CCI’s Limits

A small issue in the recent Order of the Commission in Saurabh Bhargava v. Ministry of Agriculture (Main Order/Dissenting) was whether the Commission had the authority to issue a notice to the Ministry of Agriculture or even reprimand it for any laws which it may enact which may be considered ‘anti-competitive’ in the relevant market economy. The main order does not bother to stress on the issue (presumably because the case as it is stands dismissed on merits). However, it is respectfully submitted that the CCI would not have any statutory authority for the following reasons.:

1. The definition of enterprise has been defined under Section 2(h) as follows:

“enterprise” means a person or a department of the Government, who or which is, or has been, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services, of any kind, or in investment, or in the business
of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, either directly or through one or more of its units or divisions or subsidiaries, whether such unit or division or subsidiary is located at the same place where the enterprise is
located or at a different place or at different places, but does not include any activity of the Government relatable to the sovereign functions of the Government including all activities carried on by the departments of the Central Government dealing with atomic energy, currency, defence and space.

Now firstly, regulations or rules issued by any executive authority for the purposes of regulation of the provision of any goods or service cannot be it self be considered a service on the part of the Government. It is merely the exercise of the legitimate state authority. Secondly, using the phrase “..relating to the….” to justify such sanction of such executive authority is I feel too broad an interpretation of the definition of the term “enterprise”.

2. Section 3 is irrelevant in such cases as the Government does not enter into an agreement of any form in stipulating certain regulatory criteria which requires fulfillment by an individual to commence his or her operations.

3. An argument against the government under Section 4 would also fail in light of the definition of the term “Dominant Position” under the explanation to Section 4.:

(a) “dominant position” means a position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to—
(i) operate independently of competitive forces prevailing in the relevant market; or
(ii) affect its competitors or consumers or the relevant market in its favour.

The dual requirements of this definition cannot be fulfilled since any such ministry or other governmental department is not part of any relevant market or catering to any consumers with any goods or services.

4. A notification under Section 54 would also not be necessary in such a circumstance for the reasons mentioned above.

However, I should clarify that I certainly do not intend to say that a PSU cannot be held accountable under the Act. The above argument would apply strictly to an executive authority of the government such as a ministry or a sub-division of a ministry.

It’s Not the End of the World You know….

A recent article in the Economic Times pointed out a flaw in the Competition Act, 2002 that the Commission under Section 26 cannot close a case if the Director-General of investigation points out a contravention after a matter is referred to it for investigation.

While the oversight is unfortunate, the concerns of the author in the article are slightly exaggerated. Assuming a party in the future was to raise the issue before CCI or a higher forum, it will in all probability be remedied considering the stance of the hon’ble Supreme Court on the interpretation of statutes. Don’t get the wrong impression. I am certainly not condoning the error on the part of the government. To quote the lament of the late great Nani Palkhivala, “we legislate first, and think afterwords….” (Source: Soli J Sorabjee and Arvind P Datar, Nani Palkhivala: The Courtroom Genius)

Coming back to the interpretation of statutes, a court of law is entitled to depart from the literal rule of interpretation (i.e. words of a statute should be construed as they are) and insert words into a statute wherever required. To quote from Hameedia Hardware Stores v. B. Mohan Lal Sowear, 1988 (2) SCC 513

“Words may also be read to give effect to the intention of the Legislature which is apparent from the Act read as a whole”

This rule has been used a number of times by the Court in cases such as Siraj-ul-haq v. Sunni Central Board, U.P., AIR 1959 SC 198; State Bank of Travancore v. Mohammad, AIR 1981 SC 1744 and Union of India v. Seppo Rally, AIR 2000 SC 62. There can be no doubt that the intention of the legislature was in general, subject to the exceptions under sections 54 to 56, to grant supremacy to the CCI to be the final arbiter as to any perceived anti-competitive conduct in the country. Therefore, there does exist an effective judicial solution to the problem if required. And of course, there is always the option of a retrospective amendment to the Act. However, considering the present state of affairs in the country, don’t see that happening anytime soon.

A Layman’s Guide to Indian Competition Law

I found a nice presentation by Shri Vinod Dhall, Former Chairman of the CCI while “competition surfing” the net as I like to call it. Its simple and easy to understand and should help any individual other than a lawyer to easily understand the provisions of the Act.

The presentation can be found here

A Few Thoughts on Competition Law in the Technology and Media Sector

I recently wrote a post titled “A Few Thoughts on Competition Law in the Technology and Media Sector” for the India Law and technology Blog. To read the article, please click here.

Indian Competition Law’s Dark Night.

The analogy might seem stupid or funny to many, but I just couldn’t help but remember the movie Batman Begins while reading the news about the CCI’s Cement Cartel Decision. Think about it, just like the Batman, there are now those who love the CCI, proud that someone decided to teach the big corporations a lesson, and there are those who hate the CCI, who are not only crying themselves hoarse on the injustice meted out to the Cement Manufacturers’ Association (CMA) and its affiliated companies and who will surely appeal to the COMPAT, and if required, even the Supreme Court.

While I do support the decision (a day may come when I shall become Anti- CCI, but it is not today and shall probably not come for quite some time), there are a few questions or points which do merit consideration, just for the sake of clarification, if nothing else. They are as follows:

1. Almost all the companies as respondents have contended that there profits actually fell for the period in consideration, and hence, no benefit actually accrued to the companies who were allegedly members of the cartel. Even assuming that this is true, the argument is irrelevant under competition law. The U.S. Supreme Court held as far back as 1927 in United States v. Trenton Potteries Co. et. al., 273 US 392 (1927) that

“the aim and he aim and result of every price-fixing agreement, if effective, is the elimination of one form of competition. The power to fix prices, whether reasonably exercised or not, involves power to control the market and to fix arbitrary and unreasonable prices….Once established, it may be maintained unchanged because of the absence of competition secured by the agreement for a price reasonable when fixed. Agreements which create such potential power may well be held to be, in themselves, unreasonable or unlawful restraints without the necessity of minute inquiry whether a particular price is reasonable or unreasonable as fixed and without placing on the government”

The decision was further affirmed in United States v. Socony-Vacuum Oil Co., 310 US 150 (1940) wherein it was observed

“Any combination which tampers with price structures is engaged in an unlawful activity. Even though the members of the price-fixing group were in no position to control the market, to the extent that they raised, lowered, or stabilized prices, they would be directly interfering with the free play of market forces.”

2. Circumstantial Evidence also seems to have become a bone of contention with every respondent contending that the circumstantial evidence is not good enough to prove a cartel. This IS a contentious issue since the use of circumstantial evidence in competition law is as of now debatable. I would prefer to let the OECD do the talking on this subject, through their excellent policy roundtable paper on the same. The key point to note is that their primarily two forms of circumstantial evidence, communication evidence and economic evidence. Of the two, communication evidence is considered to be the more important as economic evidence is often ambiguous due to the multiple interpretations available for the same. This is more than evident in the Order itself, wherein a number of respondents have relied on the affidavits and expert opinion of economic experts to substantiate their case. ( One sees to get the impression that all of them have their own opinion regarding the same !! 😀 Also, pages 156 and 157 of the Order speak on the Commissions decision of circumstantial evidence).

3. There is a prickly issue in the claim that the collection of the information was asked by the government itself, and that after the closure of the Office of Development Commissioner of Cement Industry (DCCI) in 1989, the CMA was directed by the Department of Industrial policy and Promotion to collect and submit data which was earlier collected by the DCCI. Now Section 54 clearly allows the Central Government, by notification to exempt any enterprise or class of enterprises from the provisions of the Act where that enterprise performs a sovereign function on behalf of the Central Government. Also, in case an enterprise is engaged in any activity including the activity relatable to the sovereign functions of the Government, the Central Government may grant exemption only in respect of activity relatable to the sovereign functions. The collection of such information by the CMA for the Ministry of Commerce can be interpreted as the performance of the sovereign function for the Central Government. The catch: I could not find any notification issued by the Central Government published in the Gazette which grants such an exemption to the CMA. If the respondents possess one, then good for them. It will be a very strong argument before the COMPAT.

4. I don’t see the relevant market issue ( See pages 184 and 233 of the Order) as a serious problem as long the evidence points to a general collusion. However, only further proceedings before the COMPAT help us understand this issue better.

Some Thoughts on Cartels in India

This post arises out of the often lengthy (and occasionally extremely annoying to others!!) bouts of brooding which often hijack my head. Though the subjects of such musings are mixed and varied, this particular one was specifically on competition law. Eventually, the contemplation became more subject specific, i.e., on cartels in India. Therefore, I pen my thoughts below and invite an active discussion on the issues regarding the same.

1. Under Section 27(b) of the Act, the Commission can impose a penalty against any cartel which shall not be more than ten percent, of the average of the turnover for the last three preceding financial years upon each person or enterprise involved in any such a cartel. The Question: Will ten percent really be enough to deter any cartel formation ?? Allow me to explain. It is now accepted that the level of sanctions should be of such amount so as to deter crime. A high level of sanction therefore, contributes to minimise the costs of enforcing the law as a high penalty acts as an effective deterrent to crime. Now when it comes to a cartels, a firm shall only participate in such collusion depending on the advantage it may derive from such a cartel. Obviously, if the profits are not worth the risk, why bother to step on the shoes of the law in the first place ?!?! Now, even with the imposition of penalty (which to be noted cannot exceed ten percent as per Section 27(b)), would this clause of a ten percent limit on an imposition of the penalty actually act as a deterrent in the effective enforcement of the law ??

To take a hypothetical example, lets say four firms decide to enter into a cartel sensing to grab the opportunity to abuse their combine domination on the market. The Cartel presumably, is not discovered for atleast two years (its a lot harder than one would like to believe), and in the meantime each firm manages to garner a turnover/revenue of approximately 400 crore for each year. Therefore, for the two years, a turnover of 800 crore. The year before that (which would be required to calculate the penalty), on an average, each company use to make an average turnover/revenue of 200 crore. Therefore, an average of of the three years – 333 crore(approx.). Therefore, ten percent of this amount would result in 33.3 crore penalty on each firm. A paltry and insignificant sum as compared to the 400 crore advantage each firm derived in the two years of the existence of the cartel. Therefore, where and how does it create a deterrence amongst firms to engage in such future cartelisation , when it is more than obvious that irrespective of the penalties, the firms shall make a profit ?!?!

(Update: Of course, as it turns out, the above was a redundant questions as I completely forgot to take into account the proviso to Section 27(b) which does provide a solution to the dilemma. An unfortunate consequence of writing posts half asleep !! Deeply apologise for the error as regards cartels. However, the theory would still hold true for other anti – competitive arrangements.)

2. Should the Commission (and the DG of investigation) adjust penalties and sanctions by granting the incentive to one or more members of the cartel to undercut each other ?? Simply put, undercutting in cartels is allowing one firm an exemption from a probable penalty for participation in a cartel by encouraging it to break the cartel by offering their goods at lower prices than the collusive price among member of the cartel. Its not a tactic that Commission has used till now, but it should consider using such innovative methods if it intends to maintain competition in the market and still be able to effectively conduct investigations and pass orders in a reasonable time and prevent a backlog of cases, which is unfortunately, more than prevalent among other Courts and Tribunals in the Country.

Why the Communications Sector Should not be Exempted From the Competition Act.

Communications Today reported on 19th March, 2012 that the Telecom Department will ask the Union Cabinet to exempt the communications sector from the country’s Competition Act. According to the article, “the move comes after the competition watchdog-Competition Commission of India (CCI)-recently raised the red flag over the telecom ministry’s plans to allow mergers and acquisitions (M&As) if the combined market share of merged mobile phone companies was less than 60 percent.”

We shall not comment upon the logic or exigencies which compel the Telecom Department to make such a demand but shall only list below point by point reasons the reason why we feel the Telecommunications sector should not be exempted under the Competition Act, irrespective of the complaints which support the request. They are as follows:

1. As of December, 2011. there were exactly fifteen different players in the Sector (Bharti Airtel, Reliance Comm., Vodafone India, Idea Cellular, BSNL, Tata Teleservices, Aircel, Uninor, Sistema Shyam Teleservices, Videocon Tele, MTNL, S Tel, Loop Telecom, Etisalat DB, HFCL). Granted, there are maybe players one too many in the sector, but the fact remains that six of the above are extremely small players, with atleast two of them confirmed to be losing subscribers as per TRAI. Only the first eight are predicted by analysts to be major market players in the sector, and it is expected that these players shall in all probability fade away on their own. This is exactly what is envisaged in a competitive sector. The players in the relevant market which fail to grow and develop themselves in the relevant market should leave.

2. Continuing from the above, talking from the consumers perspective, tariff rates in the telecom sector in India can hardly be considered as an issue as frankly, they are one of the lowest in the world and even if assuming that they are raised in the near future, users can well afford the market rates, despite the recent cease fire in price wars. Admittedly, quality of service is a problem, but the reason for that is primarily lack of infrastructure rather than excess of competition, and merging companies shall certainly not help improve the same. What is required is some seriously heavy investment in infrastructure, rather than simply buying out smaller players in the market, and additionally maybe even some corporate restructuring.

3. The Supreme Court has recently cancelled all 2G licenses issued during A. Raja’s tenure as Minister of Telecommunications. With the Judgement it self being questionable as regards its ratio and till a certain extent, its reasoning, and at the same time a Presidential reference also having been filed asking for clarifications to the same, it is best to follow a wait and watch policy and act only after receiving the Supreme Court’s reply on the Reference.

4. As per the Economic Times, there is a new round of Spectrum wars that’s about to begin with the upcoming re-auctioning of spectrum. Again, it is best to wait till the conclusion of the auction before deciding on such issues.

5. Clause 5(3) of the The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 provides that form may be filed preferably where “the parties to the combination are engaged in production, supply, distribution, storage, sale or trade of similar or identical or substitutable goods or provision of similar or identical or substitutable services and the combined market share of the parties to the combination after such combination is more than fifteen percent (15%) in the relevant market”. In light of this sub-clause, it is best to maintain harmony between various government policies and the Act and regulations made under it in order to prevent unnecessary conflicts and confusion between the CCI, the Government and the Industry. In fact, the government, in its National Competition Policy, has sought to bring about harmony between the Act and policies and has suggested an elaborate mechanism to achieve the same.

6. Finally, if such an exemption is allowed, it will set a bad precedent in general and may encourage industries to lobby for exemptions in their favour.

The source of all data and statistics is The Economic Times

And I Thought My Jokes Were Bad….

Much has been said about the notification empowering the Competition Commission with its full merger control powers (as usual, I am late in publishing this post. I really must learn to be more punctual with this blog). To summarise, “the Central Government hereby appoints the 1st day of June, 2011 as the date on which Sections 5, 6, 20, 29, 30 and section 31 of the said Act shall come into force.”

However, the same notification also exempts, “in public interest”, the “group” exercising less than fifty percent of voting rights in the other enterprise from the provisions of Section 5 of the Act for a period of five years. At the same time, the Central Government has also again, “in public interest”, exempted an enterprise, whose control, shares, voting rights or assets are being acquired has assets of the value of not more than 250/- crores or turnover of not more than 750/- crores from the provisions of Section 5 of the said Act for a period of five years.

While what construes as “public interest” is subject to interpretation by the reader, what is not subject to interpretation is the fact that the exemptions more or less render the notification of the above mentioned sections, particularly Sections 5 and 6, worthless and as good as not having been notified at all. In fact, when read carefully, it is evident that the exemptions are in fact, clearly NOT in public interest.

Firstly, looking at the exemption of groups, it is evident that consequent to the exemption, any such “group” as defined in the act can effectively acquire voting rights in an enterprise through stock purchase, thus controlling the company. Since the term “group” has been used under Section 5(b)(ii) of the Act, the purpose of this part, i.e., to prevent combinations of or among enterprises engaged in production, distribution or trading of a similar or identical or substitutable goods or provision of a similar or identical or substitutable service, remains unfulfilled in preventing horizontal mergers inhibitory to competition in the market and the growth of a dominance of a single group in the relevant market.

Secondly, the exemption relating to acquired enterprises in even more disastrous in consequences than the previous one. It blatantly allows a larger enterprise and one endowed with considerably large pool of resources (which most large enterprises without a doubt have) to buy out any other comparatively smaller venture which has the potential to or is already building up a competitive position in the market. The acquired enterprise having been exempted, such acquisitions cannot fall under the regulatory jurisdiction of the CCI.

An argument may be raised that any such merger or acquisition would still be subject to the procedure of approval under the Companies Act, 1956. However, with all frankness, taking into account real practice, the procedure laid down under the above act under Section 372 is not an effective mechanism to check or determine the effect of an acquisition or merger on competition in the markets. Sanctions are usually granted with little objection, and the procedure relates more to internal formalities within the companies rather than regulatory external control.

On a sarcastic note, maybe “public interest” means not the interest of the citizens of India and the Indian market, but rather the “public” government.