Competition Act - A critical analysis

by APURVA KOTHARI on NOVEMBER 2, 2008 Fair competition ensures improved productivity, greater efficiency, and productive innovation, which results in a consumer oriented, fair priced Market with improved quality products on offer. After the gates of Indian economy were opened in the liberalization era, the time has ripen enough after 17 years wherein it became important to regulate the dominant positions and huge combinations achieved by mergers and acquisitions. Anti competitive factors are detrimental to the growth of mid and small sized producers and the ultimate consumer. The markets were calling for a shift from the government regulation of curbing monopolies by MRTP act to promoting competition by way of a new anti trust law. In light of these, the Indian legislature has passed the competition act w.e.f. 14.01.2003. Point 48 this act provides for the repeal of MRTP act and the MRTP commission, but the act has not yet been brought into force by the government.

Prior to the enactment of the competition act, in pursuance of the industrial policy statement of 1991, the legislature has made changes in the MRTP act but in spite of those amendments the pre entry barriers continued to exist and were detrimental for the investments. As the new amendments have not proved productive, the government set up the S.V.S Raghwan committee on the basis of whose recommendations the competition act was drafted. The new act also drew the inspiration from Article 38 and 39(b) of the constitution which provides for proper distribution of the countries wealth to subserve the common good and to prevent the concentration of wealth.

International ScenarioThe need for a anti trust law to regulate the market was felt by other countries earlier than India The Sherman act of 1890 is the antitrust law of America, the mergence of the competition laws is traced to this legislation In 1879, C. T. Dodd, an attorney for the Standard Oil Company of Ohio, devised a new type of trust agreement to overcome Ohio state prohibitions against corporations owning stock in other corporations. A trust is a centuries old form of a contract whereby one party entrusts their property to a second party. The property is then used to benefit the first party. In a corporate trust, the various corporations assign their stock to a board of trustees. The trust then issues trust certificates to the stockholders. They receive the financial benefits, while the board of trustees maintain operational control. By consolidating control of most companies in an industry under one controlling board, the

industry is essentially monopolized. Similarly, article 82 of the EU treaty contains provisions which prohibits the abuse of dominant position. Around 80 countries have the anti trust laws and around 20 countries are in the process of giving their markets a competition law

CoverageThe competition act covers all the entities engaged in commercial activities, it may be natural or artificial persons like companies, corporations, domestic and foreign firms, Hindu undivided families, trusts, statutory corporations like municipal corporations, cooperative societies, government departments etc. although the departments of the government engaged in sovereign functions have been exempted from the purview of the act like defence, atomic energy, currency, space etc. The coverage is very wide and the coverage is on the basis of the activity performed by the organization i.e. whether it is into commercial activities or not and not on the basis of its ownership or organizational form or structure. This neutrality which is sought to be achieved can done away by the central government by issuing notifications for granting exemption for the purpose of security reasons, public interest, to honor a treaty or sovereign functions

Objects of the act The object of the act can be looked into from the preamble which says-to provide for establishment of a commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interest of consumers and to ensure the freedom of trade carried on by other participants in the market, in India, and for matters connected therewith or incidental thereto To promote competition in the markets or in other words to prevent the activities having adverse effect on competition the act act provides for stringent actions. There are three practices which have been recognized by the act as anti competitive: 1. anti competitive agreements-

As the name is, anti competitive agreements are those agreements which have an adverse effect on the competition. Such agreements are entered into by the market players and can be divided into two on the basis of the way they are dealt with in competition act

1. Agreements which have the effect of (a) Directly or indirectly determining purchase or sale prices;

(b) Limits or controls production, supply, markets, technical development, investment or provision of services;

(c) Shares the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way;

(d) Directly or indirectly results in bid rigging or collusive bidding, Such agreements shall be presumed to have an appreciable adverse effect on competition. Such agreements are difficult to prove and even if proved, they have to qualify the rider that they have an appreciable adverse effect on the competition. Therefore the presumption with regard to the above mentioned agreements will make it easier for the competition commission to prevent such anti competitive activities.

2.

other agreements like

(a) Tie in arrangement;

(b) Exclusive supply agreement;

(c) Exclusive distribution agreement;

(d) Refusal to deal;

(e) Resale price maintenance Requires the proof that they have an adverse effect on competition and no first hand presumption is raised. But here section 2 eases the work of competition commission as by the force of this section both formal agreements (written and oral) which are intended to be

enforceable in the legal proceedings, as well as other informal agreements without any intention to make them enforceable will be covered and will give rise to the cause of action. Hence with respect to such cartels the competition act is very stringent and comes down heavily on them and makes them void
The act also provides the guidelines to determine that whether a particular agreement will have an adverse effect on competition, the commission must have due regard to all or any of the following factors, namely:

(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.

To break such cartels the competition commission can initiate leniency programmes like imposing lower penalties on the member of the cartel which provides vital information to the commission regarding the cartel which can help the commission to proceed against such anti competitive agreement, it is like turning approver in a criminal case. Some countries treat cartels as criminal offence life US, Canada, Japan and UK. The logic behind considering it as a criminal offence is that the fine imposed on the enterprise sometimes proves to be very high for them and often results in bankruptcy and consequent loss of jobs. Other countries are also considering the taking of strict steps for ex. Australia is considering a proposal of criminalization of cartels and removal of the concerned person from the post of director, Brazil has created an intelligence center for cartel investigation plus provision for dawn raids and wire tapping and France, Hungry, Japan, Netherland and European commission have introduced leniency programmes

2. Abuse of dominant position: Dominant position refers to a position of strength wherein the enterprise has gained such a position in the market by way of big market share or otherwise that he is able to play independent of market forces. It refers to the position where the player can manipulate the markets. The competition act does not prohibit the dominant positions as was the case in MRTP act but it prohibits the abuse of the same. By abuse the act refers to acts like increasing prices, reducing supplies etc, by which the markets are manipulated in ones favor and detrimental to other competitors. An enterprise indulges into the abuse ots dominant position if (a) Imposes discriminatory price in purchase or sale (b) Imposes conditions in purchase or sale of goods and services (c) Limits or restricts production or supply or technical or scientific developments (d) Activities that denies market excess (e) Uses its dominant position in one relevant market to enter into or protect other relevant market To press in section 4 for accusing an enterprise of abuse of dominant position the commission will have to determine that whether the enterprise enjoys the dominant position or not for which various determining factors are provided in the act itself like
(a) Market share of the enterprise; (b) Size and resources of the enterprise; (c) Size and importance of the competitors; (d) Economic power of the enterprise including commercial advantages over competitors; (e) Vertical integration of the enterprises or sale or service network of such enterprises; (f) Dependence of consumers on the enterprise; (g) Monopoly or dominant position whether acquired as a result of any statute or by virtue of being a Government company or a public sector undertaking or otherwise;

(h) entry barriers including barriers such as regulatory barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or service for consumers; (i) Countervailing buying power; (j) Market structure and size of market; (k) Social obligations and social costs;

(m) Any other factor which the Commission may consider relevant for the inquiry.

Where the abuse of dominant position is proved the commission can impose a penalty of up to ten percent of the average turnover of the preceding three years. The law also provides for division of enterprise a famous example is the division of the giant American telecom company AT&T, in 1980s into five baby bell companies.

3. Elimination/reduction of competition in market achieved through acquisitions, amalgamation or mergers: The proposed law is not against every acquisitions, amalgamation or mergers but it refers only those which give rise to combinations beyond a particular size in terms of assets and turnover

Combinations One of the biggest threat to competitions is the mergers and acquisition activities by which the factors governing the competition in the market are grabbed by a few or a single enterprise. But not all the combinations (mergers & acquisitions) are within the purview of the act, it specifies a limit beyond which all the desired combinations need to be approved by the competition commission to see the light of the day. The notice of such upcoming combinations can be voluntarily given by the parties involved, or by any person (not required to be a affected party), or on reference by a statutory authority for ex. TRAI may notify the commission of a combination of two telecommunication players, or the commission can itself take the suo moto action. Besides going beyond the limit provided for in the act to make a combination actionable, the commission will also have to prove that such a combination will have an adverse effect on

the competition and in determining such effect the commission must have regards to the fact like level of competition in the market, barriers in entering the market, likelihood of the combination of effecting the price or supply, degree of countervailing power in the market, market share of the proposed combination etc. it can be so that the benefits of a combination may outweigh its adverse effect, then the commission may give way to such combinations. To ensure the speedy work on part of the commission so that the important mergers do not remain hung up in air for indefinite period, the act provides for a specific period within which the commission has to pass an order otherwise the combination will be deemed to be approved also the commission can not take note of a combination after one year of its coming into existence.

Proceedings before the commission-

The proceedings will be deemed to be judicial proceedings although the commission will not be bound by the procedure laid down by Civil procedure code of 1905, the inquiries will be governed by the principles of natural justice, rules made by the central government and will be subject to other provisions of the act. In a trial before the commission the commission will have the powers of a civil court provided for under the Civil procedure code of 1905. The civil courts are excluded from exercising their jurisdiction to entertain any suit or proceeding in respect of any matter which the Commission is empowered under this Act to determine and no injunction

shall be granted by any court in respect of any action taken or to be taken in pursuance of any power conferred on the commission by this act Any person aggrieved by any decision or order of CCI may file an appeal to the Supreme Court within 60 days from the date of the communication of the decision or order. The competition commission shall have a principle bench presided over by the chairperson and other additional benches and merger benches presided over by at least one judicial member qualified to be a judge of the high court. The commission should consist of one chairperson and not less than two but not more than ten members

Amendments to the actThe CCI could not be made functional due to a writ petition filed before the Supreme Court against certain provisions of the Competition Act, the Rules framed there under and the

selection of the Chairperson and Member of the CCI, it was contended that as per the doctrine of separation of power the CCI should be headed by a Judge and not by any beauraucrat. In pursuance of the orders of the supreme court and recommendations of parliamentary standing committee on finance two competition amendment bills of 2006 and 2007 were introduced in the parliament and received its accent the major recommendations proposed by these bills are

1. 2. 3.

notification by parties of the combination must become mandatory completed mergers should not be easily undone the selection committee for composing the commission must be headed by the chief justice of Indiaor his nominee and other members must consist of secretary in the ministry of corporate affairs, secretary in the ministry of law and justice and two other experts

4. 5. 6. 7.

the chairperson and other members shall not hold office after the age of 65 years creation of competition appellate tribunal to hear the appeals from commission every proceedings before the CCI need not be judicial proceeding the power of receiving complaints, awarding compensation, imposing fine and imprisonment will be transferred to the appellate body and the commission can only receive informations

8.

The bill has introduced a new concept of a local nexus for overseas entities which are parties to mergers and acquisitions and prescribes a local threshold value of assets or operations in India in addition to the existing global limits.

Difference between the two acts/Need for repealing Although both the acts are anti trust laws but still they are polls apart. MRTP act on one hand is based on pre liberalization phase where there was not much competition in the market, while on the other hand the competition act is drafted keeping in mind the recent economic history of India in the light of post economic reform phase of liberalization and globalization. The old act curbed the monopolistic activities and the dominance in the market but the new act dose not bars the dominant position but it targets the ill effects of a dominant position. The MRTP act was a tooth less tiger as it could only pass cease and deceit order but can not impose fine, penalties or imprisonment, also it didnt regulated combinations and could not lay its hand on the anti competitive agreements with a foreign origin in a direct manner, but the appellate board under the competition act has major powers of imposing fine and imprisonment and also regulates merger and acquisitions which if passes the threshold limit could prove to be detrimental to the competition in the market

Conclusion Competition is accepted worldwide as the life blood of the market economy. The effect of competition on price and accessibility is best illustrated with an example from Indian telecommunications. Tele-density in India has risen from mere 2.32 in 1999 to 11.32 in December 2005-07. Also there has been a dramatic fall in telecom tariff from Rs. 16 per min. to Rs. 1 per min. with increased competition in this sector. Similarly, consumers have benefited from competition in other sectors such as civil aviation, automobiles, newspapers, electronics etc. the enactment of the competition act is a commendable step towards achieving the twin mantra of open market economy and liberalization in a mixed economic system. In retrospect, the highlight of the Act is its intent which not only prohibits anticompetitive agreements which are detrimental to the consumers and the market but also prohibits any agreement which is likely to cause an appreciable adverse effect on competition.18 The requirement of reform in the anti trust laws has been rightly felt by the Indian legislature, the new competition law will change the face of Indian markets.