A dynamic competitive environment supported by effective competition policy and law is considered to be one of the essential elements of a successful market economy. The benefits of having competition in the market are lower prices, better products, wider choice and greater efficiency than those existing under conditions of monopoly. For healthy competition to be maintained in the markets there must be rules that producers in the market must follow. The main objective of competition law and policy is to preserve and promote competition as a means of efficient allocation of resources in the society. Competition Law is the tool through which the Government controls and regulates players in the market.
European Communities Competition law is contained in chapter 1 of Part 3 of the European Community Treaty which consists of Article 81 and Article 82. Article 81 (1) prohibits agreements, decisions by the associations of undertakings and concerted practices that have as their object or effect the restriction of competition. This prohibition may however, be declared inapplicable in case the agreements satisfy the conditions laid down in Article 81(3) i.e. in case the agreement leads to technical improvement, it will not be prohibited. Article 82 prohibits the abuse by an undertaking or undertakings of a dominant position. An additional important instrument of European Union Competition Law is the European Union Merger Regulation, which applies to concentrations between undertakings. The Modernization Regulation, adopted on 1st May 2004, has changed the way in which Articles 81 and 82 will be applied. Following the adoption of the Modernisation Regulation, European Competition Commission (also known as Commission), the National Competition authorities of the Member states and National Courts of the European Union have the competence to enforce Articles 81 and 82. In general, actions in competition cases are brought in the first instance before the European Competition Commission and then before the Court of First Instance. Member states actions are taken to the European Court of Justice.
In India, the first competition law was the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act). But this law was rigid and was adopted when India was not following the policy of free trade and privatization. After liberalization, need was felt for changing the existing legislation. As a result, The Competition Act, 2002 (Competition Act) was passed. Horizontal and Vertical agreements that can restrict competition are laid down in section 3 of the Competition Act. Dominant position and abuse of dominant position by undertakings have been laid down in section 4 of the same Act.
Horizontal Agreements are made between undertakings operating at the same level (for e.g. between competitors) of the market. Horizontal agreements between independent undertakings to fix prices, divide markets and to restrict outputs are perhaps the most obvious target for any system of competition law and are prohibited by the EU law. So are horizontal agreements which are designed to foreclose competition from other firms in order to protect the privileged position of the cartel members.
Cartels are one of the most pernicious forms of horizontal agreements. A cartel is an explicit agreement among the undertakings operating at same level. Cartels usually occur in the oligopolistic markets. There are no criminal sanctions under EC law for persons indulging in cartels, but substantial fines can be imposed on undertakings. In the UK, the Enterprise Act 2002 introduces a criminal cartel offence for individuals responsible for hard core cartels and the commission of which can lead to imprisonment for up to five years and/or unlimited fine. The European Commission has been attaching a higher priority to cartels than any time in its history. The Commission’s commitment to a tougher policy towards cartels is demonstrated in a number of ways. First, the ‘Leniency Notice’ encourages participants in cartels to provide evidence to the Commission of their unlawful behavior in return for a reduction in fines. The Commission’s Notice allows a total amnesty in some cases, although this degree of leniency will not be available to the ring leader of the cartel. In other cases the reduction of the fine may be substantial and in others, significant. A second manifestation of the Commission’s determination to combat cartels is that this is a key driving force behind the EC Modernization Regulation as it enables the Commission to redeploy its resources enabling it, inter alia, to concentrate on tracking down serious infringements of Articles 81 and 82.
Various means of cartelization which would infringe European Union Competition laws include Horizontal Price Fixing, Horizontal Market Sharing, Quotas and other restrictions on productions, Collusive Tendering, Information Agreements, Advertising Restrictions, Oligopoly, Tacit Collusion and Collective Dominance.
Horizontal price fixing is regarded as the most blatant and undesirable of restrictive trade practices. Prices can be fixed in numerous ways. For example, where firms agree to restrict credit to customers, or abstain from offering discounts and rebates, or refrain from advertising prices, etc. Competition will also be eliminated where firms enter into agreements to apportion particular markets amongst themselves, i.e., it is agreed amongst the firms that nobody will poach on each other’s territory. Geographical market sharing is particularly restrictive from the consumer’s point of view since it diminishes choice. Collusive Tendering is a practice whereby firms agree amongst themselves to collaborate over their response to invitations to tender. In the simplest form of collusive tendering, the firms in question simply agree to quote identical prices, the hope being that in the end each will receive its fair share of orders. Information agreements are the agreements in which competitors exchange information amongst them. The problem for competition law is to distinguish between those exchanges of information which have a neutral or a beneficial effect upon efficiency from those which seriously threaten the competitive process by facilitating collusive behaviour.
Advertising can also restrict competition and can be a serious barrier to entry for new firms wishing to enter a market. Enormous amount of money is spent on building the brand image and new entrant into the market who is not able to spend so much on advertising will find it difficult to enter the market.
Another problem for the competition authorities in ‘oligopoly’ (where there are few players in the market and they deal in homogenous products) is the phenomenon of ‘tacit collusion’ between the undertakings operating at the same level. It means, because of the structure of the market, operators will behave in a parallel manner and without entering into the agreement they would be aware of the marketing strategies of each other. These operators having sufficient market power will be collectively dominant and can abuse their dominant position.
In the Indian context, agreements which restrict competition were not clearly defined in the MRTP Act. Definition of ‘Monopolistic Trade Practice and Restrictive Trade Practice’ was provided. Section 2(o) of MRTP Act defined ‘Restrictive Trade Practice’ as a trade practice which prevents, distorts or restricts competition. This was very general provision and it covered all and different types of anti-competitive practices. As a result, the MRTP Commission and the Supreme Court interpreted the same provisions of the MRTP Act in a different manner, resulting in conflicting decisions. Further, there was neither definition nor mention of certain offending trade practices which are restrictive in character like abuse of dominance, cartels, collusion, price fixing, bid rigging, boycotts, and predatory pricing. Hence, the need was felt for a legislation to deal effectively with all these issues and taking into account liberalization that results in increase in trade and in the expansion of cross -border activities. The Competition Act is substantial improvement over the old Act. Agreements which restrict competition are mentioned in sections 3 and 4 of the Competition Act. Cartels are also defined in the Competition Act and specific agreements that can restrict competition have also been mentioned in the new Act.
Vertical agreements exist between the undertakings operating at different levels of market, i.e. between the buyer and the seller. Vertical Agreements are likely to have an effect on competition where the firm imposing a vertical restraint already has some degree of market power. Where this is the case, competition with other firm’s products, i.e., “inter-brand competition” may be limited. It may also be desirable that there is competition between distributors and retailers in relation to the products of the firm with market power, the so called “intra-brand competition”.
The European Commission’s Guidelines on Vertical Restraints in paragraphs 137-228 provide guidance on the application of Article 81 to eight types of vertical agreements: Single Branding, Exclusive Distribution, Exclusive Customer Allocation, Selective Distribution, Franchising, Exclusive Supply, Tie-in and Recommended and Maximum Resale Prices.
Single Branding Agreements cause a buyer to purchase all or most of his requirements of products on a particular market from one supplier, restricting inter-brand competition by foreclosing access on the part of other suppliers to the market. A supplier will often grant exclusive distribution rights to a distributor for a particular territory. The Commission notes that when most or all the suppliers in a particular market adopt exclusive distribution systems, this may facilitate collusion, both at the suppliers and the distributors level of the market, thus harming the inter-brand competition. In Exclusive Customer Allocation Agreements, a supplier agrees to sell its products to a distributor who will resell only to a particular class of customers. Agreements in the limited distribution group may lead to a foreclosure at the buyer’s level of the market, facilitate collusion and lead to a reduction or even the total elimination of inter–brand competition. The Selective Distribution Agreements are often employed by producers of branded products. The producers establish a system in which the products can be bought and resold only by officially appointed distributors and retailers. In determining the application of Article 81 to selective distribution agreements, a distinction must be made between a purely qualitative system and a quantitative system; a purely qualitative selective distribution system will not infringe Article 81(1).
An Exclusive Supply Agreement causes a supplier to sell its products only to one buyer within the European Union for the purposes of a specific use or resale. In considering whether Article 81(1) applies to such agreements, the buyer’s market share In its downstream market will be of particular importance: the more its market share, the greater shall be the anti competitive effect. In a Tying Agreement, a supplier makes the supply of one product (the tying product) conditional upon the buyer also buying a separate product. Tying may infringe Article 82 where the supplier has a dominant position; however, a vertical agreement imposing a tie may also infringe Article 81(1) where it has a single branding effect in relation to the tied product. The imposition upon distributors and retailers of minimum or fixed resale prices will be held to infringe Article 81(1). In such cases, the market power of the supplier is the most important factor to be taken into consideration along with the structure of the market. In particular the Commission considers that if it is oligopolistic, there is greater likelihood of collusion.
According to The Competition Act, following are the vertical restraints specifically stated as to be considered anti-competitive if they fall under the prescription of the sub- section (4) of section 3: Tie in Arrangement, Exclusive Supply Agreement, Exclusive Distribution Agreement, Refusal to Deal and Resale Price Maintenance Agreements. These agreements are not presumed to have appreciable adverse effect on the trade and they are to be judged by “Rule of Reason”. It means that the burden of proof is on the investigator to prove that the agreement will restrict competition. These agreements can restrict competition but are not presumed to be anti- competitive. There could be other types of agreements falling under section 3(4) as those stated in the subsection are not exhaustive. The explanation to this sub-section gives an inclusive definition of each of the vertical restraints which means that there could be vertical restraints other than those stated in the sub-section. The meaning of these agreements are similar to the definitions as stated in the EU law.
In India, there are no guidelines as to the effects of vertical agreements, but the effects of such agreements can be seen in various anti- competitive vertical practices. Hence, a need for proper guidelines on vertical agreements in India cannot be overemphasized.
After attaining independence in 1947, for a period of next forty years, India followed the policy of what is known as “Command – and – Control” laws, rules, regulations and executive orders. Government intervention and control pervaded almost all areas of economic control. There was no contestable market. This meant there was neither an easy entry nor an easy exit for the enterprises. Further, there were high tariff walls, restriction on foreign investments and quantitative restrictions. Thus, free competition in the market was under severe fetters, mainly because of government policies and strategies. These policies of the government favored big business houses.
Consequently, need was felt for laws which could regulate free competition within the market. Different committees were set up to analyze the situation. All the committees concurred that there was concentration of economic power in the hands of few industries and they indulged in monopolistic and restrictive trade practices. A Bill was drafted to tackle this problem and this Bill, when approved by the Parliament came to be known as Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act), which is regarded as the first Competition law of India. The MRTP Act tacked agreements which restrict competition. The thrust of this Act was directed towards “the prevention of concentration of economic power to the common detriment; the control of the monopolies; the prohibition of monopolistic trade practices (MTP); the prohibition of restrictive trade practices (RTP); and the prohibition of unfair trade practices (UTP)”.
The concentration of economic power may result from merger, amalgamation, acquisition or takeover. Initially, under the MRTP Act, there was pre-entry restriction requiring the undertakings and the companies with assets more than Rs. 100 crores to seek approval of the Government for expanding or setting up new undertakings. After the amendment of 1991 to the MRTP Act, pre-entry restrictions with regard to the approval of the Government was done away with but in order to check the concentration of economic power, the law retained the provisions where the Government could direct the division of an undertaking, if the working of the undertaking was prejudicial to the public interest or was likely to lead to the adoption of “Monopolistic or Restrictive Trade Practices”.
One of the downside of the MRTP Act was that the MRTP Commission had limited power in regulating or directing companies to divest them, as power to pass such order lay with the Central Government. The role of the Commission was mere advisory in nature. Owing to these and other loopholes in the MRTP Act, on the recommendations of the High Level Committee on ‘Competition Policy and Law’ appointed by the Government, the Competition Act was enacted, which came into force on 20th May 2009. Under the Competition Act, the Central Government has made effective, inter alia, anti-competitive agreements, abuse of dominance, and the competition advocacy functions of the Competition Commission of India.
The anti-competitive effects of the above-mentioned agreements, practices and concentrations have a very adverse effect on the global economy and the indulgence into activities like formation of cartels etc. must be dealt with severely by all the countries by imposing criminal penalties along with heavy fines so that such undertakings think twice before taking any anticompetitive step. The European Union has a strong Competition Law to tackle the menace of anti- competitive behavior. But developing countries still do not have such strong and effective Competition Laws. India also requires an effective implementation of the Competition Act because in today’s era of globalization, international trade is growing by leaps and bounds and a strong law for maintaining effective competition is required. In the current context, the MRTP Act has outlived its utility, so the new Competition Act should be strongly implemented to protect the interest of the traders and the consumers. Last but not the least, a mechanism should be established whereby both India and the European Union should consult more often on the smooth implementation of competitive behavior between the undertakings established in both the economic blocs.
This is a very interesting and challenging time for anyone involved in the competition law and policy of India. Sections 3 and 4 of the Indian Competition Act, which prohibit, respectively, agreements between enterprises that could have an appreciably adverse effect on competition and abusive behaviour by an enterprise that has a ‘dominant position’ on a market, are now in effect. Section 5 of the Act, which gives power to the Competition Commission of India (the ‘CCI’) to prohibit, or to require the modification of, certain mergers that might be seriously harmful to competition, is not yet in force, and it is not clear when the Government will decide to notify this part of the Act.
The legislation is drafted, as are most of the competition laws in the world (of which there are now more than 100), in fairly general terms. Some examples of the types of agreement that might violate section 3 – price fixing between competitors, exclusive supply and exclusive distribution agreements between suppliers and dealers -are specifically referred to in the Act; similarly, we are told that the denial of access to markets and the ‘leveraging’ of a dominant position from one market to another can amount to an abuse of a dominant position. However, these examples of practices that might be unlawful suggest a simplicity about the legislation which is apparent rather than real. As a general proposition enterprises can harm competition – and inflict harm on customers and ultimately consumers – only where they possess some degree of market power. In practice, the assessment of market power, meaning the ability to raise price, to reduce output, to reduce the quality of products, to limit the choice available to customers or to degrade the products of rivals without fear of a damaging competitive response by other enterprises, is technical and complex. There are no simple solutions: each case requires careful economic analysis, and lawyers and their business clients often need input from economics and econometrics in order to reach robust and defensible determinations; the same, of course, is true of competition authorities, in India’s case, the CCI.
Reverting to the opening words of this piece, competition analysis is therefore interesting; but it is also challenging, requiring businesses, professional advisers, CCI officials and judges to learn, and apply, concepts and techniques that are not part of ‘normal’ law. Competition law requires special skills and insights. But of course this also presents a challenge, to provide the training and understanding needed to make a success of the Indian Competition Act. The law schools and universities of India produce graduates of excellent quality, and many of them have begun to acquire a very good understanding of the subject; sometimes this has been supplemented by study abroad. The CCI has been actively recruiting staff and providing the training necessary for the challenges ahead. As an outside observer of the system, I hope fervently that the Indian Government will provide even more resources to the CCI to enable it to discharge the tasks ahead; and I also consider that the system would benefit hugely from activation of the merger provisions of the Act: I suspect that a three legged stool (consisting of section 3 on agreements, section 4 on abuse and section 5 on mergers) with only two legs actually functioning might be somewhat unbalanced! The third leg would provide balance.
The Competition Act provides a huge challenge – and opportunity – to corporate India. The challenge is to absorb, to understand and to internalise competition law. There will be some practices which are deeply ingrained in the custom and practice of enterprises in India, including, I suspect, price fixing and bid rigging/ collusive tendering that, quite simply, are unlawful; significant fines can be imposed on enterprises which behave in this way. It is important, therefore, that companies review their commercial behaviour and introduce change where change is needed; ideally the inspiration for this should come from board level: behaviour is unlikely to change unless the need for change is recognised at the most senior level of the organisation. A ‘competition law compliance programme’ is a necessity for any company that is at risk of infringing the law.
However it would be wrong for enterprises to see competition law purely as a risk and a burden: there are immense benefits for enterprises – and consumers – from the prohibition of practices that exclude competitors from markets in an anticompetitive manner and that lead to higher prices, inferior products and restricted choice. Competition law offers opportunities as well as challenges, and where anti-competitive behaviour may be causing harm to the proper functioning of free markets it will be worth considering making a complaint to the CCI.
The Indian economy is growing rapidly, and an effective and efficient system of competition law can contribute significantly to the country’s economic success. Many people – in India and beyond – will watch developments in the next few years very closely: it is indeed an ‘interesting and challenging time’. …as told to Avinash Mohapatra
Merger control is the most important facet of any competition legislation. It is non-adversarial, ex-ante transaction where both or almost all parties come to a certain kind of agreement and a permission of the competition authority is sought before closure of the Merger control ensures protection of future anti-competitive scrutiny should the merged entity continue to abide by competition law provisions post-merger. Merger control scrutiny also enables a new competition authority learn complex competition principles better than adjudicating a dispute of an alleged ‘cartel’ or ‘abuse of dominant position’. Gathering evidences against cartel and defining market against allegation of an abuse of dominant position are so complex that competition agencies and the professionals representing parties seldom agree. On the contrary, in a merger notification in almost 90- 95% cases, the professionals and the competition authorities agree to close the deal. Professionals would be eager to close the deal as such would be ever willing to assist the competition authority with all possible help. Competition authority likewise, would like to earn a reputation by closing deals because they are aware that a successful closure enhances economic activities. Thus, the professionals and competition agencies are not hostile to each other in a merger notification unlike adjudicating disputing cartels or bidrigging. India has a young competition law enforcing authority. Merger control has not yet been notified though other provisions have been in force since May 2009. India had a great poet “Kalidas”, who prior to his gaining prominence in the field of literature, was believed to have sat on the edge of a branch of a tree and with an axe, cut the root of the same branch. The stakeholders who are currently opposing notification of merger control would hopefully gain sense and come out of this “Kalidas”-mode, thereby gaining the wisdom to ensure India’s competitiveness in the international markets.
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