Director’s Brought Under The C.C.I. Scanner

The post below is by Kritika Sethi, a 4th year B.A. LLB. (Hons.) Student at NALSAR, Hyderabad. In it, she examines the Director’s Fiduciary competition law liability in light of the recent C.O.M.P.A.T. Order in National Stock Exchange v C.C.I., Appeal No. 15 of 2011.

The Competition Appellate Tribunal (C.O.M.P.A.T.) in its recent Order dated 05.08.2014 in the case of National Stock Exchange v C.C.I., Appeal No. 15 of 2011, has upheld the Order of the C.C.I. in MCX Stock Exchange Limited v. National Stock Exchange of India Ltd., Case No. 13 of 2009 [Majority Order, Dissenting Order, Section 38 Order] in holding the Company liable for abuse of its dominant position in the currency derivative business segment.

The case arose out of an information which was filed by the MCX Stock Exchange (“MCX”) against National Stock Exchange of India Ltd.(“NSE”) wherein it was alleged by the former that the latter has abused its dominant position in the Currency Derivatives (“CD”) segment. CD was introduced in accordance with the recommendations of R.B.I. and S.E.B.I. in August 2008. NSE had started its operation in the CD segment from that month itself. Further, vide its circular dated 26.08.2008, it had announced a waiver of transaction fee in all the currency future trade which included the CD segment. This waiver was extended from time to time. This extension was in operation when Section 4 of the Competition Act, 2002 was notified in 2009. MCX and NSE were the only active players that dealt in the currency derivatives market. The former operated in the CD segment only. It was not given the license to operate in any other segment like Stock Futures and Options, etc. On account of the waiver of the transaction fees and other associated charges in the CD segment by NSE, MCX was forced to waive various charges as well. It could not levy any other charge for income generation such as, inter alia, annuals subscription fees, and advance minimum transaction fees. By virtue of this waiver, it suffered huge losses. Further, NSE was charging annual subscription fees in the other segments, where MCX didn’t have a license to operate. Therefore, it was alleged by the MCX that this had a potential of removal of the only competitor and any potential competitor in the CD market due to its non-profitability.

NSE was held to be a dominant player in the market on account of its resources, size, higher degree of vertical integration, power in the market, absolute dependence of consumers etc. NSE had a higher market share than MCX and was financially stable and sufficiently resourceful to survive in the market despite waiver of any transaction charges, which was not the case with MCX.

The point to be appreciated is that the additional fiduciary duty which has been imposed on the director’s of the Company to be cautious in not violating the Competition Act, 2002. The Companies Act, 1956 did not codify the myriad of duties of the director’s of a Company and so the Courts had to rely upon common law in order to cast any duty on the directors. The Companies Act, 2013, on the other hand, recently codified various duties of a director of a Company under Section 166 of the Act. It provides for two kinds of duties i.e. duty of care, skill and diligence and fiduciary duties. One recent addition is the ‘fiduciary antitrust duty’ pursuant to which, if the company is in a dominant position in the market, the directors have a duty to take precautions so as to not to abuse the same. The Competition Act, under Section 4, does not proscribe enjoyment of a dominant position by an enterprise in the market. It is its abuse which is penalised under the Act.

The Tribunal opined that NSE must have known about the “activation” of Section 4. The Tribunal was “perplexed” when, after going through the minutes of the Pricing Meeting of the company, there was no mention of Section 4 being taken into consideration while deliberating on whether to extend the fee waiver on March 30, 2009 till June 2009; whereas the section was notified on 20 May 2009. The tribunal had expected NSE to take note of the activation of Section 4 of the Act as and when it was notified.

This ruling can have an immense impact on other companies which are assumed to be aware of their dominant position in the market. Its impact on cases brought up in the future will have to be analysed to fathom the scope of such a duty.

The penalty imposed on NSE by the CCI (and as upheld by the COMPAT), has been stayed by the Supreme Court by its Order on Sept 23, 2014.

Invitation to Fill C.O.M.P.A.T. Vacancy

The Ministry of Corporate Affairs has released an Internal Communication within certain departments, calling for Applications for the post of “Member”, Competition Appellate Tribunal. I found a copy of it which was circulated in Ministry of Finance, Department of Revenue, Central Board of Excise and Customs calling all Chief Commissioners and Director General’s interested to apply.

Actually, it was released on 12th June and the copy which is on the link was circulated within the Department on 26th June, so am presuming the appointment process must be almost over by now. About time. There is a tonne of work waiting for the Tribunal when it starts sitting again.

P.S.: In related news, Mr. U. C. Nahta has been appointed as a Member of the C.C.I. He belongs to the Indian Corporate Law Service and was formerly the Director (Inspection & Investigation) in the Ministry of Corporate Affairs. He will serve a full term of five years.

Brief Notes – II

Continuing with my comments on contemporary competition case law, on the agenda today is the decision of the Competition Appellate Tribunal in M/s. United Phosphorous Limited and Others v. Competition Commission of India & Others. The decision is well known and has been already debated upon a lot and frankly, I have nothing new to contribute. The C.C.I. will probably file an Appeal in the Supreme Court against the decision. It is an open debate as of today. However, if a wager was in order, the odds are that the concept of “Relevant Turnover” for the calculation of penalty is probably here to stay under Indian Competition Law. But what is frustrating is that the Competition Act just does not help to reach a solution. In fact, truth be told, the C.O.M.P.A.T. has reached it’s conclusion more on the basis of international precedents rather than actual application and interpretation of Indian law. This is not surprising. To quote Section 2(y) of the Act:

“turnover” includes value of sale of goods or services;

Ambiguous and exceedingly broad, to say the least. Furthermore, since Section 2(z) of the Act allows for borrowing definitions from the Companies Act, 1956, then one may try to derive an interpretation through the definition of “Turnover” as given under Section 43A of the same:

“turnover” of a company, means the aggregate value of the realisation made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year;

But not only can this definition not be taken in light of Section 2(y), but also, Section 43A lends the definition on a different context to that of the issue in the case.

Two observations of the Tribunal do deserve a mention. Firstly, the C.O.M.P.A.T. has affirmed and now firmly established that mere price parallelism alone cannot be enough for drawing an inference of cartelisation. Secondly, it has differentiated between the terms of “Restricted Turnover” (as used by it in MDD Medical Systems India Pvt. Ltd. v. Foundation for Common Cause & Ors.; Appeal No. 93 of 2012) and “Relevant Turnover” as delivered in this Order – the discussion can be found on page 48 of the Order.

Blog Notice For DLF Matter

This is to inform all that I will not be writing any more posts on the DLF competition matters currently pending before the COMPAT (and which in all probability will end up before the Supreme Court irrespective of who wins). This is because I’ve now become a part of the research team working on the matter (as an intern) and so it’s best if I refrain from discussing it too much.

To give you the latest (and final update), the matter is presently being heard on a daily basis. Furthermore, DLF filed two more appeals against the supplementary orders passed by the CCI which came up for hearing today. To be fair to DLF, the appellants aren’t just nitpicking. They have raised some extremely testing questions. Justice Sirpurkar appeared deep in thought by the end of the day on what course of action to take.

Honestly, the hearings are a lot of fun !! 😀 Justice Sirpurkar has a good sense of humour and the counsels aren’t exactly being polite to each other. 😉 Do come and watch if possible. Next date is on 12 February, 2013, Tuesday.

Eastern India Motion Picture Association v. Ms. Manju Tharad, Appeal No.17 Of 2012 with I. A. No.31 Of 2012

To be honest, I did not know what to write about this Order (begins from page thirteen of the document), which is the primary reason for the delay to this post. The issue arose more as a result of bad drafting and communication rather than any actual serious question of law. Furthermore, what the Tribunal has actually enumerated is a well accepted principle of natural justice rather than a recognition of any previously unrecognised principle of competition law.

Nevertheless, important growths and developments always have small beginnings, and so till that extant this decision stands on its own. To quickly reiterate the facts, the Appellants challenged the Order passed by the CCI whereby all the appellants were imposed a penalty of Rs.25,000/- per day under Section 43 of The Competition Act, 2002 (hereinafter the ‘Act’). It was further provided that if the information asked was not supplied within 30 days, the penalty was to be Rs.50,000/- per day for the next 30 days and Rs.1,00,000/- per day thereafter, till penalty amount culminates to Rs.1.00 crore. Before the Commission, the Respondent in the present case approached the Commission under Section 19 of the Act with an information because of the action taken against her by Eastern India Motion Picture Association, the Appellant. The matter was referred to the Director General for Investigation under Section 26 (1) of the Act and the Director General in his report observed that the action taken by the appellant was not anti-competitive or in violation of Section 3 of the Act. The CCI however directed the Appellants to appear before the Commission on 03.11.2012 for making submissions. The CCI later in a meeting observed that the members of the Appellant’s association did not comply with the directives of the CCI as they had failed to file their individual profit and loss statements as called for by the CCI and directed the Appellant to file the individual financial statements and issued a show cause notice, consequent to which, the penalty.

Important portions of the Order:

We have found nothing in the impugned order justifying the action only against the four office bearers. The learned counsel pointed out before us that at the relevant time, there was 28 members of the Executive Committee of first appellant and that was clear from the records. (Paragraph 21)

We must clarify that the directions which are to be followed imperatively under Sections 48 read with Section 36 cannot be given casually. There must be some application of mind before issuing such directions and the orders must reflect such application of mind…. A look at the complaint would suggest that there were no allegations against the office bearers individually. If that was so and more particularly when the DG had exonerated the first appellant, it is not known as to why the CCI thought it fit to call the information about the personal accounts of appellant Nos.2, 3, 4 and 5. (Paragraph 22)

The last words of Clause of sub-Section (4)(a) [of Section 36] namely — “the examination of which may be required for the purposes of this Act” would in our opinion entail and would require the Commission to state at least prima-facie as to why the examination of the books of accounts was required. The Clause of sub-Section (4)(b) also uses the similar words. Therefore, the Commission would have to show before issuing any such direction that it has come to the conclusion that it would be necessary to examine such books or documents or for that matter the Commission would have to come to the conclusion that the information in possession of such persons would be required for the purposes of this Act. The Section is not meant to give an untrammeled and uncontrolled discretion to the Commission to ask for any information from anybody. It cannot be a mere ipse-dixit on the part of the Commission to decide to call for the production of books and documents or supply of information and the non-compliance of which would result in the penalty under Section 43. We find that the language of sub-Section (4)(a) and (b) of Section 36 would require a deeper examination of the issue as to whether production of books or documents in custody of such persons are necessary at all, the examination of which would be required for the purposes of the Act. (Paragraph 23)

COMPAT Admits Anti-DTH Appeal.

The Competition Appellate Tribunal (COMPAT) has admitted the appeal of the Consumer Online Foundation (COF) against the decision of the CCI clearing DTH operators including Tata Sky and Reliance Big TV of charges of market dominance abuse in the set-top boxes case has been challenged by a consumer rights group. The matter has been listed for September 5th.

The appeal is not surprising. I have already expressed my views on the apparent confusion of the CCI in the relevant matter on the India Law and Technology Blog.