existing Combination Regulations serves to indicate that the CCI is already clarifying ambiguities in the underlying legislation through its practice and guidance. Specifically, the “Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Amendment Regulations, 2012”, published on 23 February 2012 make several significant changes to the Combination Regulations of 11 May 2011. Key points include:
- Exemptions from filing: In particular, the following categories of transactions are included within the types of transaction not likely to cause an AAE on competition in India and, as such, will not normally require a filing: (i) acquisitions of less than 25 per cent of equity shares or voting rights in the ordinary course of business or for investment purposes, without an acquisition of control; (ii) acquisition of shares or voting rights pursuant to a bonus issue or stock splits or buy back of shares or subscription to rights issue of shares, not leading to an acquisition of control; and (iii) certain intra-group mergers and amalgamations involving subsidiaries wholly owned by the same group.
- Increased filing fees:· The Form 1 (short form) filing fee is increased from INR 50,000 to INR 1,000,000 (approximately USD 20,000/ Euro 14,900) and for Form 2 (long form) the fee is increased from INR 1,000,000 to INR 4,000,000 (approximately USD 80,000/ Euro 60,000),
- Form of notice: ·Although parties have an option of using Form 1 (short form) or Form 2 (long form) a preference is expressed for notification using Form 2 (long form) in the case of overlap where the parties have market shares exceeding 15 per cent (horizontal relationships) and/ or 25 per cent (vertical relationships).
Penalties with clout
The consequences of non-compliance may be serious in terms of significant financial penalties including up to 10 per cent of turnover for agreements and commercial practices; void agreements; impacts on M&A in terms of timing and modifications to secure clearance and harm to reputation and shareholder value as a result. The CCI has already imposed fines for violation of the prohibitions on anticompetitive agreements and abuse of a dominant position. However, the CCI has not yet provided any clarity on how it determines penalties other than to say that the fine must be “commensurate” to the violations.
Competition law enforcement trends emerging
As with any new law in the early stages of adoption, it can be difficult to chart the path that the regulator will take in prioritising its enforcement. In the absence of detailed case law and guidance under the Competition Act, the case law under the Monopolies and Restrictive Trade Practices Act, 1969 (‘MRTPA”) is likely to be a starting point for enforcement priorities. However, since it is intended that the new law represents a ‘clean break’ from the old, the CCI will be determined to establish its own way. It is likely that the experience of competition enforcers outside India, in particular in Europe and the U.S., can be expected to provide insights on how the law will be applied in practice. It is interesting to see that the CCI is already citing EU cases to substantiate their analysis and conclusion(s). Businesses under investigation can therefore serve themselves well by strengthening their arguments and evidence with international competition case law precedents where relevant.
The CCI has already begun to turn its gaze to particular industries presenting competition issues including airlines, cement, motion pictures, real estate, shipping, technology and telecoms. Businesses dealing in commoditised sectors or mature markets or facing low margins are likely to be subject to particular scrutiny owing to the obvious risk of collusion in such markets. Other future areas for intensified competition enforcement could include the energy, financial services, and pharmaceutical sectors. These sectors are vital to the economy, health and development of India and have been the subject of recent competition inquiries in Europe and the U.S. It would not be surprising if, in the future, the CCI follows the international competition law brethren with inquiries in these areas.
Businesses may adopt mechanisms to manage the risks and opportunities presented. This recognises that an awareness of how competition law impacts businesses in practice may identify areas where the law can be used to business advantage, for example where a company is the victim of anticompetitive practices by others. The steps that can be taken vary from business to business but will tend to involve: conducting a competition law risk assessment; developing a competition law policy; devising a competition law manual, developing fact-specific guidelines and case studies; conducting employee training; and regular competition law audits and monitoring. The CCI has issued guidance to businesses on how to create effective compliance programmes.
Future legal developments and areas where competition law may be strengthened
The law is not static and there are a number of areas where the law is either unclear or the enforcement agency lacks specific powers. No doubt experience itself will reveal additional areas for modification or enhancement. Potential areas for future examination, enhancement and guidance include:
- Continuing to ensure that the members of CCI are from a wide range of disciplines including law, business, finance and economics, and are economically and politically independent and that they are recruited on a permanent basis to facilitate the necessary capacity building and commitment to the CCI’s future development of expertise. A concern has been raised that at least in the early days the CCI has had a staff from government departments;
- Reasserting the principle of prohibiting cartels as an enforcement priority in the practical application of competition law and advocacy. A notable feature of the CCI’s initial case record has been the weighting of abuse of dominance cases. Whilst preventing and sanctioning abuse of market power is a key plank of the legislation, the controversial nature of these cases can raise questions about the appropriate deployment of the CCI’s resources where budgets are tight. A focus on price fixing, market sharing and bid rigging would send a signal of a change in the underlying paradigm away from the MRTPA and towards a zero-tolerance of cartels;
- Guidance on the CCI’s approach to calculation of the appropriate level of fines, leniency and powers to conduct unannounced inspections;
- Guidance on the CCI’s approach to typical commercial practices such as the treatment of joint ventures under the behavioural or merger control provisions of the Competition Act and the circumstances in which efficiency enhancing vertical agreements may be compatible with competition law;
- Abbreviated investigation procedures where investigated parties may be prepared to offer commitments or modifications to commercial practices;
- Strengthening competition in regulated markets through increased cooperation with the sector regulators and establishing guidance on the appropriate demarcation between the two to improve the coherence of competition policy;
- Increasing the role of competition law in state-controlled sectors;
- Confronting the roles of consumer protection and price regulation and how these interface with the CCI’s role as an economic competition regulator;
- Increasing consultation and cooperation with the international antitrust community (whether regulators, business or practitioners) to continue and enhance the CCI’s credibility and effectiveness globally.
The challenges of creating an effective enforcement regime and culture of competition compliance must not be underestimated. The CCI will have a critical role to play and has done much to lay the groundwork. As with any law with wide ranging commercial impact, business can also enhance this process by disseminating knowledge and experience of what constitutes a violation. For multinational companies with operations in India, educating local employees and monitoring local activities reduces the risk of competition law investigations. Further strengthening of the CCI is the key for effective enforcement but the CCI will also need to tread carefully if it is to command the respect of business that its enforcement is targeted to those cases which present serious risks to competition. Its early track record signals a determination to tackle problems that currently impede wider participation by India’s consumers in the benefits that robust competition may bring. However, matters are complicated by institutional arrangements and legacies of the old regime that may temper resolute action. While it may be too early to tell how effective it will be, an important factor will be how the CCI can encourage a fundamental change in attitudes among businesses, government and consumers to adopt a more vigorous approach to competition law enforcement and improve economic growth such that it is no longer ‘business as usual’ in India.
Suzanne Rab is a Partner in the Antitrust practice at King & Spalding in London. Suzanne advises clients across all areas of European and UK competition law. She has particular experience advising on transactions and behavioural matters, including in proceedings before the UK competition and regulatory authorities and the European Commission. She has worked on some of the most high profile merger, market and cartel investigations in Europe and the UK. Suzanne can be contacted at firstname.lastname@example.org.
By Suzanne Rab