India’s Competition Act takes shape with enforcement actions and appeals: key cases, key points for international companies

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Competition law in India has begun to take shape as major enforcement actions involving a host of industries have worked their way from initial complaint to a finding of an infringement and appeal to the Supreme Court of India.

The Indian Competition Act, 2002 was enacted to “promote and sustain competition…to protect the interests of consumers and to ensure freedom of trade.”i The Competition Act mirrors more established competition law regimes in that it prohibits agreements among parties, mergers or combinations and abuse of dominance conduct that has an appreciable adverse effect on competition.

Here, we review the key provisions of the Competition Act and how they have been applied by the Competition Commission of India (CCI) - the sole enforcement agency in India that may determine whether a violation of the Competition Act has occurred – and India’s courts.  We also offer some key points for businesses to note as they operate in this new, and evolving, climate.          

ABOUT THE COMPETITION ACT OF INDIA

The Competition Act prohibits “agreement[s] in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.”ii Under the Competition Act, certain horizontal agreements – price fixing, bid-rigging and market allocation – are presumed to have an appreciable adverse effect on competition.  Other restraints, including vertical restraints, mergers and alleged abuse of dominance are analyzed under a balancing test to determine whether they have an appreciable adverse effect on competition. 

The Competition Act identifies three areas of possible anticompetitive conduct:  

  • Anti-competitive agreements  (Section 3)

Any agreement that causes or is likely to cause and appreciable adverse effect on competition.  The agreement need not be formal or in writing; it can be inferred from the circumstances.

  • Abuse of dominant position  (Section 4)

The Competition Act does not prohibit a company from obtaining or maintaining a dominant position; but certain conduct by a dominant firm may constitute an abuse of a dominant position.  Abusive conduct may include imposing unfair or discriminatory price or conditions of sale; limiting or restricting production or innovation and technical development; tying of goods, exclusive dealing obligations; or cross-subsidizing costs by leveraging a dominant position in one market in some other market.

  • Combination [merger] regulation   (Sections 5 and 6)

The Competition Act prohibits mergers or other combinations that causes or may cause an appreciable adverse effect on competition. The Competition Act also has prior notification requirements for transactions that meet a certain financial threshold.

The CCI conducts investigations; determines whether a violation has occurred, and decides the penalty.iii  Appeals against the orders of the CCI lie with the Competition Appellate Tribunal (COMPAT).   Thereafter, appeals against orders of COMPAT lie with the Supreme Court of India.

HOW IS THE CCI APPLYING THE COMPETITION ACT? MAJOR CASES

Investigations under the Competition Act begin either when a complainant (that is, an informant) files a complaint or the CCI finds reason on its own to open an investigation.  Several significant cases have been brought which provide real-world insight into the CCI’s interpretation of the Competition Act as well as rulings made by the COMPAT and Supreme Court of India respectively.

Anti-competitive agreements (section 3)

a.         The Cement Cartel Case

In 2011, the Indian Builders Association filed a complaint with the CCI against ten cement manufacturers and their trade association alleging they had formed a cartel to restrict output and fix prices.   The CCI responds to complaints made to it with either a declination or by opening an investigation if it finds that a prima facie case of a violation has been made.  The CCI has an investigative arm: the Director General. When the CCI finds sufficient evidence to warrant an investigation, “it shall direct the Director General to cause an investigation to be made into the matter.”iv  The CCI referred the cement complaint to the DG for investigation. After concluding its investigation, the DG made its recommendation to the CCI that a cartel infringement had taken place.

The CCI independently reviews evidence developed by the DG (even though the DG is an arm of the CCI) to determine whether a violation has occurred. In the cement case, the CCI agreed with the DG’s conclusion. The CCI issued a 258-page order stating that the “acts and conduct of the cement companies establish that they are a cartel.  The Commission holds that the cement companies acting together have limited, controlled and also attempted to control production and price in India.” The CCI further stated, “The act of the cement companies in limiting and controlling supplies in the market and in determining prices through an anti-competitive agreement is not only detrimental to the cause of the consumers but also the whole economy.”

The CCI not only determines whether an infringement has occurred, but it is also empowered to impose monetary penalties on both individuals and corporate enterprises. Directors, managers, officers and the secretary of a company may be individually fined for their consent, connivance or neglect resulting in a breach of the Competition Act. There are no criminal provisions in the Competition Act, but fines can be significant.  The CCI can impose a penalty on a defendant of the higher of up to three times of its profit earned during the duration of the cartel, or up to 10 percent of the average annual turnover during the duration of the cartel. The CCI has wide discretion in imposing fines  – there are no guidelines other than the maximum penalty. In the cement case, the CCI imposed fines of just over US$1.13  billion against the 10 largest cement manufacturers in India and the Cement Manufacturers Association.

The defendants in the cement case have taken their appeal to COMPAT. The COMPAT has the power to reverse the findings of the CCI or to reduce penalties imposed by the CCI. Before hearing the appeal, however, COMPAT ordered the defendants to deposit 10 percent of the fine in escrow. The defendants appealed this order to the Supreme Court of India.  In June 2013, the Supreme Court of India upheld this order.  The merits of the fine are still to be considered by COMPAT.v

The Competition Act allows for consumers who have been victimized by a price fixing suit to parties to file compensation claims before COMPAT as a class. For example, the CCI has said that a builder’s association trade group that initiated the cement case investigation can file an application with COMPAT for the award of compensation to recover damages from the fixed, inflated prices. No party has yet to pursue a damage award through COMPAT so the procedure the tribunal will follow is unclear.

b.         Other Section 3 Anticompetitive Agreement Cases

For a new enforcement organization, the CCI is extremely active. Many of the complaints made to the CCI are dismissed without action. Others may involve fairly local disputes such as an order by the CCI modifying an apartment buyers' agreement because the seller of apartments abused its dominant position with one-sided provisions in the sales contract. But there are also a number of significant cases that may affect consumers and competition throughout India. To give a flavor, some of the more noteworthy cases that are in various stages of the process are summarized below.          

c.  All India Organization of Chemists and Druggists

While the cement case has drawn international attention because of the magnitude of the fines imposed, perhaps the most significant case the CCI has brought to date is Santuka Associates v. All India Organization of Chemist and Druggists (AIOCD).  Santuka Associates was the informant  – that is, the firm that filed a complaint with the CCI in May 2011. According to the complaint, the trade association of nearly 750,000 retailers and wholesalers across India was engaged in widespread anticompetitive activities. These allegations included limiting new entrants into the market, charging manufacturers fees to be listed in the Associations’ Product Information Service, fixing prices, and boycotting any manufacturer that did not adhere to these restrictions. The CCI found that there was a prima facie case and referred the matter to the DG for further investigation.  At this point, the informant withdrew the complaint (perhaps under pressure from the AIOCD), but the CCI moved ahead on its own.

After reviewing submissions from many sources, including several major drug manufacturers, the CCI found the AIOCD guilty of various infringements. More specifically, the CCI found that:

  • AIOCD’s requirement than any new entrant into the wholesale or retail business must first obtain a statement of non-objection from the AIOCD was an illegal restraint limiting the distribution of pharmaceuticals
  • The requirement of fees in order for a drug manufacturer to have its drug listed on the PIS was a restriction on the entry of new drugs and also raised the prices of the drugs to recoup the cost of the fee
  • The AIOC limited price competition by requiring fixed margins.  This restraint artificially inflated or maintained the price of drugs at great detriment to consumers
  • The AIOC boycott of manufacturers that did not comply with these conditions not only raised the price of drugs but also made other pharmaceuticals not available to consumers.

The CCI fined the AIOCD about US$50,000. Much more significant, however, are the remedial measures imposed by the CCI order. The CCI order required the AIOCD to cease the anticompetitive conduct and send notice to drug manufacturers and AIOC members that the anticompetitive practices were no longer in effect.

This was an important case for the CCI. The CCI noted that the AIOCD had control over the wholesalers and retailers of drugs and medicines throughout India. Because of its breath, the anticompetitive acts of the AIOC limited supply and controlled prices in a crucial consumer product.  The CCI stated that “it cannot be doubted that had these practices not been there, the consumers at large would have benefited in monetary terms and otherwise, and accordingly the AIOCD needs to be sternly dealt with.”

The AIOCD case is far from over. The AIOCD filed an appeal with COMPAT challenging the fine and other remedial measures ordered by the CCI. Also, given the far-reaching remedial measures sought by the CCI against long standing, entrenched practices in the industry, it also remains to be seen to what extent the AIOCD complies with the CCI’s orders and the CCI’s ability to monitor and enforce compliance with its orders.

Preponderance of probabilities; not beyond a reasonable doubt

When competitors reach agreements to fix prices or otherwise reduce competition, these agreements are presumed to have an adverse effect on competition. But such agreements are rarely in writing, so decisions often turn on a finding of whether there was an agreement. All forms of formal or informal (including oral, unwritten or indirect) agreements, arrangements, practices or decisions are included within the ambit of "Agreement." The CCI does not bring criminal cases, so the standard of proof both for anti-competitive agreements (under Section 3 of the Competition Act) and abuse of dominant position (under Section 4 of the Competition Act) is not “beyond a reasonable doubt.” Rather, the standard is “preponderance of probabilities.” The CCI may, and has, determined an infringement based solely on circumstantial evidence.

CCI cases to date have not been built on testimony of witnesses to an agreement, but instead by documents and other circumstances from which the DG initially, and then the CCI, could conclude (or decline to conclude) that an agreement had been reached. Mere identical pricing or parallel pricing by competitors is not enough to find an agreement. Parallel pricing can be indicative of independent decisions made in a competitive market. The DG, however, examines all circumstances surrounding bids to determine if there are other indicators of collusion. The CCI cases show that while mere identical prices is not sufficient to prove an agreement, the addition of other circumstantial evidence may satisfy the preponderance of probabilities standard. 

In April 2012, the CCI imposed a fine on three manufacturers of aluminum phosphide tablets for cartelization and bid rigging. The price for such tablets had nearly doubled in the period between 2007 and 2009.  CCI held that three competitors had acted in a collusive manner and imposed a penalty on the three companies equivalent to 9 percent of their average turnover in the past three years which aggregated to more than $US 60 million. Not only did the companies submit identical prices on many different items, but the CCI found that the firms all had different cost structures, making identical prices improbable.  Also, as the CCI noted in its Order, “The entry of representatives of all companies who submitted bids to the [tender opening] at the same time could not have been mere coincidence since the companies are located at different places at Mumbai and Delhi unless all had decided that they would enter the premises together at the same time.” This case has produced a just announced (October 29, 2013) important decision by the COMPAT. The COMPAT upheld the CCI’s finding of a bid rigging cartel, but the fines were significantly reduced. The COMPAT found that the relevant turnover to be used as the basis for the fine is the turnover in the product subject to the bid rigging; not the turnover of the an entire multi-product enterprise. Also, the COMPAT instructed the CCI to provide a well-reasoned order explaining the factors it considered in determining the fine.

In another case, the CCI issued an order dismissing a complaint of price fixing against five Indian soda ash companies. Here, the CCI found that evidence of similar prices and price policies did not itself support a finding of collusion. Similar or even identical prices can also be evidence of competition. Suspicious pricing patterns may be enough to prompt an investigation  but standing alone are not enough to infer a collusive agreement.

Most recently, the CCI fined 11 rubber shoe manufacturers for bid rigging in the supply of rubber shoes soles on a public procurement. In this case, there were signs of collusion which the CCI found sufficient to infer an agreement: near identical bid prices; near identical estimation of quantity quotes; similar explanations for the price and quantity bid; and competitively sensitive information of one competitor found in the files of a competitor. These additional factors, besides similar prices, supported an inference of an agreement.

KEY POINTS

Infringements of Section 3 can result in severe financial penalties. A few things to keep in mind are:

a)         Leniency:  The CCI, like most modern competition agencies, has a leniency program whereby a company meeting certain conditions can provide evidence of an infringement, cooperate and have a reduced financial liability or escape financial liability altogether in some instances.

b)         Extraterritoriality: The Competition Act empowers the CCI to bring cases against foreign companies that sell into India if they have engaged in conduct that has a appreciable adverse effect on competition in India. While it has not done so to date, the CCI is likely to turn its attention to international cartels that sell into India.

c)         Compliance: The CCI has placed great emphasis on its advocacy role, in particular, urging companies to adopt internal competition compliance programs. The Chair of the CCI, Ashok Chawla has convened meetings of the top 100 companies in India as well as large trade associations to emphasize this point.

d)         Public procurement: The CCI has also made uncovering bid rigging in public procurement a top priority. Public tenders constitute a large part of the Indian economy and are inviting targets for collusion. Many of the CCI investigations involve public tenders and that trend will continue.

Section 4  (Abuse of Dominance)

Abuse of dominance cases, like monopolization cases in the United States, involve certain practices that might otherwise be legal, except when done by a dominant player for anticompetitive reasons. For example, the Board for Control of Cricket in India was fined for an abuse of its dominant position as the de facto regulator and organizer of cricket events in India.  A cricket fan filed the complaint complaining that the BCCI was squelching competition from possible competing leagues. The CCI remarked in its decision that “The policy of BCCI to keep out other competitors and to use their position as a de facto regulatory body has prevented many players who could have competed for the competitive league. The dependence of competitors on BCCI for sanctioning of the events and dependence of players and consumers for the same reason has been total.” 

The CCI also issued an order finding no abuse of dominance by Apple in the sale of smart phones in India. The CCI in its order outlined the steps it took to analyze the abuse of dominance allegation:

i.  delineate the relevant market where anticompetitive conduct has been alleged

ii.  determine the dominance of the parties accused of a violation in the relevant market so defined and

iii.  establish if there has been abuse of dominance by the parties in the relevant market.

The CCI undertook well-accepted economic analysis of a possible monopoly/abuse problem. The CCI found that the product market was not Apple phones, but all smart phones sold in India. In this properly defined market, Apple’s share was far too low to present any possible abuse of dominance problems.

Sections 5 and 6  (Combinations/Mergers)

Certain transactions that meet a specified financial threshold are referred to as combinations and must be notified to the CCI and are subject to review by the CCI for possible adverse effects on competition.  Such transactions cannot be completed until the CCI has explicitly approved the transaction. The transactions referred to here may be in the nature of acquisitions of shares, voting rights, control or assets, mergers and de-mergers and amalgamations that meet the prescribed financial thresholds.

For example, in March 2013 the CCI approved British liquor company Diageo PLC offer to buy a majority share in United Spirits, an Indian company. The CCI said the relevant geographic market was the whole of India.  As to product market, the probe focused on wine and branded spirits. CCI observed that United Spirits and Diageo are mostly in different price/quality categories so there is little competitive overlap. In the whiskey market, where the two companies are close competitors, the CCI observed there are other players with multiple brands effectively competing in the market.             

While the CCI has been relatively quick to review and approve mergers, failure to file has resulted in penalties in at least three consummated transactions. The first penalty was a nominal fine of approximately US$9,000 but in the next failure to file case (involving the indirect acquisition of an Indian company by a multinational corporation), the CCI imposed a fine of about US$180,000.  Another “failure to file” case was brought in August 2013 with the acquiring party fined approximately US$74,000.

KEY POINT

The CCI has yet to challenge a combination under Section 5 and 6 of the Competition Act. But it does take seriously instances where companies fail to file, or make a timely filing with the Commission. It is important for companies doing business in India, or purchasing Indian assets (even indirectly) to be aware of the reporting thresholds. In fact, there are over 100 countries with competition agencies and filing requirements, so careful consideration must be given to worldwide filing requirements.          

Proposed changes to the powers of the CCI

The CCI is a relatively new agency, and changes in its processes will likely be made.  CCI in many ways acts as the investigator, prosecutor, judge and jury. The private bar in India is pushing back strongly against what it perceives to be limited rights during the investigation and sentencing stages. Lawyers for subjects of CCI investigations are seeking more procedural fairness and transparency in the CCI’s decision making. This includes better and earlier access for the subjects of an investigation to the evidence against them, the right to cross-examine witnesses who provide evidence to the CCI and the right to be heard regarding sentencing. 

Some of these changes would be accomplished through proposed revisions contained in a bill to amend the Competition Act that is being considered by the Indian government. One change would give parties the opportunity to be heard before the imposition of penalties. This is extremely important because the CCI has the power to impose significant penalties and the size of the penalty is at the discretion of the CCI. The change would make the penalty phase of the CCI investigation more transparent and fair by allowing parties an opportunity to make a submission and be heard on the appropriateness of the penalty.

Another change, however, would give the CCI significant new power and reduce transparency. The bill would allow the CCI (through the DG) to conduct searches based on only on the approval of the chairperson of the CCI. Currently, the DG needs authority from a magistrate to conduct a search and this is rarely (if ever) sought. If approved, this new power could add to the CCI’s bias towards finding a violation since once the agency head decides that a search is warranted, the agency may not have a completely open mind as to whether there was in fact an infringement. 

There are other significant proposed changes to the Competition Act in the bill that is still pending in Parliament, including changes related to abuse of dominance and increased thresholds for reporting requirements for certain combinations. These developments will be watched and reported on in future alerts.

THE CCI’S TREATMENT OF THE PHARMACEUTICAL INDUSTRY

The CCI has given special attention to the pharmaceutical industry. As noted, the case against the AIOCD is perhaps the CCI’s most important to date. The imposition of the CCI’s remedial measures bears watching. The CCI is also currently investigating the Bengal Pharmacist Association. In an October 2, 2013 interviewvi Chairman Chawla stated, “This is an important area from our point of view because pharmaceutical retail and prices at the consumer end impact a very large number of the population.”

Just recently, the CCI announced that it would be undertaking a comprehensive study of the pharmaceutical industry, including pricing and selling practices and patent regimes. The CCI has also demonstrated heightened sensitivity to the pharmaceutical industry with its treatment of non-compete clauses in pharma-related acquisitions.  In two pharma sector transactions in the last year that were submitted to the CCI for clearance, the CCI has asked the parties to modify post-transaction non-compete clauses. The CCI required the length of the non-compete clause to be reduced to four years.  Limiting a non-compete clause to four years when one company sells assets to another is not out of line with international standards.  But what is worth noting is that the CCI took action with these pharma deals, where other sectors have had non-compete clauses of longer duration without objection from the CCI. This is simply an indication of the close attention the CCI pays to the pharma sector. In his recent interview, however, Chairman Chawla did have some welcome news for the pharma industry when he said,  “We don’t interfere in fixing of prices and the actual movements in the market place. Whether the prices are high or low, it is not really for us to say.”

A last topic worth noting is that the Government of India is considering legislation that would substantially increase the thresholds that trigger notification requirements under the Competition Act. The proposed revisions, however, would empower the Government to have flexibility to specify lower thresholds in sectors which it considers sensitive and which it would like the CCI to keep a close eye on. This revision would allow the CCI to pass on “brownfield” pharma investments (i.e., purchases by foreign companies of a share of an already existing Indian domestic pharma company) that would otherwise fall under the new increased threshold triggers.

A MARKED IMPACT EVEN IN THIS EARLY PHASE

Competition rules and policies in India are in the early stages. Amendments and rule changes will work out some of the issues that come to light as the CCI gains experience as India's competition watchdog.

However, as is evident from the case law discussed, the Competition Act is making a strong impact on the way business and transactions are conducted in India. The fines imposed by the CCI are some of the highest in the world. In an age when competition law regulators across the world are increasing their cooperation with respect to enforcement, India has already engaged in competition law-related cooperation agreements with the United States and Russian competition regulators, and there are indications that the government is contemplating additional arrangements with other countries. This is especially relevant for international companies with a presence in India and those considering entering the Indian marketplace. 

ii   Competition Act, Section 3

iii   See Fair Play, Volume 4 January-March 2013.   The CCI publishes four newsletters per year that are available on the CCI website.

iv   See, Connolly, “Cartel Enforcement in India—A Recap of the ABA Antirust in Asia Conference and a Look Forward,” ABA Cartel & Criminal Practice Newsletter, Issue 2, April 2013. 

v In the Coal Case, the CCI found that 10 explosive manufacturers had collectively agreed to boycott a tender by Coal India.   The CCI levied a fine of US$10.8 million, which was appealed.  COMPAT upheld the CCI’s finding of a bid-rigging infringement, but drastically lowered the fine – by 90 percent.  In the view of COMPAT, the CCI had not adequately considered that this was a first offense and that the boycott was limited to one tender.

vi  See this page