Over the years, the Competition Commission of India (CCI) has dealt with several cases involving resale price mechanism. Last year in August 2021, CCI dealt with one such case involving country's leading and largest automaker, Maruti Suzuki India Limited (MSIL) and imposed hefty penalty of INR 2 billion on MSIL upon finding it guilty of indulging in market practices in contravention of the Competition Act, 2002 (the Competition Act). The case of MSIL lays down the principles on which the CCI concluded that the practice of fixing and enforcing a minimum retail price has the effect of not only resulting in decrease in intra-brand price competition, but also decrease in inter-brand price competition.
The CCI took this matter suo motu upon receiving an anonymous e-mail from an MSIL dealer alleging that the MSIL followed a discount control policy, which was against the interest of customers and in contravention of the Competition Act. MSIL's discount control policy entailed controlling of maximum discount that could be offered by the dealer to customers. A dealer could offer discounts in addition to that prescribed by MSIL only after obtaining prior approval of MSIL, failing which a penalty was levied upon the dealer by MSIL.
It was alleged that to enforce the discount control policy, MSIL appointed mystery shopping agencies (MSA) to conduct mystery shopping audits. MSA would pose as customers to MSIL dealerships to find out if any additional discounts were being offered to customers. If found to be offered, the MSA would report to MSIL management with the relevant proof (audio/ video recording). MSIL's management would then send an e-mail to the errant dealership with a report from the MSA and seek clarification on additional discounts found to be so offered. If a clarification was not provided to the satisfaction of MSIL, a penalty would be levied, not only on the dealership, but also on other personnel of that dealership.
Findings of the Director General Investigation
The Director General (DG) had the following findings pursuant to investigation:
- MSIL and its dealers entered into agreements on principal-to-principal basis which were at different stages of production chain in different market and thus, such agreement involving alleged resale price maintenance agreement would fall within the ambit of Section 3(4) of the Competition Act;
- Based on the large number of emails exchanged between MSIL and its dealers from 2012 to 2019, it was evident that MSIL did not allow offering of discounts without its permission and appointed MSAs to keep track of discounts offered by dealers and threatened to impose/ imposed penalties on them and/or threatened to suspend supply of premium models to them for violation of discount control policy.
- MSIL practiced resale price mechanism which caused an appreciable adverse effect on competition (AAEC) within India and lowered inter-brand and intra-brand competition, leading to products not being offered to consumers at best prices. Thus, such practice by MSIL was in contravention of Section 3(4)(e) of the Competition Act.
The objections raised by MSIL to the DG report are briefly summarized below:
- MSIL denied the existence of a discount control policy and submitted that there was no agreement between MSIL and dealers for controlling the discounts offered by dealers. MSIL further submitted that any such policy, even if found in existence in some regions was only a form of policing by the dealers inter se without any role of MSIL.
- MSIL denied mystery shopping audit being conducted by it through MSAs on discounts being offered by the dealers, but submitted that such audits were conducted to check the services, efficiency, application of MSIL guidelines etc. of each dealer. It was also submitted that dealers conducted such mystery shopping audits amongst themselves to check and prevent provision of additional discounts without any involvement of MSIL. MSIL, upon being informed of provision of extra discounts by say, Dealer X, in the interest of natural justice and fair play, sent the report and sought Dealer X's comments. It communicated the appropriate penalty to be levied by dealers, as decided amongst themselves, for violation of mutually agreed upon guidelines and thereby only played the role of an independent third party in dealers policing each other.
- MSIL could not have possibly been able to control the discounts offered by the dealers looking at the very nature and diversity of such discounts and geographically spread out 331 parent dealers and 3067 outlets across India. 22-36% of all sales of MSIL involved discounts that were given to customers and officially admitted by the dealer to MSIL over and above the declared consumer offers.
- There is no possible or perceived benefit to MSIL (directly or indirectly) with the extent of discounts offered by the dealers and this issue directly effects only the dealers. Therefore, there is no motive for MSIL to engage in resale price mechanism as upon supplying the vehicle to the dealer, the title of vehicle passes from MSIL to the dealer and dealings thereafter do not concern MSIL.
- MSIL contended that the DG had not established that the alleged resale price mechanism is a vertical agreement which has caused AAEC in terms of Section 3 (4) of the Competition Act. Also, the alleged discount control policy could not have an anti-competitive effect since MSIL did not have a high market power and consumers would rather switch away than pay a price they deem too high. MSIL also submitted that its market share keeps fluctuating and if the prices of MSIL vehicle are kept high, consumers always have the choice of switching over to vehicles of other brands. Therefore, high market share of MSIL holds no nexus with any AAEC.
CCI Analysis and Observations
The CCI made the following observations while adjudicating on the matter:
- The DG found multiple incriminating e-mails, which proved that MSIL had a discount control policy whereby the dealers were discouraged from giving extra discounts, freebies etc. beyond what was permitted and in case of violation, the dealers were threatened with stoppage of supplies and/or imposition of penalty. Such emails were considered to be agreements between MSIL and the dealers to control discounts.
- Several emails from MSIL to the dealers available as evidence demonstrated that each and every discount offered by the dealers over and above MSIL customer offers of MSIL were to be permitted by MSIL. Any discounts given before permission of MSIL were followed by penalty threats and stopping of supply of vehicles. The emails also indicated that MSIL conducted meetings on the discount control policy and therefore, control by MSIL was limited to evaluation and regulations by the MSAs.
- The CCI observed that if MSIL was an independent party, it
would not have been involved in issuing threats to dealers against
violation of discount control policy. The very act of MSIL of
monitoring and controlling the discounts by issuing threats and
penalties with or without active participation of dealers
tantamounted to indulgence of retail price mechanism.
Further, MSIL decided mode and frequency of visits of MSAs and their costs were borne by dealers. These MSA's used to pose as customers to MSIL dealerships to find out if any additional discounts were being offered by such dealerships to customers. If found offered, they were reported to MSIL with proof (audio/video recording), who, would eventually send emails to defaulting dealers seeking clarification. If the clarification was not satisfactory, MSIL would levy penalty and/ or threaten to stop supplies.
The penalties were imposed by MSIL on the errant dealerships and their concerned individuals for violation of discount control policy. In such a case, an audio clip of the mystery shopping audit would be sent to the concerned dealer seeking clarification. If the clarification was not found acceptable, MSIL would impose penalties and/or stopped supplies. MSIL also informed dealers where the penalty amount should be deposited and consistently reminded them about pendency of payment of their penalty amounts.
Emails reviewed by the DG were found to be abundantly clear on the restrictions imposed by MSIL on the dealers to offer additional discounts along with threats of imposition of penalties and stoppage of supplies. Therefore, as a policy, all discounts were given to customers by the dealers only upon receiving prior approval of MSIL.
- For the above reasons, the CCI concluded that there was a vertical agreement in terms of Section 3 (4) of the Competition Act between MSIL and the dealers.
- The CCI observed that resale price mechanism can prevent
effective competition both at intra-brand and inter-brand levels.
When a minimum resale price is imposed on dealers, the mechanism
does not allow distributors to compete effectively on price. This
forced dealers to sell the same product at the same price, largely
eliminating price competition amongst them (i.e., intra brand
competition) resulting denial of benefits to the consumers.
The CCI was also of the view that imposition and enforcement of resale price mechanism by a big player such as MSIL (having significant market share) leads to lowering of inter-brand competition. Discounts being fixed by a significant market player can decrease the pricing pressure on competing manufacturers. When all dealers of MSIL sell vehicles at fixed similar prices, they can be easily comprehended by other players of the market who can factor in their pricing strategy, thereby softening competition. These other players can price their competing models accordingly. This led to denial of benefits to the consumers as they were made to pay high prices, created barriers for new entrants/ dealers in the market as the new dealers would take into consideration restrictions on their ability to compete with prices in intra-brand competition of MSIL brand of cars.
Conclusion and Penalty
In view of the above, the CCI concluded that resale price mechanism arrangement between MSIL and dealers caused AAEC within India and held MSIL guilty of contravening Section 3(4)(e) read with Section 3(1) of the Competition Act. The CCI directed MSIL to cease and desist from indulging in resale price mechanism directly and/ or indirectly and imposed a hefty penalty of INR 200 crores (INR 2 billion) on MSIL.
Challenge before the National Company Law Appellate Tribunal (NCLAT)
An appeal before the NCLAT was filed by MSIL challenging the order of the CCI. Vide its interim order dated November 22, 2021, the NCLAT held that the factual and legal issues require an elaborate rumination at the time of final hearing of the appeal. NCLAT granted an interim stay on the CCI order and CCI's demand notice to claim the penalty, subject to payment of 10% of penalty amount as a fixed deposit with the NCLAT. The matter is sub judice before the NCLAT.
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.