CPI Cartel Column edited by Rosa Abrantes-Metz (NYU Stern School of Business)
India: Prohibition of Anti-Competitive Agreements and Abuse of Dominant Position by K K Sharma* (KK Sharma Law Offices & Ex – Director General, CCI)
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After a long wait of nearly six years, during which it was exclusively engaged in competition advocacy duties under section 49 of the Competition Act, 2002 (the Act), the Competition Commission of India (CCI) got enforcement powers for prohibition of anticompetitive agreements, cartels and abuse of dominant cases on May 20, 2009. Perhaps, as can be understood for any new competition agency, it took some time for the CCI to put the entire investigating and secretarial machinery in place for it to be in a position to carry out its enforcement mandate effectively.
Although the flow of information (as the complaints are called under the Act) started coming in right in the first few weeks of the enforcement powers being given to the CCI, and although the first investigation reports from the Director General began flowing in from September, 2009 onwards, it took a while for the CCI to start delivering its orders restraining erring market players or imposing penalties on them or their associations. The reasons for this were not far to seek. The CCI had to give an opportunity of being heard to the different parties involved. The Indian lawyers, used to the judicial system in India, had their own ways of asking for inspections, copies of various documents or adjournments on one excuse or another which, effectively, meant a delay in the proceedings. “Justice delayed is justice denied” is not just a saying but a vibrant reality in Indian sub-continent, not just India. This is almost an article of faith amongst some lawyers who, perhaps, believe that howsoever weak their defense may be, tomorrow may develop some escape route.
On May 25, 2011, disposing off the very first information before the CCI (Case No. 1 of 2009), the CCI agreed1 with the findings of the Director General (DG) that the United Producers and Distributors Forum (UPDF) had indulged in cartelizing conduct by way of not supplying prints of the motion pictures to multiplex theatres, but imposed a token penalty of Indian rupees 100,000 (only about USD $1,667) each on the cartelizing members. Some of the parties still went in appeal before COMPAT. In absence of any strong defence, agreeing clearly with the categorical finding of DG and still imposing a token fine - after keeping the matter pending for nearly two years - it is not very easy to understand. If finalization of this matter had been done expeditiously, and not much after the cartelization was proved by DG, it would have had the potential to be an admitted cartel case with, maybe, a still higher fine and a much stronger advocacy value. When compared with Singapore, wherein the first few cartel cases were used to showcase the determination of the authority, this may have been an opportunity missed here by CCI.
In its very first case, after the enactment of the Competition Act of 2004, the Competition Commission of Singapore (CCS) imposed a penalty totalling S $262,759.66 on six pest control companies.2 Interestingly, in this case, none of the six parties objected to the findings of CCS,3 nor did they appeal the CCS’s order. In the same press release,4 in which this infringement order was announced, the CCS also showcased its leniency program and induced the members of the public as well as any cartels to come forward with instances of cartelization. During the course of investigation, CCS ensured that this case becomes that of an admitted cartel and the parties investigated do not file appeals against the order of CCS. Similarly, if the very first case of cartelization before the CCI was used to gain visibility (the case had great potential coming from the high visibility entertainment sector) and credibility, by making it an admitted cartel and announcing the decision quickly, the journey of the CCI towards being seen as an effective and mature competition agency could have been much quicker as such actions give credibility and confidence to any new competition agency.
The next order coming from the CCI related to a trade association was Paper Merchants Association of Delhi (PMAD) in Vijay Paper Merchant5 case (Case No. 7 of 2010). Although no penalty was levied on the PMAD, cognisance of the anti-competitive clauses in the constitution of the association was taken and the PMAD was directed to modify the constitution and report back to the CCI. Even without imposing a penalty, this was the first case taking cognisance of anti-competitive clauses in the constitution of a trade association. It is important to note that, despite a lapse of nearly four years of enforcement, the trade association activities remain a big headache for the CCI even today. Case after case, the dubious role of the trade associations keeps on surfacing in the matters before the CCI. This also indicates in India how rampant the old business practices are, many times under the guise of trade associations, which are either instances of plain cartelization or border on cartelization.
Thereafter, the next true first affirmative order of the CCI imposing penalty on a market participant was in the case of National Stock Exchange (NSE) (Case No. 13 of 2009). This was a complaint from MCX Stock Exchange (MCX-SX) against the NSE for not charging any transaction fee for two long years despite recurring costs for providing its services. The allegation of MCX-SX was that the NSE was cross subsidising its operations in providing services for currency derivative segment from the receipts being collected by an NSE from its operations in the share market segment. A further allegation of MCX-SX against NSE was that NSE was merely waiting for MCX-SX to fail before being in a position to capture and exploit the market. This tactic of predatory pricing was used by NSE to ensure that the new entrant into the market, MCX-SX, was wiped out. It was a matter where the CCI had a ready case of predatory pricing. It may be mentioned that, across the competition world, cases of predatory pricing are extremely difficult to prove. This is true for the reason that predatory pricing requires intense economic analysis which may not be easy for a new competition agency in a developing economy, as was the case with the CCI.
However, things were made easier by the fact that the predatory price, in this case, was not a finite price but a zero price. Naturally, it made the task for the CCI easier. The second factor that went in favor of MCX-SX was that its net worth was continually eroding and it was public knowledge as to how long it could survive. The complainant could bring out forcefully before the CCI that it is, financially, on a death bed and it is only a matter of time before it is totally wiped out from the market, and that the predator exploits the market to its advantage. Another factor that went against the NSE was that although originally treated as a promotional price, zero pricing continued nearly indefinitely on one pretext or the other that were not fully explainable.
The order against the NSE set the pace of the future course of action of the CCI to come heavily against all anti-competitive practices. This order, imposing a penalty of INR 55.5 Crores (about USD $9.25 million.), was followed by another landmark order against realty major in India, DLF Ltd.6 A massive penalty of Indian Rs. 630 Crores (about USD $105 million) was imposed on DLF for abusing its dominant position. People may keep debating as to whether it was a consumer matter or a competition issue, however it certainly marked the beginning of an upbeat CCI confident of passing similar orders in other cases of infringements in a way to signal that it would not take violations of competition law lightly.
Another important case was that of LPG Cylinder Manufacturers.7 It may be interesting to note that the case was brought against Public Sector Oil (PSU) major, Indian Oil Corporation by a manufacturer of LPG cylinder, Pakaj Gas Cylinders, who was a member of LPG Cylinder Manufacturers Association. During the course of investigation by DG, it was found that not only were the allegations untrue, but the complainant was a part of a cartel of LPG Cylinder Manufacturers Association that was consistently rigging bids of the tenders floated by the oil processing companies. The case against the Indian PSU company was predictably turned down. However, the CCI simultaneously took cognizance, on its own, of the cartel of LPG Cylinder Manufacturers Association members who were consistently submitting bids after the pre-bid meetings amongst all the members of the association. This investigation resulted into very interesting results. It was found that the association was a hotbed of anti-competitive conduct. Not only were they indulging in anti-competitive practices but they also had the gumption to approach the CCI.
A look at the orders handed down by the CCI in cases of anticompetitive agreements, including cartels, or cases of abuse of dominant position, shows a trend that the CCI is not shying away from the imposition of heavy fines just because it happens to be a new competition authority. In the case of DLF, being held guilty of abuse of dominant position within the relevant market of Gurgaon, a suburb of Delhi in the adjoining state of Haryana, the CCI imposed a penalty of 7 percent of its average turnover for the last three years. This was a bold move if we compare the evolution of competition law either in the United States of America or the European Union. Similarly, the CCI did not think twice before imposing a fine of 10 percent of turnover in the case of Cement Manufacturers Association in the cartelization by cement companies, which is the maximum allowable fine under section 27 of the Act.
The CCI has also shown maturity in not imposing multiple fines if a cause of action has been addressed by its earlier orders passed, in the case of same parties against which information has been received in the past. It happened in the case of DLF Ltd Around the same time, when information against DLF was received from Belair Owners’ Association (which finally resulted in fine). A number of additional information against DLF Ltd were received by the CCI against various completed projects of DLF. Several of this information was forwarded to the DG for investigation. The investigation reports from the DG came at various stages but not spaced too much apart from each other. It so happened that multiple cases against DLF were being heard before the CCI at around the same time. The first of these cases to be decided by the CCI was that of Belair Owners’ Association. In this case, as is widely known and mentioned earlier in this writing, a penalty of 7 percent of the average turnover of last three years, totalling to Rs 630 Crores (about USD $105 million) was imposed on DLF Ltd. Thereafter, in the other multiple cases against the DLF, the CCI did pass “Cease and Desist” but declined to impose any monetary penalty. It was a very sagacious approach signalling fairness.
Interestingly, when DLF filed an appeal before COMPAT, the CCI was directed by COMPAT to not just find fault with the buyer builder agreement, which was found to have lacunae in the case of DLF, but also give an alternative model of a similar agreement which would not violate the provisions of the competition law and, by implication, act as a model agreement between a buyer and a builder. Undoubtedly it was a positive step forward. In response to the direction of COMPAT, the CCI did draft a model agreement which would be appropriate for the builder and the buyer to enter into. This agreement, available on the website of the CCI, was passed in the form of a supplementary order8 to the order of DLF, a modification to the original order. It is a very positive development. Interestingly, it is around this time that on account of various pressures, the Government of India is also seriously considering bringing about a regulator for the housing and building sector. When that becomes a reality may not be known, but the order of the CCI has done an excellent job of focussing the spotlight on the unequal relationship between a buyer and seller of residential accommodation.
One of the cases decided by the CCI stands out for understanding its approach while dealing with different types of business segments. This is Case 5 of 2011.9 A blatant case of collusive bidding was referred to the CCI by South Eastern Railways in which all the bidders tendered identical price down to the second decimal digit. DG confirmed the prima facie opinion of collusive bidding of the CCI. The CCI passed a ‘Cease and Desist’ order but did not impose any penalty, stating that all the parties being micro and small scale industries having low awareness of competition law. For a comparison, in its second case of cartelisation by 16 coach operators and their association,10 the Competition Commission of Singapore noted "ignorance or a mistake of the law is no bar to a finding of intentional infringement under the [Competition] Act.” This is an important indication of the approach of the CCI keeping in mind that since 2003 the CCI has been doing high decibel competition law advocacy in India.
When we look at the landscape of the cases decided by the CCI, one thing is certain: in a short span of about three years, the CCI has been able to touch nearly all sectors of the economy – be it pharmaceuticals, realty, entertainment, software, advertisement, finance companies, stock exchanges, and basic commodities such as onions, sugar, et cetera. Luckily, the orders of the COMPAT have been of help in establishing the rule of enforcement of competition law in India. In a good number of cases, the orders of the CCI have been confirmed by COMPAT, such as the case of cartelization brought by Coal India Ltd before the CCI, in which penalty imposed by the CCI has been confirmed by COMPAT11 with some modifications. In a number of cases, although the quantum of penalty has been reduced the basic allegation has been upheld. The confirmed cases include a good number of cartel cases including those relating to the travel agents’ association, and many others.
As already mentioned in this article, in the case of cement companies, COMPAT has insisted on payment of at least 10 percent of the penalty amount imposed by CCI on the cement companies involved. Despite having travelled up to the Supreme Court, the finding of the COMPAT has been upheld. This is a big victory for the competition law and a big setback for cartelization tendencies. Unfortunately, the courts of the subcontinent are notoriously slow and it is jocularly remarked, though based on stark facts, that the pending workload before the judiciary, in any court in the subcontinent, is so much that it cannot be completed in this lifetime of the concerned judge. With the situation being so serious, it is indeed heartening to note that the resolution of appeals filed before the Supreme Court by cement companies against the order of COMPAT was quickly disposed of. This has given a very clear signal to all and sundry across the country that no violations of competition law would be taken lightly.
Thus, on the basis of the performance of the CCI, COMPAT and Supreme Court, it can be said that, irrespective of differing opinions on matters of detail, what is clear is that competition law is here to stay. Other than cement companies, there are pending cases before COMPAT where COMPAT is insisting on payment of not just 10 percent of the total penalty imposed by the CCI but, in some cases, as high as 25 percent of the penalty imposed by CCI, before taking up appeals. All this augurs well for the establishment of competition law in India.
This is a far cry from the time when cases of cartelization used to come before MRTPC Act but could not be resolved on account of lack of proper provisions in the then applicable law, MRTPC Act, 1969 and an absence of a clear definition of the word “cartel.” In some cases, because of this, unfortunately, despite having held that cartel conduct was there, no penalties could be imposed. In the present dispensation, not only are the cases being disposed of quickly by COMPAT, but the parties are required to pay at least part of the fines imposed by the CCI before their appeals can be heard. This is not a part of law anywhere. However, these are the practices being developed by COMPAT.
When discussing the enforcement of prohibition of anticompetitive agreements and abuse of dominant position by the CCI, we cannot be oblivious to the fact that despite leniency regulations of the CCI being in place for nearly three years, not a single serious application has been filed before the CCI for leniency. This is slightly unusual. As is generally believed, the success of any leniency program depends on the quality of leniency programs, as to whether it is well drafted or not, and the effectiveness of the competition agency in pinning down the anticompetitive conduct. In view of this, not a single application of leniency coming to the CCI indicates some gaps in the leniency program, or the fact that a full fear of enforcement has not yet percolated down to the persons indulging in anticompetitive conduct. Some attribute it to the lack of certainty, for the person coming forward to avail the leniency, of waiver from fines because of the use of the word “may” and not a more definitive “shall” in the operative part of the regulations12 (clause 4(a) of the regulations), which detail as to how much waiver can be expected by the leniency seeker. There is a view that the fear among cartel members in exercise of the CCI’s discretion is keeping them away from the CCI. It may or may not be true. However, if a more definitive and less discretionary language is used in the leniency regulations, it certainly would inspire more confidence in the cartel members coming forward to the CCI to spill the beans about cartelization activities. It may improve the effectiveness of the agency if leniency regulations are amended suitably. However, the agency has acquitted itself quite well in its functioning against antitrust enforcement. There is always a hope that tomorrow would be a better day.
* For further details, visit www.kkslawoffices.com and the autor can be reached at kksharma@kkslawoffices.com or kksharmairs@gmail.com
1 http://www.cci.gov.in/May2011/OrderOfCommission/FICCIOrder260511.pdf
2http://www.ccs.gov.sg/content/ccs/en/Public-Register-and-Consultation/Public-Register/Anti-competitive-Agreements.detail.collusive_tenderingbid-riggingfortermitetreatmentcontrolservices.html
3 Para 359 Ibid 3
4 http://www.ccs.gov.sg/content/ccs/en/Media-and-Publications/Media-Releases/CCS-Fines-Pest-Control-Operators-for-Bid-Rigging.html
5 http://www.cci.gov.in/menu/OrderVijay150411.pdf
6 http://www.cci.gov.in/May2011/OrderOfCommission/DLFMainOrder110811.pdf
7 http://www.cci.gov.in/May2011/OrderOfCommission/LPGMainfeb2.pdf
8 http://www.cci.gov.in/May2011/OrderOfCommission/192010S.pdf http://www.cci.gov.in/May2011/OrderOfCommission/DLFMainOrder110811.pdf
9 http://www.cci.gov.in/May2011/OrderOfCommission/REF-052011.pdf
10 http://www.ccs.gov.sg/content/ccs/en/Public-Register-and-Consultation/Public-Register/Anti-competitive-Agreements.detail.price_fixing_of_coachbusservicesfortravellingbetweensingaporeand.html
11 http://compat.nic.in/upload/PDFs/aprilordersApp2013/18_04_13.pdf
12 http://www.cci.gov.in/images/media/Regulations/regu_lesser.pdf?phpMyAdmin=NMPFRahGKYeum5F74Ppstn7Rf00