India: Cartels And Whistle-Blowing: The Importance Of Establishing A Robust Leniency Regime In India

Last Updated: 17 February 2016
Article by Rudresh Singh

Introduction

Of late, business news papers have hurled a new term at us, 'cartels', which we till the recent past were only relatable to Joaquín "El Chapo" Guzman and the drug mafia. However, globally, and as well as in India, the origins of many industries have been on the foundation stone of price fixing and market allocation agreements. These agreements, which may be in the nature of agreements to fix sale prices for customers, agreements for market allocation or tacit understandings between competitors to rig bids or collusively bid for a tender, have the effect of stifling competition.

However, post the enactment of the Competition Act, 2002 (hereinafter Act), huge cartel fines have been levied on companies in sectors ranging from cement, real estate, pharmaceuticals, to airlines. Further, various cartel investigations are ongoing in multiple sectors where parties are likely to be penalized by the Competition Commission (CCI) if found guilty. However, the detection of cartels, subsequent investigation and the full evidence taking process is procedurally cumbersome, time consuming, and involves consumption of monetary and manpower resources not only of the CCI but of all stakeholders. Further delays ensue with the parties almost always moving in appeal against the order of the CCI. However, given that companies are often aware of the illegal nature of cartels and the attendant penalties, cartelists would not be forthcoming about their illegal activities unless some sort of an incentive mechanism was built into the system. It was for this reason that Section 461 and the Competition Commission of India (Lesser Penalty) Regulations, 2009 (hereinafter the Lesser Penalty Regulations) were drafted into the Act.

Legislative framework for the Indian leniency program

The CCI's leniency program offers companies and individuals benefits under Section 46 of the Act in case they report the existence of a cartel to the CCI. Regulation 4 of the Lesser Penalty Regulations provides that an applicant may be granted benefit of reduction in penalty of up to one hundred percent, if the applicant is first to make a vital disclosure by submitting evidence of a cartel, enabling the Commission to form a prima facie opinion regarding the existence of a cartel. Similarly, the applicant marked as second in the priority status may be granted reduction of monetary penalty of up to fifty percent and the applicant(s) marked third in the order of priority may be granted reduction of penalty of up to thirty percent.

In order to obtain a marker position, a leniency applicant must (i) cease to have further participation in the cartel unless otherwise directed by the Commission; (ii) provide a full, true and vital disclosure in respect of the violation of Section 3 of the Act and provide all relevant documents and evidences; (iii) cooperate genuinely, fully, continuously and expeditiously all through the investigation and not conceal, destroy manipulate or remove the relevant documents in any manner2.

When should an entity file for leniency?

Given the exorbitant penalties being imposed on parties to a cartel, it is imperative that companies report the existence of a cartel as soon as it is detected. Apart from very high monetary implications, sanctions can be imposed on delinquent officers and directors of companies involved in anti-competitive behavior. The only issue that needs to be assessed before filing a leniency application with the CCI is whether the potential leniency applicant has sufficient evidence to submit to the CCI so that it can find a prima facie violation of law.

This evidentiary obligation raises two issues which need some attention: (i) what evidence is sufficient for the CCI to form a prima-facie opinion; (ii) what does a cartel participant do in case it does not submit sufficient evidence for the CCI to form a prima-facie opinion or decides not file for leniency for lack of sufficient evidence.

With no guidance in the Act or the Lesser Penalty Regulations, parties looking to avail the benefit of the Lesser Penalty Regulations, generally rely on international best practices (for example on the type of evidence acceptable to an antitrust regulator to prove a cartelist's participation) to determine what level of evidence is sufficient for the CCI to form a prima facie opinion. It may be noted that generally sophisticated cartel participants rarely maintain evidence so as to make the cartel immune to prosecution, specially when the cartel is sustainable, and they do not fear the risk of a break-down of the cartel. It is therefore essential that the CCI understands the nuances of such sophisticated cartels and accepts evidences in the form of affidavits, diary entries, and other circumstantial evidence so long as the objectives of the leniency program are achieved, namely: (i) cessation of cartel activity in the country; (ii) limited use of resources which would otherwise be required to detect and prove cartel activity; and (iii) incentivizing companies to report cartels to the CCI. Some level of formal guidance from the CCI will bring in more certainty to the process.

Current concerns with the Indian leniency regime

Confidentiality

Regulation 6 of the Lesser Penalty Regulations provides that the CCI shall treat as confidential not only the name of the leniency applicant but also all the information submitted by it to the CCI (or its investigative arm) during the course of the investigation. This regulation is different from Regulation 35 of the CCI (General) Regulations, 2009 (hereinafter General Regulations), where the CCI has a discretionary power of granting confidentiality for information filed with it in cases where it is satisfied with the claimant's reasons for seeking confidentiality. Further, under Regulation 35 of the General Regulations, confidentiality may only be sought if making the documents public would result in disclosure of trade secrets or destruction or appreciable diminution of the commercial value of any information or can be reasonably expected to cause serious injury. This is in strict departure from the protection granted to a leniency applicant under Regulation 6 of the Lesser Penalty Regulations, where the CCI is obligated to grant confidentiality treatment to the identity of the leniency applicant and the information submitted by it.

The policy reasons for maintaining strict confidentiality of the identity of the leniency applicant are twofold. First, the confidentiality is maintained so as to make applications to the CCI as risk-free as possible. Second, and more importantly, the confidentiality is maintained so that the leniency applicant is not worse off, and preferably in a better position, than non-leniency cartelists in case follow-on damage claims3 are brought by customers.

It is therefore essential that the CCI understands the significance of Regulation 6 of the Lesser Penalty Regulations. Any attempts to limit the protection granted by way of these regulations by the CCI, whether deliberate or not, will in all likelihood severely affect the development of the regime in India. For a proper development of a competitive landscape, where companies are incentivized to break away from cartels, the confidentiality protection is probably one of the most significant incentives, which, if whittled down even slightly, will have the potential of dislodging the leniency regime in India.

Given that we have limited experience with respect to leniency programs, it may be prudent that we defer to other jurisdictions while interpreting the functioning of the confidentiality provisions guaranteeing protection to leniency applicants. In this background, it is noteworthy that even the European Commission's files and records are considered confidential under EU law, subject to specific exceptions. Regulation 1/2003 [2003] OJ L1/1 art.28 provides that the officials of the European Commission will not, "disclose information acquired or exchanged by them pursuant to this Regulation and of the kind covered by the obligation of professional secrecy" and that the information collected can be used only for the purpose for which it was acquired. Further, even access to the European Commission's file is provided, upon request, only to "the persons, undertakings or associations of undertakings, as the case may be, to which the Commission addresses its objections" - i.e. it is provided only to the defendants and even such information is redacted.

The Indian jurisprudence too needs to evolve in a similar fashion where the leniency applicant is granted fully confidentiality on its submissions and no disclosure is allowed by the CCI to third parties. A limited exception to this rule may be allowed where a co-cartelist may be supplied with a redacted version of the information only for the purposes for investigation and where the said co-cartelist is mandated to keep the information confidential qua all other parties.

Role of the Director General (DG) while investigating a leniency matter

One of the most pressing issues for ongoing leniency matters is the manner in which the DG is going ahead with its investigations. Lack of set procedures that should be followed gives high discretionary powers to investigating officers which leads to a great level of uncertainty. Such uncertainties, specially for international corporations from developed competition law regimes, does not bode well if we are trying to match international best practices. It is essential that the CCI expeditiously establishes standard procedures for issues like evidence collection, cross examination and depositions so as to ensure that the process is fair, reasonable and does not lead to litigation.

More specifically, the DG office needs to be sensitized about how sophisticated cartels operate and how there would be limited hardcore evidence establishing the existence of a cartel. In such a scenario, the DG may want to look at alternative forms of evidence and treat them as sufficient proof either for establishing contravention or at least for furthering the investigation. The DG office should also ensure that the applicant's counsels are allowed to be present at all times during a deposition so as to incentivize a leniency applicant and also to give him comfort.

Role of the ringleader

Another key issue that needs to be given some clarity on by the CCI is how it would deal with a leniency application filed by a ring leader of the cartel. The Indian law as it stands right now does not differentiate between a regular cartel participant and a ring leader of that cartel. The CCI may want to provide some clarity on how they would treat a ringleader and whether the same level of immunity would be offered to them as is available for other leniency applicants. It will probably be a difficult call for the CCI given that international jurisprudence on this issue is divergent. The European Union's leniency program grants substantial reductions to ringleaders4 while the US leniency regime does not give any immunity from fines to ringleaders.5 This issue (of the role of ringleaders) raises two questions for the CCI's analysis: (i) when can a cartelist be termed as a ringleader; and (ii) can ringleaders be given reduction in penalty as provided under the Lesser Penalty Regulations. Given the divergent opinions of the US and the EU law on this point, some clarification of this concept would be necessary when the CCI comes across such an instance.

Conclusion

India has a well structured leniency program in place. It is imperative that all stakeholders work towards ensuring that a robust leniency regime is developed which can be achieved by ensuring that the small roadblocks are removed so that companies are incentivized in reporting cartel activity. It is also essential to remember that most small and medium sized Indian companies are still not aware of the nuances of the law and that their actions (for example in the nature of allocating markets/customers etc) may in fact be in contravention of a law. In this background, it is essential that the CCI ensures that for the initial few years, it imposes lower penalties on leniency applicants so that it does not deter future applicants from approaching the CCI. Further, the CCI needs to ensure that no disclosure of the submissions of leniency applicants or the case files is made to third parties, without which the Indian leniency program may not be a success. Finally, in line with settled global jurisprudence, the CCI should prepare two versions of the final order and incorporate minimal details in the public version of the order and any press releases issued by it while continuing to maintain full confidentiality on the documents/information filed with the CCI and the DG during the course of the investigation.

Footnotes

* Rudresh Singh is a Senior Associate with the Competition Law Practice Group at Luthra & Luthra Law Offices, New Delhi. The author is a trained competition lawyer and is a graduate of the University of Michigan Law School, USA, where he was a Mitsui Fellow. He regularly represents local and international clients in a wide range of competition law issues and appears before the CCI, COMPAT, and the Supreme Court of India on merger control, abuse of dominance and cartel enquiries. He is currently representing multiple companies in leniency proceedings before the Competition Commission of India. He can be reached at rudreshs@luthra.com.

1.Section 46 of the act states that "The Commission may, if it is satisfied that any producer, seller, distributor, trader or service provider included in any cartel, which is alleged to have violated section 3, has made a full and true disclosure in respect of the alleged violations and such disclosure is vital, impose upon such producer, seller, distributor, trader or service provider a lesser penalty as it may deem fit, than leviable under this Act or the rules or the regulations."

The provisos to the section are of vital importance. They require that (i) lesser penalty shall not be imposed by the Commission in cases where the report of investigation directed under section 26 has been received before making of such disclosure, (ii) lesser penalty shall be imposed by the Commission only in respect of a producer, seller, distributor, trader or service provider included in the cartel, who has made the full, true and vital disclosures under this section, (iii) lesser penalty shall not be imposed by the Commission if the person making the disclosure does not continue to cooperate with the Commission till the completion of the proceedings before the Commission, and (iv) lesser penalty shall not be granted where the party (a) not complied with the condition on which the lesser penalty was imposed by the Commission; or (b) had given false evidence; or (c) the disclosure made is not vital.

2. See Regulation 3 of the Lesser Penalty Regulations.

3. Section 53N of the Act gives the powers to any enterprise to file a compensation claim before the COMPAT. Any person can file an application for recovery of compensation for the loss or damage caused as a result of any contravention of the provisions of the Act.

4. See generally, Geradin and Henry, The EC fining policy for violations of competition law: An empirical review of the Commission decisional practice and the Community courts' judgments, GCLC Working Paper 03/05.

5. See generally, Aubert, Rey, Kovacic, The impact of leniency and whistle-blowing programs on cartels, International Journal on Industrial Organisation (2006).

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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