India: Revisiting The Concept Of Single Economic Entity Under The Indian Competition Act, 2002

Last Updated: 21 December 2015
Article by Arjun Nihal Singh

The basic principle of competition laws is the prevention of practices that harm the normal market forces between independent parties competing for a larger slice of the market. For this reason, market participants that form part of the same group are normally excluded from their purview as all such participants are together seen as one economic unit in the market place. The evolution of the concept of 'single economic entity' can be traced back as early as the 1960s when the European Commission (EC), in Mausegatt1, observed that "affiliation to the group deprives the subsidiary company of the ability to act according to an economic scheme of its own. The 'given conditions' of such a subsidiary's operations are prescribed not by the market but by the instructions of the principal company". In this case the relationship between the parent and the subsidiary was used to demonstrate that a cartel could not be formed between the parent and subsidiary, as they must be considered to be governed by the same leading group.

This concept was formalized in the EC Guidelines on Horizontal co-operation2 which notes "Companies that form part of the same 'undertaking' within the meaning of Article 101(1)3 are not considered to be competitors for the purposes of these guidelines. Article 101 only applies to agreements between independent undertakings. When a company exercises decisive influence over another company they form a single economic entity and, hence, are part of the same undertaking. The same is true for sister companies, that is to say, companies over which decisive influence is exercised by the same parent company. They are consequently not considered to be competitors even if they are both active on the same relevant product and geographic markets".4

The Supreme Court of the United States in Copperweld5 similarly concluded that "an internal agreement to implement a single, unitary firm's policies does not raise the antitrust dangers that Section 1 of the Sherman Act was designed to police"6; it was further observed that a parent corporation and its wholly owned subsidiary "are incapable of conspiring with each other". 7

The Competition Act 2002

The Competition Act, 2002 (Act) applies to the activities carried on by an 'enterprise',8 a concept similar to that of an 'undertaking' in the EC. The question that begs an answer here is whether Section 3 of the Act9 applies strictly to enterprises forming part of a single economic entity. The Raghavan Committee Report (based on which the Competition Act was framed) noted that to be covered by the scope of Section 3 of the Act, "it is also required that the parties to the agreement are engaged in rival or potentially rival activities. A potential rival is one who could be capable of engaging in the same type of activity. Such a provision has generally been interpreted to mean that firms that are under common ownership or control are not considered as "rival" or "potentially rival" firms".10

CCI's application of the SEE

Given its nascent stage, the precedents so far on the concept of single economic entity are extremely limited under the Indian competition regime. However, the Competition Commission of India (CCI) has also recognized that when a parent company owns all in its subsidiary, it constitutes a single economic entity. In Exclusive Motors11, the CCI accepted the concept of single economic entity and opined that "Agreements between entities constituting one enterprise cannot be assessed under the Act. This is with accord with the internationally accepted doctrine of 'single economic entity'.... As long as the opposite party and Volkswagen India are part of the same group, they will be considered as a single economic entity for the purpose of the Act".12

In an appeal filed by Exclusive Motors13 before the Competition Appellate Tribunal (COMPAT), the COMPAT observed that an internal agreement between subsidiaries, which are a part of the same group, cannot be considered as an agreement for the purpose of Section 3 of the Act, thereby endorsing the view of the CCI. The decision in Exclusive Motors is suggestive of the fact that an intra-group agreement or arrangement cannot fall within the confines of the Act.

Similarly, in Shamsher Kataria14, the CCI observed that "an internal agreement/arrangement between an enterprise and its group/parent company is not within the purview of the mischief of section 3(4) of the Act... At the same time, the Commission would like to emphasize that the exemption of single economic entity stems from the inseparability of the economic interest of the parties to the agreement. Generally, entities belonging to the same group e.g. holding-subsidiaries are presumed to be part of a 'single economic entity' incapable of entering into an [anti-competitive] agreement, the presumption is not irrebuttable."15

Moving on to a recent decision, the opposite parties in cartelization by public sector insurance companies16, submitted that the Government of India holds 100% shares of each of the companies i.e., National Insurance Co. Ltd., New India Assurance Co. Ltd., Oriental Insurance Co. Ltd. and United India Insurance Co. Ltd and that the management and affairs of the companies are controlled by the Government of India through Department of Financial services (Insurance division), Ministry of Finance. However, the CCI rejected the submissions of the insurance companies and stated that even though the overall supervision of the insurance companies are with the central government, each of the companies placed a separate bid in response to the tenders floated by the government. Further, it was also observed that the Ministry of Finance did not exercise de facto control over the insurance companies business decisions and as such cannot be considered as a single economic entity.

Conclusion

The CCI is currently investigating the alleged cartel in the sugar industry for supply of ethanol. As per reports,17 three government owned Oil Marketing Companies (OMCs) namely Indian Oil Corporation Limited, Bharat Petroleum Corporation Limited, and Hindustan Petroleum Corporation Limited, have contravened the provisions of the Act by floating a joint tender for the procurement of ethanol, pursuant to the ethanol blending programme, which makes 5% blending of ethanol compulsory in petrol.

It will be interesting to observe how the CCI will approach this. Will it give the benefit of the doctrine of single economic entity to the three OMCs as they come under the direct control of the Ministry of Petroleum or will the CCI, as recent practice suggests, penalize the OMCs for anti-competitive practices by floating the joint tender.

Arjun Nihal Singh is an Associate in the Competition Law Practice Group at Luthra and Luthra Law Offices. He graduated from Amity Law School, Delhi in 2014 with a Bachelors degree in Arts & Laws (Hons.). At the Firm, he has been engaged in various competition law litigations, merger advisory and clearances, as well cartel investigations across various sectors, including real estate, sugar, and technology markets, before the Competition Commission of India.

Footnotes

[1] Mausegatt v. Haute autorite, C-13/60

[2] Guidelines on the applicability of Article 101 of the Treaty on the functioning of the European Union to horizontal co-operation agreements. [2011]

[3] Article 101: The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which:

(a) directly or indirectly fix purchase or selling prices or any other trading conditions;

(b) limit or control production, markets, technical development, or investment;

(c) share markets or sources of supply;

(d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

(e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

2. Any agreements or decisions prohibited pursuant to this Article shall be automatically void.

3. The provisions of paragraph 1 may, however, be declared inapplicable in the case of:

- any agreement or category of agreements between undertakings,

- any decision or category of decisions by associations of undertakings,

- any concerted practice or category of concerted practices,

which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not:

(a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives;

(b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

[4] Ibid., at Para 11

[5] Copperweld Corp. v. Independence Tube Corp., 467 U. S. 752 (1984)

[6] Ibid., at Para 7

[7] Ibid., at Para 13

[8] "Enterprise" as per Section 2(h) of the Act, means a person or a department of the Government, who or which is, or has been, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services, of any kind...but does not include any activity of the Government relatable to the sovereign functions of the Government including all activities carried on by the departments of the Central Government dealing with atomic energy, currency, defense and space.

[9] Anti-competitive agreements

[10] Ibid., at Para 4.3.5 of the Report

[11] Exclusive Motors Pvt. Ltd. v. Automobili Lamborghini S.P.A, Case No. 52 of 2012, Order dated 06.11.2012

[12] Ibid., at Para 6

[13] Appeal No. 01/2013, Order dated 28.02.2014

[14] Shamsher Kataria v. Honda siel & Ors, Case No. 03/2011, Order dated 25.08.2014

[15] Ibid., at Para 20.6.5

[16] In re: cartelization by public sector insurance companies in rigging the bids submitted in response to the tenders floated by the Government of Kerala for selecting insurance service provider for Rashtriya Swasthya Bima Yojna, Suo Moto Case No. 02 of 2014, Order dated 10.07.2015

[17] http://www.livemint.com/Politics/3kvJxpZXKhvxNzDxueVbyJ/CCI-probes-cartelization-in-sugar-industry-for-ethanol-suppl.html (last visited on 29 September 2015)

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