India’s antitrust regulator releases new guidance for strengthening antitrust compliance. Avirup Bose and Sagardeep Rathi report
A recent article in IBLJ’s sister publication Asia Business Law Journal – entitled “A Regional Comparison of Competition Law” – analyzed key competition law developments across seven Asian countries, including China, India and Australia. While the focus of the article was on demonstrating the rapidly developing jurisprudence on competition law in the region, and the willingness of enforcement agencies to frequently clamp down on abusive market activity, it concluded that there has “never been a greater need for investors to strengthen compliance and be up to date on laws across the region”.
This is especially true for a jurisdiction like India where antitrust investigations cannot be settled with the regulator and adverse findings against a company could be litigated until a final order by the Supreme Court. Given the backlog of cases before the courts, this could mean years of legal battles and unquantifiable business risk.
Risking more than fines
Further, antitrust scrutiny for large listed multi-product companies could mean much more than the substantial monetary penalties that antitrust regulators are typically empowered to impose. The Competition Act, 2002, allows the Competition Commission of India (CCI) to impose a penalty of up to 10% of the turnover of a company (or three times the profit for a cartelizing firm).
Real estate giant DLF’s shares plummeted 2% on the announcement of the CCI’s decision to impose a penalty of ₹6.3 billion (US$97 million) on it. A series of other related cases were brought against DLF, and while the matter is in appeal before the Supreme Court the company has had to deposit the entire penalty amount before the court. On the announcement of this order DLF’s stock fell a further 4.4%. Similarly, Monsanto India’s shares fell by 4% on news of the CCI’s prima facie order directing a detailed investigation of the company’s joint venture with its US parent. Consequently, for DLF and Monsanto India, the loss of reputation and losses on the stock market was significant.
Minding your Ps and Qs
It is against this backdrop that the CCI has issued its first substantial guidance document called the Competition Compliance Manual for Enterprises. The 50-page compliance manual is a joint initiative of the CCI and India’s Competition Law Bar Association. It has been issued with the belief that stakeholders have to be inspired to inculcate a culture of competition at all levels of their business organization, given that India’s antitrust law is relatively new.
The manual will help companies implement the CCI’s earlier guidance – issued in a 2016 advocacy booklet on competition compliance programmes – that “the existence of a strong compliance programme reflecting the commitment of the management to comply may help in reduced penalties/punishment in case of any violation.”
The manual provides the basic principles of competition law that impact a company’s relationship with customers, agents, suppliers, distributors and competitors. In addition, rather than discussing antitrust principles in abstract terms, it provides a breakdown of actionable items and also permissible levels of business conduct.
As such, the manual provides detailed guidance on what company executives should do if they receive an invitation to discuss business strategies over dinner with a competitor, or a WhatsApp message regarding a proposed meeting of bidders for a tender. It also details issues that should be kept in mind while doing a due-diligence of a competitor and while conducting a trade association meeting. Many of these illustrations have been incorporated from the CCI’s decisions, which have been codified and presented in a convenient question-and-answer format.
Given that India’s anti-trust regime is suspensory, no transaction can be consummated without the CCI’s approval. Consummation, which is not synonymous with closing a transaction, could be inferred if parties take any business action to integrate their businesses. Such action attracts heavy “gun-jumping” antitrust fines.
In order to avoid falling afoul of antitrust laws in this manner, the manual recommends that companies constitute so-called clean-teams while awaiting the CCI’s approval for a transaction. These small teams will consist of a few members of senior management, and internal and external legal counsel, who alone will have access to commercially sensitive information on the merging party.
The aim is to isolate members of senior management involved in the transaction so that they do not consciously or unconsciously access price sensitive information while awaiting the CCI’s approval. This will help them perform their day-to-day business operations – such as determining price, sales quantity, marketing strategy – without being influenced by competitively sensitive information. Thus any inference of the consummation of a transaction without the CCI’s approval can be avoided.
The manual also provides guidance on how a company should comply and cooperate with the CCI during and after an antitrust investigation so as to reduce exposure to antitrust risk.
Until the publication of the manual, there was little information regarding compliance with procedures of an investigation and about anti-trust sanctions. Thanks to the manual, it is now known that parties can pay antitrust fines in instalments and that company executives are not required to be familiar with the CCI (Manner of Recovery of Monetary Penalty) Regulations, 2011, which are often seen as legally verbose.
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An outline for effective compliance
The CCI’s approach to compliance programmes is set out in detail in chapter 5 of the manual. The regulator lists the desirable features of such a programme, so that it ensures adequate awareness of competition law risks and an understanding of what it takes to mitigate such risks at the organizational level.
The manual provides a three-pronged approach to effective competition law compliance. Companies must set in place protocols to evaluate agreements, market conduct and proposed schemes on an ongoing and real-time basis. Companies must also put in place a “rigorous and suitably specific” competition compliance system while also investing suitable resources to conduct periodic training of employees and senior management.
In order to effectively implement a compliance programme, the manual suggests that companies constitute a company-wide competition compliance committee that can take forward the company’s compliance agenda with the active participation and support of its senior management.
A company’s compliance programme must also have an adequate mechanism in place to identify and address conflicts that emerge on an ongoing basis. The manual recommends that companies adopt a robust whistle blower policy, so that breaches of competition law can be brought to the notice of top management.
Using its powers under section 48 of the Competition Act, the CCI has imposed penalties on individuals within senior management of companies in both cartels and behavioural cases. This trend of holding senior management personally liable for violations of provisions of the act has also meant that the CCI has begun to specifically direct its investigative arm, the Director General, to examine the role of individual officers while investigating the conduct of companies under investigation.
The adoption of a competition law compliance programme, and a whistle-blower policy, will allow the senior management of a company to identify and ensure that antitrust violations are not occurring under their watch. Once such breaches are identified, management can take a more informed decision on the next course of regulatory corrections, including applying before the CCI under its leniency programme.
The manual is a good starting point for companies to understand their compliance priorities, but it is by no means an end in itself. To keep up with the country’s rapidly evolving competition law regime, a company’s framework for competition law compliance must take into account new decisions or regulations that are put in place.
Measures for mitigation
Unlike the US or the EU, India does not have formal penalty guidelines. While the CCI has said – in its 2016 advocacy booklet on competition law compliance – that the existence of a strong competition law compliance programme could be a mitigating factor in reducing a penalty, in practice this is seldom considered.
However, ruling in Excel Crop Care Ltd v Competition Commission of India and Another (2017), the Supreme Court has expressly required the CCI to consider aggravating and mitigating factors while determining the quantum of penalty. One such mitigating factor is the existence of a robust competition compliance programme and adherence to it by the defendant company.
Subsequently, in Re: Fx Enterprise Solutions India v Hyundai Motor India Limited (2017) the CCI considered among other things the existence of a competition law compliance programme as a mitigating factor while quantifying the penalty to be levied against Hyundai. The CCI held that, “In the aforesaid backdrop, while quantifying the penalty in the instant case, the commission has duly considered the pleas advanced by [Hyundai] in mitigation viz. proportionality, no supra-normal profits, putting competition law compliance programme and first-time offender with no previous valid order”.
The CCI has said that it is the duty of Indian enterprises to take concrete steps to adopt a robust competition law compliance programme. In one of its early decisions, FICCI – Multiplex Association of India, New Delhi v United Producers/Distributors Forum, Mumbai and Ors (2011), the CCI held that it is the “bounden duty of the persons/enterprises to ensure that knowingly or unknowingly they do not infringe the provisions of the act and to take necessary and concrete steps in order to maintain a competition compliance programme.”
Establishing awareness
The CCI apart from imposing penalties has sometimes required companies and trade associations to adopt a competition law compliance programme, within a specified period of time, and also to appoint a dedicated compliance officer to oversee its implementation.
This was the case in the CCI’s order in Royal Agency, through its Partner Maria, Goa v Chemists and Druggists Association and another (2015). The antitrust regulator said that the penalized enterprise “shall also implement a competition compliance programme in the company and appoint a senior officer as compliance officer, within 60 days”.
In other instances, the CCI has ordered companies to organize competition awareness programmes for their employees. As part of the penalty imposed in PK Krishnan v Paul Madavana and others (2014) one of the defendants, the All Kerala Chemists and Druggists Association, was ordered “to organize, in letter and in spirit, at least five competition awareness and compliance programmes over the next six months” in Kerala for its members.
Despite the enormous costs and risks posed by the threat of antitrust action in India, a 2014 Ernst & Young survey revealed that 80% of Indian companies were not aware of the existence of competition laws in India.
With the publication of the manual, the CCI has extended a friendly hand and it’s time Indian companies reassess their compliance standards to ensure that their businesses are both profitable and legally efficient.
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Avirup Bose is a professor at Jindal Global Law School and Sagardeep Rathi is an associate partner at Khaitan & Co
https://law.asia/notes-caution-merger-control/
