As per its Annual Report for the year 2013-14, the Competition Commission of India (“CCI”), has imposed a totalpenalty of ` 9886.96 Crores, in a total of 35 cases, during the period of last five years, starting from the year 2009. The severity of these penalties has made most business entities in India increasingly aware and sensitive towards the need for Competition law compliance. However, apart from a very general and broad understating of the law, many business entities seem to be unsure regarding the reach and sweep of the law, its applicability to their conduct and activities. Though, the CCI has undertaken several advocacy measures, the CCI is yet to come out with guidelines for anticompetitive agreements, abuse of dominance, combinations or even the penalties. As a result, the business entities are uncertain of a likely violation that their conduct and activities would cause, inviting severe penal consequences.
As per Section 27of the Competition Act, 2002 (“The Act”), the CCI can impose a penalty of upto 10% of the average turnover of the last three preceding years in abuse of dominant cases. In cases of cartels, the upper threshold is even higher and the CCI can impose penalties of upto 3 times of its profits for each year of the continuance of such agreement or ten per cent of its turnover for each year of the continuance of such agreement, whichever is higher. Further, the legislature has employed the words “as it may deem fit” in Section 27, thereby, leaving the determination of the quantum upon the CCI. TheAct is,however, silent regarding the methodology which the CCI ought to employ in calculation of the penalties. Thus, any objective assessment of the criteriaregarding the exact quantum of penalty which the CCI may or would impose in a specific case remains uncertain and the parties have to make their own inferences based upon the decisional practices of the CCI. The CCI, in its various orders, has often justified the high quantum of penalty imposed by it by stating that it has been vested with wide discretion by the legislature in the matter of imposition of penalties. 1In all fairness, it must be stated that even in more matured jurisdictions such as that of the UnitedStates & the European Union, the quantification of the penalties is still not a matter of mathematical computation and the same is dependent on subjective assessment of the facts of each case by the Anti-trust authorities. However, these jurisdictions have penalty guidelines, based on which penalty in a particular case is decided (discussed later in detail). Notwithstanding the fact that the CCI is only about six years old, it would still be desirable to put in a penalty guidelines, as also guidelines regarding other anti-competitive conduct, in place so as tomake a beginning in this direction which would auger well for regulatory / judicial certainty.
To begin with, the CCI was initially not giving detailed reasons behind imposing a certain percentage of turnover as penalty. However, upon receiving comments / criticism from various stakeholders and more importantly, from the Competition Appellate Tribunal2, the CCIstarted identifying the relevant factors pertinent to the calculation of the amount of penalty. The CCI recognizes a two – fold aim in inflicting penalties: to show the seriousness of the offence and the second, to cause the deterrence effect. The deterrence approach calls for a penalty large enough to outweigh all benefits of a violation, thus deterring the violator from repeating his behavior, and deterring others from choosing to violate. The seriousness of the offence relates to the gravity of the offence and an attempt to equate the amount of penalty to the gravity of offence.
In addition to the above two aims, the CCI also considers any mitigating or aggravating factors before deciding the actual quantum of the penalty. However, there is no benchmark or clarity as to what could / would be considered as mitigating/aggravating factors in a particular case. There has been no clear mention in most of the orders of the CCI as to why a particular factor has been accepted as a mitigating factor and vice versa. To that extent, the quantum of penalty and factors which would determine the quantum remains uncertain &unpredictable.
The CCI has imposed higher penalties in cartel cases as compared to the abuse of dominant cases, which is in sync with the international best practices. This is because cartels are presumed have a larger dampening impact on the functioning of the market and are also harder to detect. In the various drug cartelization cases, the CCI has inflicted a 10% penalty on the various druggist associations to cause the desired deterrence effect3. But in some of the cartel cases, the CCI has imposed lesser penalties as well. For example, in a recently decided cartel matter of Re: Alleged cartelization in the matter of supply of spares to Diesel Loco Modernization Works, Indian Railways, Patiala, Punjab., the CCI inflicted a penalty of only 2%, one of the lowest in a cartel matter. Pertinently, the CCI rejected the argument that since the amount of bid is small the penalty should also be mitigated. Interestingly, the CCI observed that there are no mitigating factorsvis a vis the gravity of the offence, but still pegged the penalty at 2%. As regards the abuse of dominance cases, the CCI has inflicted a range of penalties with 7% in the DLF case, 4% in Kapoor Glass case and 5% in the NSE case4. It is interesting to note that while similar observations have been made in all these cases, the quantum of the penalties are varied.
In an abuse of dominance case of M/s HT Media Limited And M/s Super Cassettes Industries Limited Case No. 40 of 2011, decided on 1st October, 2014, the CCI inflicted an 8% penalty, one of the highest in abuse of dominant cases. The CCI held that it has been given wide discretion by the legislature in terms of inflicting penalty. The CCI further held that primary objectives on the imposition of penalty are to impose penalties on infringing undertakings which reflect the seriousness of the infringement; and to ensure that the threat of penalties will deter both the infringing undertakings and other undertakings that may be considering anti-competitive activities from engaging in them. The CCI opined that the penalties must be such so as to deter the enterprises which indulge in activities which not only lead to consumer harm but also retard economic development.
Consider the recently decided Automobile case that attracted the attention of many due to the nature of the problem but more importantly due to heavy fines imposed by the CCI5. Interestingly, the CCI imposed a penalty of 2%, which is considered to be on the lower side of the 10% threshold due to the presence of certain mitigating factors. One of the mitigating factors considered by the CCI was the willingness on the part of the infringers to voluntarily discontinue the anti-competitive practices and offer greater choice and freedom to the consumers, repairers and dealers in future. However, it may be interesting to note that where, on the one hand, willingness to discontinue the practices was considered as a mitigating factor in the Automobile case, the same was not considered as a mitigating factor by the CCI in the case involving Bengal Chemist and Druggist Association6. In this case, the members of the Bengal Chemist and Druggist Association were found guilty of cartel conduct. During the course of investigation itself, the members of the Association furnished a sworn affidavit to the DG that they would cease and desist from indulging in the anti-competitive practices. Albeit, this was not considered as a mitigating factor by the CCI and a penalty of 10% of the income was inflicted on those office bearers who were directly responsible and 7% of the income on the executive committee of the BCDA. The reason as to why the CCI did not consider the affidavit of future good conduct in the BCDA case as a mitigating factor has not been spelt out in the order. However, it appears that the CCI may be particularly sensitive to anti-competitive conduct for drugs and related industries, which directly impact the life and well-being of consumers and thus hold different position of importance in the society. Thus, in all the above mentioned cases, it is difficult to understand the rationale behind charging different penalties to different parties for the same genre of offences.
In the MCX Stock Exchange Ltd. And the National Stock Exchange of India Ltd.,7 the CCI found NSE indulging in predatory pricing with respect to the Cash Derivative segment. The penalty, however, was imposed on the overall turnover of NSE from all its stock exchange services. NSE argued that in calculating the penalty the affected turnover i.e. that arising from the CD segment must be the parameter and not the total turnover from the stock exchange services. However, the CCI rejected this contention and observed that adding the word affected to the word turnover in Section 27 would be against the intention of the legislature, especially in matters concerning Section 4(e) where leveraging is involved. It gave preference to the element of deterrence in rejecting to apply the affected turnover concept in penalizing NSE. It further held that NSE had a complete intention of ousting competition and inflicted a 5% penalty on the overall turnover of NSE. Two years after the NSE decision, the concept of affected turnover was dealt by the Competition Appellate Tribunal in the Excel Corp case, in 2013, wherein the Appellate Tribunal applied the concept of affected turnover, in the facts and circumstance of the case, in determining the penalty. In Excel Corp case, United Phosphorous and Excel Corp dealt in multiple products. The Appellate Tribunal reduced the penalty from ` 317 crores which was 7% of the overall turnover to ` 10 crores which was 7% of the revenue generated from the sale of the relevant product, in relation to which the violation was caused i.e. APL tablets. It found no reason to penalize the parties on the overall turnover when the other products borne no connection with the infringed conduct. The Appellate Tribunal for the first time recognized the concept of “affected turnover” or “relevant turnover” in the Indian context. It was also observed that the CCI which is although a regulatory body, performs judicial functions and therefore, it is obligated to give a well reasoned justification while imposing penalties. The concept of restricted turnover i.e. counting the sales in a specific geographic area or to a specific set of customers was, however, rejected by the COMPAT in this case as well as the case concerning the Sports Injury Centre, Safdarjung hospital8. It was argued in this case that the penalty should be imposed on the sales to government hospitals only. However, the Competition Appellate Tribunal opined that there is no difference in the nature of business for the two types of sale and thus restricted sales cannot be taken as the appropriate turnover.
The concept of affected turnover or restricted turnover warrants consideration as sometimes the other products of an entity have no relation with the relevant product in relation to which infringement is committed and imposition of penalty on the turnover of such products may lead to distortion of competition in such markets. However, till such time the Apex court decides the matter, the CCI continues to impose penalties on the basis of the total turnover.
The mature jurisdictions such as the EU or the USA, have pre-determined guidelines which provide a roadmap for determination of the quantum of penalty to be imposed on the infringing parties. For e.g. in the EU, the first step is to determine the ‘value’ which the infringement has generated for the violator by quantifying the sales from the relevant product concerned by the infringement. The sales figure is then reduced by multiplying it with a percentage not exceeding 30% as it is assumed that not all sales are a result of the infringement. The percentage used to multiply the sales figure is determined depending on the seriousness of the infringement, which in turn depends on a number of factors, including the nature of the infringement (e.g. the abuse of dominance, price fixing, market sharing), the geographic scope, and whether the infringement has been implemented. For cartels, the relevant percentage tends to be in the range of 15-20%. This percentage of the value of relevant sales is multiplied by the number of years and months the infringement lasted. This means that the fine is linked to the value of the affected sales during the infringement. This is an indicator of the damage to the economy caused by the infringement over time. Such methodology objectively quantifies, in monetary terms, the ‘value’ of infringement, known as the ‘value sales’. This figure gives the severity of offence and the result should not be higher than 10% of the overall annual turnover of the company. This is then increased or decreased depending upon the applicability of mitigating factors, e.g. limited role or conduct encouraged by legislation or the aggravating factors, e.g. ring leader, repeat offender or obstructing investigation. The presence of guidelines containing methodology for monetary calculation of the penalties ensures that the infringer is not charged more than the loss caused through infringement. The USA and many more anti – trust authorities in various jurisdictions follow similar practices.
Fining policy needs to cover a wide range of different factual circumstances and it is extremely difficult to envisage all of these circumstances in advance. This is why the European Commission retains the ability to amend and update its guidelines if necessary, and why the guidelines themselves contain provisions which expressly envisage deviating from the guidelines in appropriate cases. Many national competition authorities now follow the same approach, with guidelines on setting fines that are broadly in line with those of the European Commission.9
Incidentally, on 29th January, 2015, the Spanish Supreme Court invalidated the guidelines framed by the Spanish Authority which were on similar lines with the EU Guidelines on the ground that they were contrary to the wordings of the Spanish Competition Act. The Spanish Supreme Court confirmed the stance of the Spanish Authority when it overturned the decision of the Spanish High Court and held that the upper limit of fine as per the Spanish Competition Act is 10% of the overall turnover and not 10% of the relevant/affected turnover. Thus, though, the Guidelines framed by the Spanish Authority was held to be inconsistent with the wordings of the Act, the Supreme Court validated the interpretation of the Authority in holding that the “turnover” shall be the overall turnover and not the affected turnover.
The overview of penalties imposed by the CCI, discussed above, shows that the CCI, has been considering various factors in imposing penalties such as the nature or seriousness of the offence, the aggravating and mitigating circumstances, creation of the desired deterrence effect and so on. However, how exactly these factors interplay and impact the calculation of the specific penalties is largely uncertain. The mature jurisdictions have publicly stated guidelines / policies which aim to reduce subjectivity in assessment of penalty, by defining the methodology for calculation of injury caused by the anti-competitive conduct by the infringing parties. Absence of objective quantification may, thus, lead to an inference that the penalties imposed are either arbitrary or disproportionate to the magnitude of the offence committed. Additionally, it creates difficulties for the appellate authorities to adjudicate on the correctness of the penalty imposed. A penalty that is excessive can dampen competition in the relevant market whereas a penalty that is inadequate may not create the desired deterrence effect. Thus, to ensure that the penalty serves its purpose, it is necessary to limit subjectivity in imposition of penalty by the CCI. This is possible only if there are objective guidelines in place. The guidelines could prescribe the methodology for arriving at a ‘monetary value’ for the damage caused by the infringing conduct, the weightage that would be assigned to different and specific aggravating and mitigating factors, weightage regarding the impact that the penalty would have on the enterprise, such as bankruptcy of the entity or shaking the financial position of the entity in the long run, advantage that would be caused to its competitors, etc. The same would go a long way in making the penalty orders of the CCI much more transparent. It would also assist the appellate forums in deciding whether the pegging of the penalty at any particular level by the CCI has been just and proper. The same would also facilitate the general public and practitioners to offer their comments / critique on the penalties imposed by the CCI, which would contribute in the evolution of a penalty jurisprudence in the country.
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