Indian Competition Law – The Enforcement Of Abuse Of Dominance Provisions

The Competition Act, 2002 (“Act”) was enacted in January 2003 but the enforcement of its antitrust provisions viz. against anti competitive agreements and abuse of dominant position commenced only in May 2009. During this period, while there have been relatively few orders of the Competition Commission of India (“CCI”), which is not surprising considering the long gestation period required by any new organization, – it is surprisingly the provisions of the Act relating to abuse of dominance that have gained the most prominence. This is primarily on account of the CCI orders imposing heavy penalties on two well known, high profile parties viz. National Stock Exchange of India Ltd. (“NSE”) and real estate major, DLF Limited (“DLF”).

Abuse of dominance is prohibited under section 4 of the Act wherein an enterprise is said to be dominant if it is able to operate independently of competitive forces prevailing in the relevant market or affect its competitors, consumers or the relevant market in its favour. The abusive practices enumerated in the section include:

  • directly or indirectly imposing unfair or discriminatory conditions or prices in purchase or sale of goods or services;
  • restricting or limiting production of goods and services, or the market, or limiting technical or scientific development relating to goods or services to the prejudice of consumers;
  • indulging in practices resulting in denial of market access in any manner;
  • making the conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts; or
  • using dominance in one market to enter into or protect other markets.

The Act also lays down in section 19(4) the factors that shall be considered by the CCI to determine if a dominant position exists. These include market share, entry barriers, dependence of the consumers on the enterprise, countervailing buying power, the size and resources of the enterprise, the size and importance of competitors and the economic power of the enterprise.

It is interesting to note the grounds on which the CCI found that NSE and DLF enjoyed a dominant position in their respective relevant markets and thereafter proceeded to conclude that these enterprises had abused their dominant positions.

Cases where abuse was found and punished

The first case in which the CCI found an allegation of abuse of dominance maintainable on evidence was MCX Stock Exchange Ltd v. National Stock Exchange of India Ltd. and DotEx International Ltd. MCX-SX alleged abuse of dominance by NSE, which reduced certain charges in the Currency Derivatives (“CD”) segment which were normally levied by NSE in the other segments. The CCI defined the relevant market for the purposes of this case as the CD segment of the wider stock exchange market.

After giving due regard to the factors mentioned in section 19(4) (enumerated above), the CCI observed that NSE was dominant in the CD segment even though NSE had a mere 30% market share, the lowest among the three major competitors (namely, NSE, MCX and USE). The CCI observed that market share is not the sole determinant of dominant position of an enterprise; the size, resources and economic power of NSE were far greater than those of its competitors. The CCI found NSE in violation of sections 4(2)(a)(ii) (unfair or discriminatory pricing)and 4(2)(e) (uses its dominant position in one market to enter into or protect the other market) of the Act. For determining violation of section 4(2)(e), the CCI observed that “it is possible to take one market as the ‘relevant market’ for sub sections (a) to (d) of section 4(2) and the same market as the ‘other market’ for section 4(2)(e)”. Therefore, the CCI considered the ‘CD segment’ as the relevant market for section 4(2)(a)(ii) and the wider ‘market for stock exchange services’ as the relevant market for section 4(2)(e) of the Act. The CCI noted that NSE was not charging transaction fee, data feed fee, admission fee for membership, annual subscription charges, and advance minimum transaction charges in the CD segment. Also, the amount of cash deposit to be maintained by the (trading) members for this segment had been kept very low as compared to other segments. While MCX-SX, which had its operations in the CD segment only, was posting losses, NSE had not shown any variable costs and not even maintained separate accounts for the CD segment. The CCI observed that only a dominant entity could afford to do so and hence, after taking into consideration all the above factors, it concluded that NSE had abused its dominant position in the CD segment and accordingly, imposed a penalty of INR 555 million (approx. USD 12 million).

In the other high profile case, Belaire Owner’s Association v. DLF Limite, the CCI imposed a penalty of INR 6300 million (approx USD 140 million) on DLF for abusing its dominant position in the market. The case was filed by the owners’ of apartments in a real estate project developed by DLF. In its response, DLF’s preliminary contention was that as the apartment buyers’ agreements were signed before the concerned provisions of the Act came into force, and therefore, the CCI lacked jurisdiction. This argument was rejected by the CCI and it ruled that although the agreements were entered into before the Act came into force, since the provisions of the agreements were invoked after the enforcement of the Act commenced, the CCI had jurisdiction. In this case, the CCI defined the relevant market as the market for services of developer/builder in respect of high-end residential accommodation in Gurgaon (the town in question). While determining dominance, the CCI again emphasized the fact that market share is not the only determinant of dominance; the other factors, mentioned in section 19(4), had to be given due regard. Accordingly, the CCI took into account DLF’s gross fixed assets, capital employed, land bank in Gurgaon (DLF held 49% of total land bank), strength of its subsidiaries, and DLF’s size, resources, and economic power, and the power if its competitors.

The CCI rejected DLF’s contention that the conditions included in the agreement were ‘usual conditions’ and constituted an ‘industry practice’ and therefore, could not be said to have been imposed by abusing its dominant position, and that it was necessary for DLF to incorporate such clauses in order to remain competitive. Further, it was argued that such an agreement is fully protected under the explanation to sub section 2(a) of section 4 of the Act which provides for exceptional cases wherein discriminatory condition or pricing was adopted to meet competition.. However, the CCI noted that DLF had been operating in the market much before any competitor entered the market and as such had been a “trend setter”. It also stated that DLF was a market leader in the real estate segment and as such, it was DLF which would have initiated and developed the industry practice in question which was later followed by the new entrants in the market, and over the period of time was considered to be ‘industry practice’.

The decision of the CCI in this case (now under appeal before Competition Appellate Tribunal) has led to much debate in professional circles. A view has been expressed that this was typically a consumer-type complaint and should have been left to the consumer forums to decide. There has also been debate about whether the CCI correctly defined the relevant market by restricting it both product-wise (high end residential apartments) and geographically (confined to Gurgaon).

Cases where dominance found but abuse not found

In the case of M/s Pankaj Gas Cylinders Limited v. Indian Oil Corporation Limited (“IOCL”), the CCI found IOCL to be dominant but it did not find any abuse of its dominance by the company. IOCL had floated tenders inviting bids for supply of cylinders of 14.2 Kg capacity with SC valves. The tender had a clause that those bidders who were holiday listed/black listed by IOCL and two other government owned oil companies (BPCL and HPCL) could not bid for the contract. The investigation report submitted by the Director General, CCI observed that holiday listing is ordinarily in the nature of temporary restraint for a specified period and the restraint is limited to the extent of supply to the enterprise which had holiday listed the entity. Also, holiday listing is confined to a particular bid or the contract of supply and does not extend to other contracts with the holiday listed company. It was contended that the restrictive condition imposed by IOCL would have appreciable adverse effect on competition and also violates sections 4(2)(a)(i) i.e. imposing of unfair or discriminatory condition, and 4(2)(c) i.e. denial of market access, of the Act. As the per regulations, only government owned oil companies are allowed to market cylinders of 14.2 Kg and hence, such condition by IOCL would also have the effect of denial of market access as all the three government owned companies had been included by IOCL for the holiday/black listing restriction.

In this case, the CCI defined the relevant market as the market for 14.2 Kg capacity cylinders in India. The CCI found IOCL to be dominant considering that IOCL had 48.2% market share in the relevant market (BPCL and HPCL had around 26 % share each), 89 bottling plants and a wide network of offices which made it dominant in the relevant market.

IOCL contended that it was well within its right to protect its commercial interests as well as public interest and the same was sought to be achieved by putting only a temporary embargo upon a known defaulter. Also, such a temporary action would not amount to abuse of dominant position as it did not affect competition; on the contrary, it sent a strong message to unreliable players

It also submitted that the condition in the tender was neither unfair nor discriminatory as it was equally applicable to all the bidders and known to everyone. Further, the suppliers were not confined to manufacture of cylinders of 14.2 Kg only; they were free to supply cylinders of other dimensions to other buyers. IOCL further contended that the restriction on trade to sub-serve public interest should not be construed as an abuse. It also submitted that it was a common business practice that a person with undesirable conduct was precluded from participating in the tender process. Thus, if any supplier had defaulted in supply, the procurer company was well within its right not to deal with the defaulting supplier. The CCI concluded that the impugned clause did not contravene the provisions of section 4 of the Act and also, there was no appreciable adverse effect on competition in the relevant market.

In Explosives Manufacturers Welfare Association v. Coal India Limited and its Officers, the CCI found Coal India Limited (“CIL”) to be a dominant player in the relevant market but did not find any abuse by CIL.

The case pertained to an agreement entered into between CIL and IOCL-IBP for supply of explosives for five years, while earlier, the general practice by CIL had been to enter into a running contract for one year. The informant alleged, inter alia, contravention of sections 4(2)(b)(i) i.e.limiting production of goods or market, and 4(2)(c) of the Act.

The CCI defined the relevant market as ‘the market of bulk and cartridge explosives in India’. While defining the relevant market, the CCI considered the contention of CIL that since there were global players outside India who were also the consumers of industrial explosives, the relevant geographic market could not be confined to India only. However, the CCI observed that since the case was with reference to competition in India, the market within the territory of India would be the appropriate relevant market.

While determining the position of dominance, the CCI found that CIL was the biggest consumer of the product in question having a market share of around 65% with nine direct subsidiaries and two indirect subsidiaries, and in terms of size and resources it was superior to its competitors. CIL submitted that it had entered into an extended (five-year) contract for supply with IOCL–IBP to ensure uninterrupted supply. It further submitted that the contract was beneficial for consumers of coal and promoted the economic development of the country ensuring that it always had adequate and secure supplies of explosives to meet the needs of coal dependent industries.

CIL also drew the attention of the CCI to the fact that the constituent members of the informant association threatened to cut off the supply and had, on at least three occasions, collectively done so. CIL submitted that there was public interest involved in the continuity of business as coal is a crucial input for various industries such as electricity generation, steel manufacturing, fertilizers, liquid fuel, cement etc. It further submitted that the contract with IOCL-IBP was for only 20% of the total explosives required by CIL and this quantity was merely 13% of the total explosives consumption market in India. Thus, the suppliers were free to compete for the remaining supply requirements and there was no foreclosure of the market and no denial of market access either. Accordingly, the CCI did not find any contravention of section 4 of the Act.

Collective Dominance

In Consumer Online Foundation v. Tata Sky & Ors., the CCI observed that:

Indian law does not recognize collective abuse of dominance as there is no concept of ‘collective dominance’ in the Act, unlike in other jurisdictions such as Europe. The Act recognizes abuse of dominance by a ‘group’, which does not refer to a group of completely independent corporate entities or enterprises; it refers to different enterprises belonging to the same group in terms of control of management or equity.

It has been felt by some experts that the CCI should give serious thought to the issue of collective dominance, else collective action by a group of enterprises having no structural links could escape action by the CCI.

Conclusion

The enforcement practice in the above cases reflects the importance that the CCI is attaching to the abuse of a dominant position by large enterprises and it has sent out a clear signal that it would not hesitate to take action in such cases. In determining dominance, the CCI has asserted that market share would not be the sole factor, and the CCI would as well consider other factors listed in section 19(4), including the strength enjoyed by the alleged dominant enterprise outside the relevant market.

The CCI noted that any particular percentage of market share could not be designated as a parameter for dominance, and went on to find dominance with even a low market share of 30% when other supporting factors were present; it has stressed the need to take a “holistic approach”. Also, the CCI has taken into consideration inter alia the public and consumer interest as, for example, in the above cases where the alleged abuse of dominance was not found. The CCI has also given due regard to legitimate business interests of the companies while deciding on abuse, e.g. in the IOCL case, it observed that the procurer company was well within its rights not to deal with any defaulting supplier. Further, the CCI has so far taken the view that collective abuse of dominance by enterprises not having structural links was not contemplated in the Act.

Vinod Dhall is Chairman, Dhall Law Chambers, and former Head, Competition Commission of India. Mr. Dhall can be contacted at vinod.dhall@dhall-lawchambers.co. Alok Nayak is a final year law student at Gujarat National Law University, India and can be contacted at Aloknayak28@gmail.com.

 

 

By Vinod Dhall and Alok Nayak

 

Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s