India: Indian Competition Act: An Overview

Last Updated: 27 July 2005
Article by Rajkumar Dubey

In the wake of liberalization and privatization that was triggered in India in early nineties, a realization gathered momentum that the existing Monopolistic and Restrictive Trade Practices Act, 1969 ("MRTP Act") was not equipped adequately enough to tackle the competition aspect of the Indian economy. With starting of the globalization process, Indian enterprises started facing the heat of competition from domestic players as well as from global giants, which called for level playing field and investor-friendly environment. Hence, need arose with regard to competition laws to shift the focus from curbing monopolies to encouraging companies to invest and grow, thereby promoting competition while preventing any abuse of market power.

Competition: meaning and benefits

Competition is a situation in market, in which sellers independently strive for buyer’s patronage to achieve business objectives. Competition and liberalization, together unleash the entrepreneurial forces in the economy. Competition offers wide array of choices to consumers at reasonable prices, stimulates innovation and productivity, and leads to optimum allocation of resources.

Abuse of market and need for new law

In an open market economy, some enterprises may undermine the market by resorting to anti-competitive practices for short-term gains. These practices can completely nullify the benefits of competition. It is for this reason that, while countries across the globe are increasingly embracing market economy, they are also re-inforcing their economies through the enactment of competition law and setting up competition regulatory authority.

In line with the international trend and to cope up with the changing realities India, consequently, enacted the Competition Act, 2002 (hereinafter referred to as "the Act"). Designed as an omnibus code to deal with matters relating to the existence and regulation of competition and monopolies, the Act is intended to supersede and replace the MRTP Act. It is procedure intensive and is structured in an uncomplicated manner that renders it more flexible and compliance-oriented. Though the Act is not exclusivist and operates in tandem with other laws, the provisions shall have effect notwithstanding anything inconsistent therewith contained in any other law.

Three stage transition

The Act provides for three-staged transition, spanning the first three years from the date of notification of the Act, wherein the Competition Commission of India (hereinafter, referred to as "CCI") would replace the MRTP Commission.

First year

  • At the onset of first year, MRTP Commission will cease to exist and CCI would assume the role of an advisory body.
  • The pending cases in the MRTP Commission relating to unfair trade practices would be transferred to the concerned consumer courts under the Consumer Protection Act, 1986.
  • The pending cases relating to monopolistic and restrictive trade practices have to be taken up for adjudication by CCI.

Second year

  • During the second year, CCI would scrutinize the anti-competitive practices.

Third year

  • During the third year, CCI would begin regulating the mergers and acquisitions that will have adverse impact on competition.

Departure from the MRTP Act

In a significant departure from the letter and spirit of the MRTP Act, the Act hinges on the "Effect Theory" and does not categorically decry or condemn the existence of a monopoly in the relevant market, rather the use of the monopoly status such that it operates to the detriment of the potential and actual competitors is sought to be curbed.

  • The earlier legislation, considered draconian in the changed scenario, was based on size as a factor, while the new law is based on structure as a factor, aimed at bringing relief to the players in the market.
  • The Act empowers CCI to impose penalty on delinquent enterprises, whereas in the MRTP Act there were no provisions regarding such enterprises
  • MRTP Act could only pass "cease and desist" orders and did not have any other powers to prevent or punish while the new law contains punitive provisions.
  • MRTP Act was applicable to Private and Public sector undertakings only, whereas, the new Act extends its reach to governmental departments engaged in business activities.
  • As regards agreements, compulsory registration has been done away with.
  • The most path-breaking chapter in the Act has been the emphasis on Competition Advocacy that was not at all contemplated by the MRTP Act.

OBJECTS TO BE ACHIEVED

I. To check anti-competitive practices

II. To prohibit abuse of dominance

III. Regulation of combinations.

IV. To provide for the establishment of CCI, a quasi-judicial body to perform below mentioned duties:

  • Prevent practices having adverse impact on competition
  • Promote and sustain competition in the market
  • Protect consumer interests at large
  • Ensure freedom of trade carried on by other participants in the market
  • Look into matters connected therewith or incidental thereto.

1. ANTI-COMPETITIVE AGREEMENTS

The departure is reflected in section 3 of the Act, which states that enterprises, persons or associations of enterprises or persons, including cartels, shall not enter into agreements in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which cause or are likely to cause an "appreciable adverse impact" on competition in India. Such agreements would consequently be considered void.

The species of agreement which would be considered to have an ‘appreciable adverse impact" would be those agreements which:

  • Directly or indirectly determine sale or purchase prices;
  • Limit or control production, supply, markets, technical development, investment or provision of services;
  • Share the market or source of production or provision of services by allocation of inter alia geographical area of market, nature of goods or number of customers or any other similar way
  • Directly or indirectly result in bid rigging or collusive bidding.

Further, the agreements, which are entered into in respect of various intellectual property rights and which recognize the proprietary rights of one party over the other in respect of trademarks, patents, copyrights, geographical indicators, industrial designs and semi conductors have been withdrawn from the purview of "anti competitive agreements". The inherently monopolistic rights created in favour of bona fide holders of various forms of intellectual property have been treated as sacrosanct.

2. ABUSE OF DOMINANT POSITION

Section 4 of the Act enjoins, "no enterprise shall abuse its dominant position". Dominant position is the position of strength enjoyed by an enterprise in the relevant market, which enables it to operate independently of competitive forces prevailing market, or affect it’s competitors or consumers or the relevant market in it’s favour. There shall be an abuse of dominant position if an enterprise indulges into the below mentioned activities:

  • Directly or indirectly imposing discriminatory conditions in the purchase or sale of goods or service, or setting prices in the purchase or sale (including predatory pricing) of goods or services;
  • Limiting or restricting the production of goods or provision of services or market therefore; or limiting technical or scientific development relating to goods or services to the prejudice of customers;
  • Indulging in practice or practices resulting in the denial of market access
  • Making conclusion of contracts subject to acceptance by other parties of supplementary obligations, which has no connection with the subject of such contract;
  • Utilization of the dominant position in one relevant market to enter into, or protect, another relevant market.

3. COMBINATIONS

The Act is designed to regulate the operation and activities of "combinations", a term, which contemplates acquisition, mergers or amalgamations. Combination that exceeds the threshold limits specified in the Act in terms of assets or turnover, which causes or is likely to cause an appreciable adverse impact on competition within the relevant market in India, can be scrutinized by the Commission.

Threshold limits that would invite the scrutiny are specified below:

For acquisition:

  • Combined assets of the firm more than Rs 3,000 crore (these limits are US $ 500 millions in case one of the firms is situated outside India).
  • The limits are more than Rs 4,000 crore or 12,000 crore and US $ 2 billion and 6 billion in case acquirer is a group in India or outside India respectively.

For mergers:

  • Assets of the merged/amalgamated entity more than Rs 1,000 crore or turnover more than Rs 3,000 crore (these limits are US $ 500 millions and 1,500 millions in case one of the firms is situated outside India).
  • These limits are more than Rs 4,000 crore or Rs 12,000 crore and US $ 2 billions and 6 billions in case merged/amalgamated entity belongs to a group in India or outside India respectively.

Further, such combination, which causes or is likely to cause "appreciable adverse impact" on competition, would be treated as void.

A system is provided under the Act wherein at the option of the person or enterprise proposing to enter into a combination may give notice to the Competition Commission of India of such intention providing details of the combination. The Commission after due deliberation, would give its opinion on the proposed combination to approach the Commission for this purpose. However, public financial institutions, foreign institutional investors, banks or venture capital funds which are contemplating share subscription financing or acquisition pursuant to any specific stipulation in a loan agreement or investor agreement are not required to approach the CCI for this purpose.

4. COMPETITION COMMISSION OF INDIA

CCI, entrusted with eliminating prohibited practices, is a body corporate and independent entity possessing a common seal with the power to enter into contracts and to sue in its name. It is to consist of a chairperson, who is to be assisted by a minimum of two, and a maximum of ten, other members.

Acts taking place outside India

CCI has the power to enquire into unfair agreements or abuse of dominant position or combinations taking place outside India but having adverse effect on competition in India, provided that any of the below mentioned circumstances exists:

  • An agreement has been executed outside India
  • Any contracting party resides outside India
  • Any enterprise abusing dominant position is outside India
  • A combination has been established outside India
  • A party to a combination is located abroad.
  • Any other matter or practice or action arising out of such agreement or dominant position or combination is outside India.

To deal with cross border issues, CCI is empowered to enter into any Memorandum of Understanding or arrangement with any foreign agency of any foreign country with the prior approval of Central Government.

Benches

For the execution of duties, the Act contemplates the exercise of the jurisdiction, powers and authority of CCI by number of Benches. If necessary, a Bench would be constituted by the chairperson of at least two members; it being mandated that at least one member of each Bench would be a "Judicial Member". The Bench over which the chairperson presides is to be known as the Principal Bench and the other Benches known as Additional Benches. However, the Act further empowers the chairperson to further constitute one or more Benches known as Mergers Benches exclusively to deal with combination and the regulation of combinations.

Extension of the executive powers

The Act contemplates the extension of the executive powers of CCI by the appointment of a Director General and as many other persons for the purpose of assisting it in conducting enquiries into contraventions of the provisions of the Act as well as conducting cases before the Commission.

CCI is empowered to conduct enquiries into:

  1. "Certain agreements and dominant position of enterprise"
  2. "Combinations"

CCI, either on its own motion, on receipt of a complaint or on a reference made to it by the Centre or State Government may enquire into any alleged contravention regarding the nature of the agreement, which is suspected to be inherently anti-competitive, or the abuse of dominant position. Any person, consumer, consumer association or trade association can make a complaint.

An enquiry into a combination, existing or proposed, may be initiated upon the knowledge or information in the possession of CCI or upon notice of the person or entity proposing to enter into a combination or upon a reference made by a statutory authority. Limitation of time for initiation of enquiry is one year from the date on which the combination has taken effect when CCI conducts such enquiry.

Jurisdiction

An enquiry or complaint could be initiated or filed before the Bench of CCI if within the local limits of its jurisdiction the respondent\s actually or voluntarily resides, carries on business or works for personal gain, or where the cause of action wholly or in part arises.

CCI has been vested with the powers of a civil court including those provided under sections 240 and 240A of the Companies Act, 1956 on an "Inspector of Investigation" while trying a suit, including the power to summon and examine any person on oath, requiring the discovery and production of documents and receiving evidence on affidavits. CCI is also vested with certain powers of affirmative action to act in an expedited manner. Civil courts or any other equivalent authority will not have any jurisdiction to entertain any suit or proceeding or provide injunction with regard to any matter which would ordinarily fall within the ambit of CCI.

PROCEDURE OF INVESTIGATION AND ORDER THEREOF

If a prima facie case exists with respect to anti-competitive agreements and abuse of dominant position, CCI is empowered to direct the Director General to conduct an investigation in the matter.

In determining the nature of agreements, the following factors are to be taken into account:

  • Barriers to new entrants in the market
  • Driving existing competitors out of the market
  • Foreclosure of competition by hindering entry into the market
  • Accrual of benefits of consumers
  • Improvements in production or distribution of goods or provision of services
  • Promotion of technical, scientific and economic development.

In determining the nature of the dominant position enjoyed by an enterprise, following factors are to taken into account:

  • Market share of the enterprise and market structure and size
  • Size and resources of the enterprise
  • Economic power of the enterprise including commercial advantages over the competitors
  • Size and importance of the competitors
  • Dependence of consumers on the enterprise
  • The extent of vertical integration and consumer dependence
  • Whether the monopoly was gained by reason of statute or otherwise
  • Entry barriers including barriers such as regulatory barriers, financial risk, high capital cost of entry, market entry barriers, technical entry barriers, economies of scale
  • "Countervailing buying power" and "social obligations and costs"
  • Any other factor which CCI may consider relevant for the enquiry

The Director General would submit his report with recommendations. If CCI is of the view that there are no merits to the case, the complaint would be dismissed, with costs. However, during the course of enquiry, CCI may grant interim relief by way of temporary injunctions restraining a party from continuing with the ant-competitive agreements or abuse of dominant position.

An order of CCI subsequent to an enquiry, could consist of:

  • Directing the persons or entities ruled against to desist from abusing a dominant position or discontinuing acting upon anti-competitive agreements
  • Imposing penalty to the maximum extent of ten percent of the average turnover for the last preceding three financial years upon each person or entity party to the abuse
  • Award compensation
  • Modify agreements
  • Recommend the division of the dominant enterprise to the Centre, which has the ultimate authority to decide the fate of a dominant enterprise
  • Recovery of compensation from any enterprise for any loss or damage shown to have suffered by the other party.

The procedure for investigation of combinations is somewhat different, as the Act contemplates direct investigation to be conducted by CCI rather than by resorting to the via media of the Directorate General. It may call upon any party to furnish all relevant information with regard to their business operation to come to a conclusion as to the nature of the combination.

While the factors to be taken into account are similar to the parameters to be applied while examining anti-competitive agreements and abuse of dominant position the CCI shall also have due regard to the following factors:

  • Actual and potential level of competition through imports in the market
  • Extent of effective competition likely to sustain in the market
  • Likelihood that the competition would result in the removal of a vigorous and effective competitor or competitors in the market.
  • Possibility of a failing business
  • Nature and extent of innovation
  • Relative advantage, by way of the contribution to the economic development
  • Whether the benefits of the combination outweigh the adverse impact of the combination if any

In case of combination, CCI may pass following orders:

  • Approval of the combination if no appreciable adverse effect on competition is found
  • Disapproval of the combination in case of adverse effect
  • It may propose suitable modification as accepted by the parties
  • During enquiry grant interim relief by way of temporary injunctions
  • Award compensation

Penalties

In case of failure to comply with the directions of CCI and Director General or false representation of facts by parties, penalties ranging from Rs 1lac to Rs 1 crore may be imposed as the case may be.

Execution of the order

So far the execution of the order is concerned, it is the responsibility CCI. However, in the event of its inability to execute it, CCI may send such order for execution to the High Court or the principal civil court, as the case may be.

POST-DECISIONAL OPTIONS

The aggrieved person may apply to CCI for review of the order within thirty days from the date of the order, provided that the below mentioned conditions are fulfilled:

  • An appeal is allowed by this Act
  • No appeal has been preferred

Provision has been made for an appeal against any order or decision of CCI by any aggrieved person. An application for this purpose has to be made to the Supreme Court within sixty days from the date of communication of the decision or order.

COMPETITION ADVOCACY

Perhaps one of the most crucial components of the Act is competition advocacy. Intention is to help evolve competition law through review of policy, promotion of competition advocacy, creating awareness and imparting training about competition issues. For this purpose Government may, in its discretion, make a reference to CCI for its opinion thereon but is not bound by it. The power of the Centre to issue directions to CCI is inherent, and such directions would bind it.

CONCLUSION

Non-issuance of notification till date by the Government regarding the Act, has taken the wind out of the new competition policy. As a result, the proposed CCI has not become functional and the matters are still looked into by the obsolete MRTP Commission.

The act is comprehensive enough and meticulously carved out to meet the requirements of the new era of market economy, which has dawned upon the horizon of Indian economic system. It is in synchronization with other set of policies such as liberalized trade policy, relaxed FDI norms, FEMA, deregulation etc, that would ensure uniformity in overall competition policy. It’s just a matter of time when the Act is made effective and CCI becomes functional, which would, in turn, help realize our aspiration to catch up with the global economy. However, the Act is truly reflective of changing economic milieu of our country and is well equipped to promote fair competition and take care of impinging market practices, facilitate domestic players vis-à-vis outsiders, safeguard the interests of consumers and thus, ensure vibrancy and stability in the Indian market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Rajkumar Dubey
 
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