AUTHOR: Richa Nandy
CO-AUTHOR: Tiyasha Chatterjee
The Competition Act was implemented in the year 2002 prior to that Monopolies and Restrictive Trade Practices Act, 1969 was in force. The MRTP Act was repealed as it aimed at curbing monopoly and restricting unfair trade practices whereas the Competition Act focuses on preventing practices which has adverse effect on the competition. The main component of the Competition Act, 2002 are Anti Competitive Agreement, Abuse of Dominance and Merger, Amalgamation and Acquisition control. Anti competitive agreements are further branched into Vertical and Horizontal Agreement. These agreements are governed by Rule of Reason and Per se rule. Under Sec 3 of the act, anti competitive agreement are considered illegal only if it has adverse effect on the competition. The act has not defined the term adversarial adverse effect, but it has mentioned few factors which must be taken into consideration while determining whether a particular agreement has adverse effect on the competition or not. This paper focuses on anti competitive agreements and the various anti competitive practices having adverse effect on the competition such as Cartelization, Bid rigging,
Keywords: Anti Competitive Agreement, Cartel, Bid Rigging, Vertical Agreement, Horizontal Agreement.
The MRTP Act, has been in existence for over thirty years and produced the new law owing to the evolving alongwith developing financial situation in India and globally in compliance with the present economic thought of the liberalization or reform paradigm after 1991.
Competition Act has rectified the problems faced by the MRTPC to some extent. First, the crimes of exploitation of power, Cartels, bid rigging, and predatory pricing etc. have been given clear descriptions in the Act. The outgoing MRTP Act includes no such clear descriptions. Secondly, the Act sets out guidelines for determining whether a practice is having a appreciable adverse effect on competition. To this respect, the MRTP Act is vague furthermore arbitrary, since it does not include any criterion for determining a restrictive trade practice or a monopoly trade practice. One of the criteria in the said law is ‘reasonability,’ which contributes to the MRTPC’s various decisions, contingent on the Chairperson’s temperament and the bench members in a peculiar case. Thirdly, the Act stipulates that the Competition Commission of India (CCI) shall not be conjugated by the Code of Civil Procedure Procedure, but shall be directed by principles of natural justice. The CCI has authority to control its own operation. After the new legislation was passed, the government’s intention was to make rules to provide the defendant with a summary jury, except when the CCI decided it was appropriate to diverge.
Fourthly, under the Act, the CCI may refer to such specialists from the areas of economics, finance, accountancy, international trade or any other subject area as it considers indispensable to aid it in carrying out any inquiry or prior due process. The implementation of competitive advocacy role for the CCI is planned to raise consiousness amidst customers, Chambers of Industry and Commerce, Professional Institutes and even the CCI and its officers about Competition as a crucial element in the market-driven economy and activities to make a custom of competition in India.
Phased Introduction of the Act
The Authorities have agreed to enact the Act in a tailored way. In other words the Act’s central four compartments should be phased in. In the first year, the CCI was asked to implement only competition advocacy roles within the foremost year of the Act’s entry into force. The first year is and will be dedicated to raising knowledge and offering training to all those involved with enforcing and administering the Act. The Government’s view is that parliamentarians and legislators will always be informed on the principles alongwith consequences of the Act. Competition advocacy roles will additionally incorporate initiatives to raise conciousness among those concerned and in particular, the public about competition issues, as well as promoting what can be put into words as ‘competition culture’ in the country in addition to developing and bringing up a competitive steered market in the country.
The clauses associated with anti-competitive deals in addition to misuse of supramacy will come into effect in the second year. Therefore the MRTP Act would be recsinded and the MRTP Commission would be disabled. The MRTP Act will be effective within the first year of the Law’s implementation, as the CCI would solely address competition advocacy roles. The provisions relating to the hybrid regulations will come into effect within the third year of the Act ‘s implementation.
This tailored implementation of the Act is premeditatedly a foot forward in the correct path, because it will help India advance upon matters relating to competition not only slowly, but also, gradually.
The Exclusion of Unfair Trade Practices
The MRTP Act tackles restrictive trade practices, unfair trading practices and monopoly trading practices. The Restrictive Trade Practices and Monopolistic Trade Practices are integrated into the new legislation, namely the Act, with purifications and alterations in their content, linguistic communication and context. The Unfair Trade Practices are left out of the Act entirely. That is because there are clauses relating to Unfair Trade Practices in the Consumer Protection Act (CPA) intended to secure consumers’ benefit. The MRTP Act alongwith the CPA experienced a substantial variation upon the Unfair Trade Practices provisions. Of fact, of all the enactments, the MRTP Act and the CPA, the concept of ‘unfair trade practices’ practically is identical.
With the elimination of restrictions on unfair trade practices, the CCI can face a crucial defiance in getting the public buy-in, and creating a in the public eye. Hence, even with the hindrance, to create a public buy-in, the CCI will take up the concerns of customers, which are of a structural sort. Which may include: tied sales of uniforms and stationery in schools and universities, or link-up of doctors to medical centers, pharmaceutical firms, and pharmacies.
Consumer Concerns in the Act:
Any customer may push the CCI to take steps under the Anti-competitive Agreement and Dominance Abuse Act for offences. Consumer associations, meanwhile, are encouraged to push the CCI. ‘Customer’ has a broad concept in the Act that covers all buying products or hiring or making use of services. The Act’s preamble explicitly requires the law to ‘protect consumers ‘ interests. Although individual consumers who have sustained injury or loss as a result of a business supplying them with a faulty product or service are entitled to compensation under the Consumer Protection Act, (mainly unfair trade practices), they are entitled to transfer the CCI for action related to anti-competitive behavior or abuse of dominance. Nevertheless, these lawsuits under the Act are said to be broader in nature in comparison to which are under the Consumer Protection Act, because they are expected to involve a substantial body of consumers who endure as a result of activities which results in major adverse competition effects.
Only with successful compliance will the benefits made by competition law be achieved. Unable to follow competition law is even poor than lack of competition law. Poor enforcement also shows a variety of causes, like insufficient enforcement agency resources. The government should have the requisite resources and monetary assets to make the CCI an efficient tribunal for stopping, while not eliminating, anti-competitive practices and also playing its part as advocate for competition.
Section 3(1) prevents any enterprise or association from entering into any agreement which causes or can cause an appreciable adverse effect on competition in India. The Act clearly presumes that an agreement which is contravention of the said Section shall be void.
The Act makes provision for any agreement including cartels, which-
- Determines the purchase or selling rates, directly or indirectly;
- Restricts the manufacture, supply, technological growth or market service provision;
- Results in bid rigging or collusive bidding.
Must have a appreciable adverse effect on competition in India
Proviso to Section 3 states that the above categorization is inapplicable to joint ventures undertaken with the objective of increasing the caliber in the production , supply , distribution, acquisition and control of goods or services.
Anti-competitive agreements are additionally divided into Horizontal and Vertical Agreements.
Arrangements between companies at the same manufacturing level are called Horizontal agreements. As mentioned in section 3(3), agreements incorporates cartels, engaged in identical or similar trade of goods or provision of services, which-
- Determines purchase of sale prices directly or indirectly
- Limitation or control of production, supply
- Sharing of the market or source of production
- Results in bid rigging or collusive bidding directly or indirectly
Horizontal agreements are put under a marked classification under the Act and are issue to the adverse presumption that they are anti-competitive. Which being additionally said to be ‘per se’ law. Also, if there is a horizontal arrangement pursuant to Section 3(3), it is expected that these arrangements are anti-competitive and has an appreciable adverse effect on competition.
Agreements which are signed between two or more companies functioning at various output rates are called vertical agreements. Among suppliers and dealers for example. Many instances of vertical, anti-competitive agreements incorporates:
- refusal to deal & exclusive supply agreement
- Resale price maintenance
- Exclusive distribution agreement
For vertical agreements the ‘per se’ principle applied to horizontal agreements are inapplicable. Consequently, a vertical arrangement is not per se anticompetitive or has no direct adverse impact on competition.
Exemption under Section 3
In the aforementioned background, CCI notes that any sensible condition applied in IPR protection would not draw in Section 3, but would contravene Section 3 of the Act by imposing ‘unreasonable condition’ to protect IPR. The CCI offers an illustrative list of practices / agreements which may contravene Section 3 of the Act when entered into for the protection of IPR.
The case of Shamsher Kataria talked about the provision of an IPR exemption listed in section 3(5) in an elaborate way. In that matter, IPR exemption under Section 3(5) of the Act was claimed by the opposite parties and observed that the limitations implement on OESs (original suppliers of equipment) from undertaking the sale of the exclusive parts to third parties without consent would come under the criteria of a sensible condition to prevent infringement under IPRs. In the given scenario and situation of the matter the CCI observed that the exemption provided for in Section 3(5) of the Act was unavailable to those OEMs (original equipment manufacturers) who could not submit the documents evidencing the grant of the applicable IPRs in India for different spare parts. CCI also observed that the OEMs could not demonstrate that the challenged limitations implemented sensible circumstances , necessary to protect any of their rights.
In that case, the CCI clarified that while registration of an IPR does not necessarily make a company qualified to seek immunity relating to Section 3(5)(i) of the Act also necessary criterion about deciding whether an immunity under Section 3(5)(i) is obtainable is to determine that the condition implemented by the possessor of the IPR can be defined as imposing a fair condition or not.
Anti competitive practices are those practices which has an adverse effect on the competition. The term competition itself entails attempts by companies to gain advantage over their competitors. But however it should not artificially limit competition by collusive activities. Anti competitive practices may be done by a single company or by one or more companies entering into an anti competitive agreement. It is immaterial whether the agreement is a written agreement or not, as mere activity or arrangement to carry any practices prohibited under Sec 3 of the Competition Act, 2002 would be considered as an anti competitive agreement.
Cartel fall under the Horizontal anti competitive agreement. It is considered as one of the practices which is most detrimental to the Competition Law. It not only prevents free trade but it also harms the consumers. “Sec 2(c) of the Competition Act, 2002 states that “cartel” includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services.”
Cartel was initially not defined under the MRTP Act. There were no provision regarding the penalties for practicing Cartelization. The Act only allowed the MRTP commission to cease and desist to the parties involved in cartel. In the year 1999 the Raghavan Committee was formed which shed light on this aspect. The committee recommended for formation of the Competition Act, 2002. As the MRTP Act had various shortcomings, it did not have any provision defining the term Cartel, Abuse of Dominance, Price fixing. It aimed at restricting monopolistic and unfair trade practices.
Cartel is an anti competitive practice wherein a group of people engaged in similar business come together in order to control the price, production, supply of goods and services. In cartel practices they generally hike up the price of the product leaving the consumers with no other alternatives but to pay a high price for the product or services which otherwise they would have purchased at a very less price. Along with consumers cartel also affects the other market players in the same business. Cartel prevent fair competition in the market and demolishes free trade. In India if a group of people are found to have carried out cartel they would be punished for committing a civil offence without even determining whether it has actually injured the competition or not.
Essential Ingredients for Cartel are:
- Agreement has to be there, immaterial whether formal or informal.
- Agreement must be entered by a group of people dealing in similar or identical trade of goods or services.
- Aims at restricting competition by controlling the price and restricting the production and supply of goods.
The parties involved in a cartel carry out the practice very carefully and they try to make it as opaque as possible to ensure not to get detected by the authorities. Cartel is a civil offence in India but in some countries it is a criminal offence. Sec 27(b) of the Competition Act lays down penalty for Cartel it says that any person who has entered into an agreement referred to in section 3, the Commission may impose upon each producer, seller, distributor, trader or service provider included in that cartel, a penalty of up to three times of its profit for each year of the continuance of such agreement or ten percent of its turnover for each year of the continuance of such agreement, whichever is higher.
One of the most effective decision taken by the commission in order to bust a cartel is by including a leniency provision in the Competition Act, 2002. Section 26 of the Competition Act, 2002 provides that “the Commission may, if it is satisfied that any producer, seller, distributor, trader or service provider included in any cartel, which is alleged to have violated section 3, has made a full and true disclosure in respect of the alleged violations and such disclosure is vital, impose upon such producer, seller, distributor, trader or service provider a lesser penalty as it may deem fit, than leviable under this Act or the rules or the regulations.”
But this provision will only be applicable if the information about the cartel is reported before the report of investigation directed under Sec 26 making of such disclosure.
The Competition Commission should provide protection to the whistle blowers for reporting a cartel. The identity of the whistle blowers must not be disclosed. It would eventually benefit the authorities as more people would be encouraged to report such anti competitive practices.
One such case where cartel was detected was the Builders Association of India v. Cement Manufacturers Association and Ors. case. In this case the informant had filled a complain under Sec 19 of the Competition Act, 2002 against Cement Manufacturer’s Association (CMA) and 11 other cement manufacturers namely Associated Cement company, Gujrat Ambuja Cement Ltd., Grasim Cement, Ultratech Cement, Jaypee Cement, India Cement Ltd, Century Cement, J.K Cement, Madras Cement, Binani Cement and Lafarge Cement.
These cement companies were brought into the radar of the Competition Commission of India by the Builders Association of India for violating sec 3 and 4 of the Competition Commission Act, 2002. The informant claimed that CMA along with the other cement companies were involved in collusive price fixing. As the above mentioned cement companies collectively held more than 57.23% of the market share. They had a dominance in the market which they abused by arbitrarily increasing the price of the cement. They further restricted the production and supply of cement in order to control the price. The commission found that the companies would meet at the CMA and collect retail and wholesale price and accordingly price their products and control the production and supply of cement violating sec 3 of the Competition Act, 2002. The companies had sought to argue that in the absence of direct evidence, no anti competitive agreement can be inferred. But the Commission held that the behaviour of the company led them to believe that they have formed a cartel and they have controlled the price as well as the production of cement in the market.
Bid Rigging is another form of horizontal anti competitive practices. Bid rigging can also be considered as one type of cartel. Bid Rigging is a practice wherein a group of bidders decide the bid amount prior to the actual bid. This practice is done in order to get the most favourable price in a bid. Bid rigging is mostly done by a group of person or companies belonging to the same field of business. Bid rigging has adverse effect on the competition, it reduces competition in the market. It acts as a hindrance for the new player to enter into the market. Bid rigging can be practiced in various forms the parties could enter into an agreement and decide the bid winner prior to the bid on the basis of geographical areas or on rotational basis. There could be an agreement to not to bid against each other. There could be an agreement to sack out the new competitor
from the market.
There are various forms of bid rigging:
Cover bidding– a competitor submits a bid that is higher than the accepted winner’s bid or a bid that is considered to be too high for that bid to be accepted or submits an offer which includes special conditions which are considered to be unacceptable to the buyer. Cover bidding is built to offer genuinely competitive appearance.
Bid suppression– a competitor withdraws their bid so that the designated competitors bid is accepted.
Bid rotation– bidders bid at a low rate on a rotational basis.
Mere price parallelism cannot be the sole criteria for determining Bid Rigging. The market conditions must also be looked into for determining whether the practice has led to any adverse effect on the competition. In Rajasthan Cylinder case the apex court had dismissed the order of the the CCI and the Competition Appellate Tribunal. In this case the apex court laid down the standard proof required to prove bid rigging in an “Oligopsony”. Oligopsony is a market where the consumers are very less in number. Here, the appellant supplied Liquid Petroleum Gas to Indian Oil Corporation Limited. The commission held them liable for bid rigging because of quoting near identical prices in a tender floated by IOCL in violation of Section 3(3)(d) of the Competition Act, 2002. The Director General noticed that the parties submitted their bid in various states at the same level. But the Supreme court held in an oligopsonic market price parallelism might happen. Even if there is a collusive agreement it must be looked whether it has led to adverse effect on the competition or not.
Tie in Arrangement:
Tie in arrangement is a vertical anti competitive agreement. Tie in arrangement is not governed by per se rule. These agreements will be considered illegal only if it is proved that it has caused adverse effect on the competition. In this type of arrangement various enterprises from the production chain strike a deal among themselves. Tie in arrangement is a practice in which a consumer to purchase a certain product or services has to make another purchase as a condition of the initial purchase. This type of arrangement is not always considered as illegal.
In a decision in Sonam Sharma v Apple & Ors the CCI held that there was a tie in arrangement between Apple Inc manufacturers of iphones and Vodafone and Airtel. Vodafone and Airtel had exclusive selling right of the iphone. However, the commission was of the opinion that distribution of the iphones by Vodaphone and Airtel helped create a market for the manufacturers. The commission was of the view that it did not act as entry barriers to the new market participants.
Lacuna under the Competition Act:
One major setback in the present Competition Act, 2002 is that there is no particular test available to determine anti competitive agreement. There are two rules i.c Per se rule and Rule of reason based on which anti competitive practices are determined. Per se rule is used in Horizontal agreement and Rule of reason is used for Vertical agreements. Under Rule of reason it is required to be proved that the agreement is likely to cause adverse effect on competition. Adversarial adverse effect has not been defined under the Competition Act and it varies from case to case. Sec 19(3) lays down few points which are likely to determine whether the agreement has an adverse effect on the competition or not, they are (a) creation of barriers to new entrants in the market, (b) driving existing competitors out of the market, (c ) foreclosure of competition by hindering entry into the market, (d) accrual of benefits to consumers, (e) improvements in production or distribution of goods or provision of services, (f) promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services. Although Sec 19(3) helps in determining adversarial adverse effect on competition but however it is not conclusive in nature. It does not qualify for complete assessment of anti-competitive agreements under Sec 3 of the Competition Act, 2002.
Among the different type of anti competitive practices, cartel formation is the most pernicious act under the Competition Act, 2002. In India cartel is considered a civil offence, the act empowers the commission to impose a penalty on each party upto 3 times of its profit for each year of the continuance of such agreement or 10% of its turnover for each year of continuance of such agreement, whichever is higher. It is a very strenuous task for the commission to bust a cartel, since the parties involved in any of the practices mentioned under sec 3 of the act carry out the function meticulously especially cartel. The leniency provision was notified in the Competition commission of India (lesser penalty) Regulation, 2009. Leniency provision gives protection to the whistle blowers. The commission has the power to grant lesser penalty to a person who is a party to a cartel and discloses information about the same. The commission can grant lesser penalty under Sec 46 of the act only if the the party discloses about the cartel before the initiation of the investigation by the Director General. Leniency provision is a prominent step taken by the commission in order to prevent anti competitive practices which would have an adverse effect on the competition.