India’s competition regulator has been showing its teeth. But is it biting first and asking questions later … if at all? Rebecca Abraham reports
The humble onion is arguably the most important ingredient in Indian cuisine. Its price has recently soared almost 50%, creating a hole in household budgets. While commentators criticize the government for failing to control onion prices, the more discerning point to the existence of cartels.
Referring to a 2012 study commissioned by the Competition Commission of India (CCI), which assessed competition in India’s market for onions, a column in Mint recently said that “the root cause of the surge in onion prices is collusion among a few traders”, and urged the government to take action against “an unholy nexus” among traders.
The onion market is just one of several that the CCI has had its eyes on. But that anti-competitive agreements are being identified as the cause of what has is generally seen as a seasonal occurrence is a sign that India’s antitrust regulator is making its presence felt.
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A wake-up call
India’s competition law came into effect in phases. Sections 3 and 4 of the Competition Act, 2002, which prohibit anti-competitive agreements and abuse of dominance respectively, came into force in June 2009. Two years later, in June 2011, came a mandatory merger control regime, albeit with relatively high notification thresholds (see Movements in mergers, page 31).
Cartel and abuse of dominance investigations have so far resulted in fines to the tune of almost ₹210 billion (US$3.2 billion). But the jury is out on what effect the fines are having and if they are helping to level the playing field.
Reason to appeal
“Because of the heavy fines India Inc has woken up to the existence of yet another animal called competition law,” says Amitabh Kumar, a New Delhi-based partner at J Sagar Associates, who as a former civil servant was the CCI’s first director general (DG).
Yet commentators estimate that only around 1% of the fines has been collected. In several cases challenges entertained by the Competition Appellate Tribunal (COMPAT) have resulted in penalties being reduced, and in at least one case an entire order was set aside.
The order in question was that against the Board of Control for Cricket in India (BCCI). On 23 February this year the COMPAT set it aside on the basis that the CCI’s actions while arriving at its February 2013 decision, which included a ₹522 million fine for abuse of dominance, had not only resulted in a “violation of the principles of natural justice but also occasioned failure of justice”.
The COMPAT faulted the CCI for not disclosing to the BCCI information that was to be used in making its decision and for not giving the BCCI an opportunity to explain. An added problem was that the information in question had been downloaded from the internet and was not backed up by witnesses. The COMPAT observed that such information had no evidentiary value.
Movements in mergers
The clearance regime got off to a flying start but concerns are being voiced after recent amendments
While India has one of the most liberal merger control regimes in the world, in this area the Competition Commission of India receives top scores for the speed and efficiency with which it works.
“They have completely laid to rest all industry concerns that a CCI review would affect M&A timelines and would derail such transactions,” says Nisha Kaur Uberoi, a partner at Cyril Amarchand Mangaldas. She points out that the CCI has cleared 248 Form I (short form) and eight Form II (long form) merger filings, all within the timelines stipulated.
In December 2014, the CCI cleared the merger of Sun Pharma with Ranbaxy Laboratories. This was the first time the CCI required parties to make restructuring commitments. Here too India’s antitrust watchdog gets credit for the efficiency with which it acted.
Talking numbers
Yet as Amitabh Kumar, a partner at J Sagar Associates, notes, timelines have been slipping. While in the first year of India’s mandatory merger control regime, 2011-12, the average time taken for turning around a merger notification was 29 calendar days, this number has climbed to almost 54 calendar days recently. This includes periods when the party that has made the filing is putting together additional information that the CCI has sought, or clock-stop days. A recent tweaking of India’s combination regulations will according to Kumar take this to at least 60 calendar days.
Add to this the fact that the CCI now receives an average of close to three filings each month – up from one a month at the outset, and Kumar asks if “the time has come to call the parties across the table and discuss the notification openly so as to reach a conclusion, rather than send out query letters which delay the approval”.
Amendments made on 1 July to the CCI (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011, have ushered in several changes to the merger approval process. These include longer timelines for approval. The CCI is now allowed 30 working days to provide approval – up from 30 calendar days. If the CCI needs to consult a third party while determining if the combination could have an appreciable adverse effect on competition, the timeline for approval is extended by a further 15 working days. Several other changes have also been made.
Widening the net
With thresholds for notification set unusually high in India, many transactions can escape the CCI’s attention.
Yet with rules in India being different from most other jurisdictions, Anand Pathak, the managing partner of P&A Law Offices, believes that the regulator is requiring transactions that “have virtually no competitive concern for India”, to be notified in India.
The problem lies with which assets are taken into consideration for notification. Elsewhere, typically it is only those assets that a seller is parting with. But in a significant departure from antitrust rules in other jurisdictions, whether to notify the Indian regulator depends on the turnover attributable to the seller’s entire assets and not just the asset that is being acquired.
As Uberoi explains, this means that when a large conglomerate sells an asset, “seven times out of 10” the acquirer will have to undergo a merger review.
“This is done so that the commission can grab jurisdiction,” asserts Pathak, who says the result is “enormous legal uncertainty” for legal counsel and parties to transactions who may be unaccustomed to the rules as they are in India.
The growing number of specialist lawyers in this area will no doubt be up to the challenge that this presents.
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“The message from the appellate tribunal to the commission is that while the commission is a quasi-judicial body, it is bound by the principles of natural justice and it has to give people a right to a fair hearing,” says Nisha Kaur Uberoi, a Mumbai-based partner at Cyril Amarchand Mangaldas, who heads the firm’s 12-lawyer competition practice, and was the BCCI’s advocate in the matter.
Allegations of due process violations are also triggering appeals in the high courts. Delhi High Court has been the forum for several of these appeals including those prompted by an August 2014 order in which the CCI fined 14 car makers for abuse of dominance in the spare parts and after-services market. The car makers have appealed on several grounds, including that seven members of the CCI heard the case, but the final order was passed by only three members.
With litigation continuing on many fronts, the situation is difficult for parties caught up in an investigation by the CCI – conducted by the DG’s office – or proceedings before the CCI.
“I am appearing before the DG, going before the CCI and also approaching the high court in between,” says Kumar at J Sagar Associates, who adds that inconsistencies in procedures within the CCI, and also the DG’s office, are proving to be a stumbling block.
“As long as you have such a situation you are always going to see an absence of continuity and experience,” says Anand Pathak, the managing partner of P&A Law Offices. “These are normal issues in the early life of a competition authority.”A lack of sufficient, qualified staff is cited as one reason for the inconsistencies. Uberoi also sees the need for a “more constant team”, because without one there is a “loss of learning” and that slows down the process. Staff are currently seconded to the CCI for a fixed term and when they move on the expertise and knowledge they have gained is lost.
Limitations
Uberoi highlights a further problem: Despite having “the power to impose India’s highest economic penalties”, the CCI lacks penalty guidelines.
The CCI can impose a penalty of up to 10% of the average three-year turnover of a company. In cases of cartels the maximum penalty is three times profit. But there has been little consistency in the quantum of fines and the COMPAT has repeatedly criticized the CCI on this score.
Reducing a fine on MDD Medical Systems (India) and two other companies in April 2012, the COMPAT said the penalty had been fixed in a casual manner, which had resulted in an injustice. It held that the CCI must give reasons in support of the quantum of penalty, and also consider any mitigating circumstances before deciding on the quantum of penalty.
Then in October 2013, while ruling on the appeal against the CCI’s decision in a cartelization case involving aluminium phosphide tablet makers, the COMPAT urged the CCI to impose penalties based on the relevant turnover, rather than the average turnover, for multi-product companies. This ruling is being appealed in the Supreme Court, which could help bring India’s antitrust regime in line with that in some more mature jurisdictions.
Despite the COMPAT’s repeated urging there is no indication that the CCI is contemplating the introduction of penalty guidelines. “We ask for it in every forum and each time we get the same answer that we [as a jurisdiction] are too young for this,” says Uberoi.
Compliance
Is the lack of penalty guidelines affecting companies’ appetite for compliance programmes? Opinions differ.
Ravisekhar Nair, an associate partner at Economic Laws Practice who co-heads the firm’s competition practice, says that although it’s not stated in any specific guideline, the CCI has been sending a clear message that compliance is a mitigating factor.
“If you are serious about compliance you need to show it,” says Nair, adding that clients are showing an increasing interest in implementing compliance programmes.
However, Kumar at J Sagar Associates says that most of the compliance programmes his firm advises on involve multinational companies. Among Indian companies “the thinking is that if fines are not reduced [as a consequence of having a compliance programme], why put money into it”.
What lies ahead?
In view of the number of cartel and abuse of dominance cases investigated since the CCI became active in the area, Samir Gandhi, a partner at AZB & Partners who leads the firm’s 15 lawyer competition practice, believes that “the CCI is paying far more attention to abuse of dominance cases than is typically expected in the early years of enforcement”.
And it’s not just private sector companies that are being investigated. As the act applies equally to public sector companies, India’s state-owned enterprises have also been on the CCI’s radar.
On 10 July, four state-run insurance companies – National Insurance Company, New India Assurance Company, Oriental Insurance Company and United India Insurance Company – were found to have been involved in bid rigging in public procurement for a social welfare scheme run by the government of Kerala – which the CCI said was taken as an aggravating factor.
The four were ordered to pay a fine of 2% of their average turnover for the past three years, which amounted to ₹6.7 billion.
The CCI says it took up this case on its own initiative following an anonymous tip-off. India’s vast public procurement machinery has been seen as a neglected area of competition policy. Is this order an indication that the CCI may be widening its net?
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