India Law Journal

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	Advance Rulings awaited on issues under the Competition Act, 2002 G.R. Bhatia comments on advance rulings that are awaited on issues under the Competition Act, 2002.
Introduction India, in line with international trend, embraced the modernised competition regime in May, 2009. The Monopolies and Restrictive Trade Practices Act (MRTP Act, 1969) was repealed and the Monopolies and Restrictive Trade Practices Commission (MRTPC) was dissolved for all purposes by promulgation of an Ordinance of Government on 14th Oct, 2009. The will of the Government to establish an effective competitive regime is amply demonstrated by a recent statement of the Minister of Corporate Affairs: “Government is committed to develop stable, efficient, transparent and acceptable competition regime to help the country attain freedom from poverty. Control in the initial phase of the development in the Indian economy was a far sighted approach to create a robust platform for competition policy. We are now prepared for full fledged competition, when the economy has started growing at a robust pace to fulfill needs of the millions of people in the country” The twin ex-post enforcement provisions of the Competition Act, 2002 (the Act) prohibiting anticompetitive agreements (Section 3) and the abuse of dominance (Section 4), and their attendant provisions, were made effective by the Government of India from 20th May 2009. Before taking up inquiries and investigation into these dimensions of law, the CCI notified the following Regulations: The CCI (General) Regulations, 2009 which set out the procedure of inquiries into anti competitive agreements and abuse of dominance and also how a reference for rendering of ‘opinion’, shall be processed and dealt with; The CCI (Determination of Cost of Production) Regulations, 2009 which prescribe ‘cost’ which will be taken into account to examine a case of predatory pricing by a dominant player in the market; The CCI (Lesser Penalty) Regulations, 2009 setting out the mechanism for disclosure into cartel by a member besides the manner, conditions and the calibrated manner in which benefit of leniency in penalty will be given to a party revealing details of cartel; The CCI (Procedure for Engagement of Experts and Professionals) Regulations, 2009 spelling details of qualifications & experience, procedure of engagement and compensation payable to experts so appointed; and The Competition Commission of India (Meeting for Transaction of Business) Regulations, 2009 specifying the kinds of meeting which the Commission shall hold to conduct its ordinary and special business. Incidentally, in order to carry out the objectives, the Act permits CCI to regulate its own procedure while being guided by the principles of natural justice. Besides, enforcement and regulatory provisions, the mandate of the CCI extends to competition advocacy and to render advisory opinions from competition lens to statutory authorities/Governments (Union as well as State Governments). In the premises, the Act is a comprehensive competition code in itself. The provisions relating to the regulation of combinations (which includes acquiring of shares, voting rights, assets or merger/amalgamation- it can be broadly referred to as ‘merger control’) have not yet been notified. Of late, the Government, is contemplating to move a Competition Amendment Bill in the ensuing monsoon session of Parliament in order to address concerns relating to timelines of clearance of the notifiable transactions and also to provide additional filter of local nexus (total value of turnover or assets of parties to combination in India on standalone basis) for a transaction to be subject to applicability of the combination provisions. An inquiry into alleged contravention of Sections 3 and 4 may be instituted by the CCI either on its own motion; or on receipt of information from any person, consumer or association; or on a reference made to it by the Central or State Government, or a statutory authority. Since May 2009, the CCI is known to have instituted enquiries relating to: Fixed Revenue sharing cartel by producers/distributors of motion picture films (information filed by FICCI Multiplex Association of India) ; alliance agreement between two largest domestic airlines; loan pre-payment penalties imposed by India’s leading banks/financial institutions; arbitrary expulsion of a member by the Travel Agents Federation of India; alleged cartelisation by Direct to Home (DTH) television providers waiving of transaction cost in currency exchange derivatives market by the National Stock Exchange (NSE) as a case of predation and consequent abuse of dominance (information filed by MCX-SX); Not allowing customers to install meter of choice and installation of tempered/ fast meters and consequent abuse of dominance by NDPL and BSES, the two electricity distributors in Delhi; and Enquiry against Coal India Limited, for procuring ‘explosives to remove soil layer covering coal deposits in mines’ exclusively from one party without inviting bids and thereby allegedly killing competition. Enquiry into several foreign airlines for alleged cartelisation and abusive conduct in adoption of zero commission regime for the travel agents, Enquiry into alleged exclusive supply arrangement entered between a public sector steel company and Indian Railways; and Enquiry into alleged cartelisation by public sector oil companies in response to supply quotes of air turbine fuel. Under Section 26(2) of the Act, the CCI has also taken a decision in number of cases that there exists no prima facie case on the basis of information filed before the Hon’ble Commission. The reasons for such ‘no case under the Act’, by the Commission are that (a) the information filed is not within the purview of the Act and thereby no efficacious remedy can be provided; (b) the Informant was not able to place any cogent or credible material to show or establish the infringement of provisions 3 and 4 of the Act or (c) the alleged act pertains to and was committed before the coming into force of the Act. Inquiries into ‘Anti-Competitive Agreements’- Issues & Challenges Sub-sections (1) and (2) of Section 3 provide that any agreement by an enterprise or person (or an association of such enterprises or persons) relating to the production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition (AAEC) in India, is prohibited and void. The legal assessment standard is AAEC. Regarding Section 3(3), certain horizontal agreements (including cartels), which determine price, limit or control production/supply, allocate market or rig/collude in bidding are presumed to have AAEC. However Section 32 which is triggered, when an analogous agreement is entered into either outside India or any party thereto is outside India but have effect in India, does not envisage that there shall be presumption of AAEC. Thus, prima facie there is an anomaly. Parity between answering domestic and overseas parties requires resolution of this apparent inconsistency. A proviso below Section 3(3) provides an escape valve that an efficiency enhancing JV agreement (when parents are in the similar or identical business) shall not be subject to the rigor of presumption of AAEC. While the law is not explicit, it is believed that the benefit will be extended only when increment in efficiency is demonstrated and not merely claimed. However, the dual obstacles in its assessment are – (i) identification and quantification of efficiency and (ii) the parties to such agreement (not the competition agency) have access to the facts relevant to efficiency claim. Sub-section (4) stipulates that vertical agreements, including tie-in arrangement, exclusive supply/distribution, refusal to deal and resale price maintenance being often pro competitive, are to be judged under the ‘Rule of Reason’. In determining AAEC, CCI has a mandate to give due regard to all or any of the factors listed in the law, namely: the barriers to new entrants, driving out existing competitors; accrual of benefits to consumers; improvements in production/distribution; and promotion of technical and economic development. The determination of an AAEC is a formidable challenge – firstly it is a subjective assessment; secondly the law does not provide in detail how to quantify the pro and anticompetitive effects; and thirdly, how much importance is to be given to each factor. It is more onerous in Indian jurisdiction as law does not provide for doctrine of ‘De Minimis’. Further, the AAEC is required to be determined twice - once while forming prima facie view to initiate an inquiry and the other before passing a final order after full fledged inquiry into anti competitive agreement. In both the situations, the parameters which the CCI is required to look at to determine AAEC happen to be the same. The law is silent as to standard of proof while assessing prima facie AAEC and while determining AAEC before delivering its final order. Of course, the Appellate Tribunal in its order has held that the Commission has to indicate reasons which need not be elaborate but should be sufficient to show application of mind and that sufficiency of foundational material for recording of reasons cannot be questioned. Concerning sub-section (5) of Section 3, a holder of IPR may impose reasonable conditions in order to restrain any infringement of, or to protect any of, his rights. However, more often than not ‘reasonableness of conditions and whether the condition aims to protect the right vested in the holder of intellect property’ will be a contentious issue until case law is developed in India to shed light in this grey area. Independence of parties to an agreement is a condition precedent to bring a case within the purview of this Section. The Act does not make explicit reference to ‘independence of parties’ and the scope of the term ‘group’ is beyond the meaning of ‘holding company’ and ‘subsidiary’ Further, the term ‘control’ as explained in the law, is open ended. Recently, the Securities Appellate Tribunal in the matter of Subhkam Ventures India Private Limited v. SEBI has lent clarity on the point of veto rights and that they do not constitute ‘control’ under the SEBI Takeover Code. It was observed that the concept of control is pro active and not a reactive power. Therefore, a power by which an acquirer can only prevent a company from doing certain acts is by itself not ‘control’. Negative rights such as amendment to the memorandum and articles, change in share capital, amalgamation, winding up, etc., and also certain matters pertaining to the business such as approval of the business plan, sale of property, appointment of key officials, capital expenditure, etc. do not constitute ‘control’. SAT held that such a requirement of right conferred on the investor did not constitute control by the investor as they do not cover the day-to-day operations of the company. In the premises, how far the concept of ‘group’ and ‘control’ and consequent ‘single economic entity’ doctrine is evolved by the CCI is to be seen in the times ahead. Inquiries into ‘Abuse of dominant position’- Issues & Challenges Section 4 of the Act prohibits the abuse of dominant position by an enterprise or group. Existence of dominance does not constitute a per se violation, but its abuse does. Unlike China , the ‘abuses’ set forth in sub-section (2) are exhaustive. Abuses encompass both exploitative and exclusionary conducts. As per the Act, 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, consumers or the relevant market in its favour. Thus, an inquiry into abuse shall have three phases: (i) demarcation of relevant market; (ii) determination of dominance; and (iii) indulgence into abuse. Where a contravention of the provisions of Section 4 is established, the CCI may pass directions to discontinue such a practice and impose a penalty as specified under Section 27 of the Act. The CCI may also, under Section 28 of the Act, direct the division of an enterprise or group enjoying a dominant position to ensure that such an enterprise or group does not perpetuate with abuse. Instead of the sole arithmetical market share criteria, which used to exist in the MRTP Act, the Competition Act provides for a comprehensive list of factors, which the CCI has a mandate to consider. Some of these factors strengthen, while others constrain/mitigate, dominance. Besides, CCI has to take into account non-competition dimensions, namely: (i) the social obligations and social costs; (ii) relative advantage by way of contribution to economic development; and (iii) any other factor which is considered relevant for inquiry. Recognising that there are costs associated with both inappropriate intervention and no intervention at all, an arduous task for the CCI is to optimise the level of its intervention. The plain reading of Section 4 suggests that the finding as to an AAEC is not required to make out a case of abuse. However, this runs contrary to the terms of Section 32 of the Act, which confers extra-territorial jurisdiction in respect of overseas acts having an effect on competition in India, where the key to make out a case of abuse is a definitive finding as to an AAEC. This anomaly is to be sorted out before it is too late. The lack of clarity also give rise to question as to whether a defence of ‘objective justification’ and ‘benefit of efficiency’ will be looked at or sidelined in an enquiry into abuse of dominance. Other challenges The regulation of combination is sine qua non to establish effective competition. The need is to remedy the fractured mandate of the CCI at the earliest by making effective this compartment of law. The ex ante regulation of merger is based on the maxim ‘prevention is better than cure’ and that the absence of regulation of mergers is an escape valve for those who are frowned upon by the CCI for cartel conducts. Further, though the merger provisions are yet to be enforced, Government, as per media report, seems to have conceded to grant exemption to banking and shipping sector from the applicability of the provisions of the Act. Though, the CCI is resisting any such exemptions, the power to grant them, even without consulting the agency, vests with the Government of India. While the CCI is grappling with the immediate challenge of establishing its credibility as an off market regulator, its consultative approach holds promise for addressing challenges in the times to come. These issues, challenges and rulings thereon being ever evolving can be described as ‘works in progress’.

G.R. BHATIA is the Partner & Head of the Competition Law Practice team at Luthra & Luthra Law Offices at its New Delhi office.

REFERENCES
The CCI is established since 14th Oct, 2003 and exactly after six years its predecessor MRTPC was dissolved on 14th Oct., 2009. Para 37 of order dated 15th Feb., 2010 by the Competition Appellate Tribunal in the matter of CCI Vs Steel Authority of India & Anr. Appeal No. 8 of 2009 decided on 15.01.2010 SEBI as per news item in media of 13th May, 2010 has filed an appeal in the Supreme Court against order of 15th January, 2010 of the Securities Appellate Tribunal. The Government of India is considering to impose a cap as step down arms often blur parent subsidiary ties- a news item under the caption ‘ Govt. could impose cap on step down subsidiaries’ in Financial Express of 10th May, 2010. In China, the list of abuses is open ended as there is residuary clause which empowers the Agency to hold any conduct as abusive.