Companies should implement compliance programmes to ensure they don’t fall foul of India’s increasingly stringent competition law
On 20 June, the Competition Commission of India (CCI) imposed a penalty of over ₹60 billion (US$1 billion) on 11 cement producers and the Cement Manufacturers’ Association after finding them guilty of cartelization under section 3 of the Competition Act, 2002.
Two days later, the CCI announced that it had begun investigating certain milk producers and co-operatives for alleged price cartelization after they had raised milk prices several times in unison over a short period of time. On the same day, the chairman of the CCI, Ashok Chawla, stated that the regulator had “taken note” of oil companies that acted in unison to raise oil prices.
The CCI is soon expected to pass an order on alleged cartelization by several major tyre manufacturers. It has said that similar investigations are pending against companies in the aviation, real estate and pharmaceuticals sectors.
Increasingly aggressive
Since coming into full operation in May 2009, the CCI has shown a growing intolerance of anti-competitive collusion between firms. As one of the few Indian regulators with such a large ambit and fining powers, it has not hesitated to impose hefty monetary penalties.
In June, the CCI imposed penalties of more than ₹2.5 billion on United Phosphorus and ₹600 million on Excel Corp Care for collusive bidding for tenders floated by the Food Corporation of India. Before that the CCI had imposed a penalty of approximately ₹600 million on 10 manufacturers of explosives that it found guilty of forming a cartel. In 2011, the CCI found a major real estate developer, DLF, and the National Stock Exchange of India guilty of abusing their dominant position and imposed penalties of ₹6.3 billion and ₹555 million respectively.
The CCI has accumulated a considerable stock of case law and some valuable precedents in a relatively short time. However, an environment of uncertainty remains especially for two reasons. First, the regulator has not provided any formal guidance to businesses on sensitive topics such as: means of collaborating with competitors; structuring mergers, joint ventures or other commercial transactions; or trade association activities. Such guidance is provided by antitrust regulators in some other jurisdictions, including the UK and Canada.
Second, several appeals against orders passed by the CCI have not yet been ruled on by the Competition Appellate Tribunal. An order of the Competition Appellate Tribunal can be further appealed before the Supreme Court.
In this environment of heightened regulatory scrutiny and in the absence of substantial formal guidance, Indian companies need to be proactive in ensuring that their business practices comply with competition law and are in sync with the enforcement priorities of the CCI.
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What does the law prohibit?
The law against anti-competitive agreements is contained in section 3 of the Competition Act, which prohibits agreements and “concerted practices” which aim to fix prices, limit or control production or markets, or share markets or sources of supply. It is important to note that for the purposes of competition law, an agreement does need to be written or intended by the parties to be enforceable in a court of law. Thus “a wink or a nod” among competitors would suffice to get a company into trouble.
Section 4 of the act prohibits abuse of dominant position by a company that enjoys a strong position in a market. Examples of potentially abusive practices include: predatory pricing, excessive pricing, imposition of unfair purchase conditions, refusal to deal with existing or new customers, and royalty rebates.
When companies in a dominant position in a particular market enter into any anti-competitive agreement, they can be held liable under both section 3 and section 4 of the act.
Additionally, the merger of companies, the acquisition of shares or business assets and the establishment of joint ventures may be subject to prior evaluation by the CCI if monetary thresholds, set under section 5 of the Competition Act, are met. Certain exemptions to the pre-merger notification process are available under the act and the regulations made under it.
Any proposal for the sale or purchase of a business unit, assets or shares, or the setting up of a joint venture should be scrutinized by in-house or external legal counsel to check if it needs to be notified to the CCI.
It is important to note that failure to report a qualifying transaction to the CCI would run the risk of a monetary penalty and also of having the transaction declared null and void.
The competition law rules apply to all businesses, including government or non-profit entities to the extent that they are engaged in performing any economic activity, and ignorance of competition law is not a valid excuse.
Non-compliance no longer an option
The penalties levied on companies are substantial and do not include the immeasurable cost of damage to a company’s reputation
Not complying with competition law can result in both high costs for legal defence and hefty penalties if the Competition Commission of India (CCI) finds a company guilty of anti-competitive or unfair trade practices. Even rumours of an ongoing investigation can dampen the share price of a listed entity.
Within a day of a CCI order against 11 cement producers on 20 June, most of the companies found guilty of cartelization were trading lower by more than 3% on the Bombay Stock Exchange.
Walking on glass
The cement cartel case vividly demonstrates that all businesses operating in India must be aware of the competition law rules. In this case, the CCI held that the companies were using the platform of the Cement Manufacturers’ Association as an opportunity to determine and fix prices.
The fact that the companies were interacting to collect data relating to retail and wholesale cement prices from different parts of the country to be sent to the Ministry of Commerce, at the ministry’s request, was not enough to absolve them of liability.
The CCI’s determination that an act conducted under the auspices of a central government ministry was anti-competitive drives home the point that businesses in India need to ensure that their business practices are in compliance with competition law rules.
Cost of non-compliance
Penalties under the Competition Act can amount to a mind-numbing 10% of a company’s turnover and for participants of a cartel up to three times the profit for each year of the existence of the cartel. Contravention of an order of the CCI is punishable by imprisonment for up to three years and a monetary penalty of up to ₹250 million (US$4.5 million).
In addition, the directors or officers responsible for the affairs of a company that is found guilty of any anti-competitive conduct may be personally proceeded against and punished by the CCI.
While no directors or officers of companies have been proceeded against as yet in India, competition law practitioners are increasingly concerned that it could happen in cases where the CCI has evidence that they knew about the violations. The CCI is empowered to proceed against such officers both under section 48(1) of the Competition Act and section 27, which allows the regulator to pass any other orders it deems fit.
In certain other jurisdictions courts are allowed to disqualify a director for up to 15 years if the company of which he or she is a director breaches competition law.
Under the Competition Commission of India (Lesser Penalty) Regulations, 2009, companies which are first to disclose the existence of a cartel are entitled to up to a 100% reduction in any financial penalty.
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Compliance – the need of the hour
A company can minimize the risk of infringing competition law by putting in place: (1) a compliance programme that is tailored to the nature of the company’s business operations and its size; (2) a training programme that enables employees to detect prohibited conduct and understand the parameters of acceptable behaviour; (3) regular competition law audits; (4) appropriate whistle-blower policies; and (5) carefully written corporate communications documents.
Programme content. While the substantive content of compliance programmes will vary, it is vital that a company identify, assess, mitigate and review its competition law risks in order to create and maintain a culture of compliance which works for the organization.
Where infringements are detected, the company should have procedures to ensure that they are reported to the authorities at the earliest instance.
An effective compliance programme would include the following:
- Specific policies and procedures for different business units based up on their degree of exposure to competition law risks, with a list of dos and don’ts or highlighted red flag issues.
- Details of possible disciplinary action for failure of compliance and incentives for employees who adhere to the policies and procedures.
- A competition law manual that typically highlights topics that can never be discussed with any competitor. This includes: prices; timing and magnitude of change in prices; costs; sales forecasts, plans or territories; profit margins; capacity utilization; terms offered to particular customers; competitive bidding plans or strategy; pricing and marketing strategies; and market shares.
A list of topics that can be discussed with competitors would typically include: non-confidential technical and promotional issues; issues relating to health, safety and environmental matters; technical standards; transportation hazards and regulations; quality control issues; and new and proposed legislation. - Details of how specific components of the programme are to be distributed among relevant staff.
- A requirement that employees sign a certification letter stating that they have read and understand the compliance programme.
While designing a compliance programme it should be kept in mind that some divisions within a company may be more prone to competition law risks than others. For example, a department that deals with bids and tenders would be more prone to committing anti-competitive acts.
If a company regularly submits bids or tenders, a list of prudent practices that should be followed during this process should be included in the compliance programme. The list should include instructions that the employees concerned should have no contact with competitors while preparing bid documents. Additionally, a procedure to obtain prior approval of the senior management or the legal department should be established in cases where the company plans to jointly bid with, or subcontract work to, one or more competitors.
Training programme. Documents can only go so far in promoting compliance. A well structured training programme may help to instil an appropriate culture among employees to ensure effective compliance. Such training can be conducted by in-house or external legal counsel, competition law consultants or other designated compliance officers.
In addition to enabling employees to detect prohibited conduct and understand the parameters of acceptable behaviour, it might be helpful to make the employees aware of the possible range of penalties that may be imposed on the organization and/or on certain categories of officers for non-compliance.
Competition law audits. If the size of the company warrants, areas of a company’s business most prone to competition law risks should be regularly audited by in-house or external legal counsel to ascertain if the company’s business is in compliance with the current law, and to identify new areas of risk, areas where additional training is required, and areas where new compliance issues may require new policies to be developed.
Whistle-blower policies. It is important that companies ensure that employees know to whom they should report suspected anti-competitive behaviour, particularly where employees suspect members of their own teams have indulged in such behaviour. Usually this can be done by adopting a formal whistle-blower policy where clear reporting lines are established – usually ultimately to a member of the senior management or the legal counsel. Some organizations may prefer to establish a confidential reporting procedure.
Corporate communications. While preparing business memos or public speeches for company officials care should be taken not to include words or phrases which may convey that the business may be anti-competitively aggressive (e.g. schemes to root out a competitor or mechanisms for below cost pricing), or that the company is the dominant or the largest player in the industry.
If the company is listed or about to go public, its business should be carefully described in the company’s annual reports or other IPO documents. If the company is a member of any business or trade association, employees representing the company at meetings of the association should be made aware of what amounts to permissible interactions with competitors.
The CCI may consider the adoption of a strong compliance programme as a reflection that the management of a company is eager to comply with competition law. This may temper the severity of the punishment handed down for any violation.
An FAQ-style booklet on competition law compliance programmes can be downloaded from the CCI’s website (http://www.cci.gov.in/images/media/Advocacy/CCP2012.pdf).
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Avirup Bose is an expert in competition law with the Competition Commission of India. He is qualified to practise law in India and New York. This article reflects his personal views and not the official views of the CCI.
