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Competition Law –Competition Act 2002

Dr. Geeta Gouri

Former Member,

Competition Commission of India

Competition Act -2002• Competition Act 2002 is a new Act post Economic Liberalization - An Act to regulate the Market

• The Competition Act replaces the older Monopolies and Restrictive Trade Practices (MRTP) Act

• Need for a new Act on account of a paradigm shift in industrial and trade policies

• MRTP a controller of markets to CA a market regulator

• MRTP structuralist to CA conduct oriented

• Proactive market regulator

• Economic Law meant to regulate markets.

• What is Competition and Why

• Competition creates the forces which make business active

• Competition helps to reduce costs, motivate innovations and ensure efficiency and wider consumer choice

• Why an Act and Why a Market Regulator?

• Competition needs to be nurtured and markets regulated for benefits to accrue;

• to make markets work effectively is the role of the regulator – an independent body set up under a statute

•

Competition Act -2002

• As in most international competition laws, the Indian Competition Act seeks to:

• prohibit anti-competitive agreements, including cartels (S.3);

• prevent abuse of dominant position (S.4); and

• regulate mergers and acquisition above the specified threshold (S.5and 6)

• As of now separate Acts for:

• Consumer Protection Act ,1986 – redressal process for individual consumers

• Sector Regulators – for regulating natural monopoly

• The Competition is for consumers but focused on ‘class action’

Preamble to the Competition Act,2002

• “ An Act to provide, keeping in view of the economic development of the country, for the establishment of a Commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in India …..”

Competition Commission of India -CCI• Features of CCI

• A quasi judicial expert body – 7 Members• Agnostic – any one can file information on anti-competitive practices • Suo moto cases • Can advice government• Right to fine and levy penalty - stiff can go upto 10% of the average of the turnover of the past

three years• Liability extends to Directors of Companies• Extend to all areas of economic activity except currency defence and atomic energy• Decisions of CCI appeal to Appellate Tribunal and Supreme Court• Can conduct dawn raids and seek information• Leniency Provisions for informants

• It is an Economic Law and analysis must necessarily follow the rigour of economics

The Commission,2009

• During the last nine years, the CCI has received over 800 matters alleging violations of Sections 3 and 4 of the Act relating to anti-competitive agreements and abuse of dominance in diverse sectors such as stock exchanges, infrastructure, travel, automobile manufacture, real estate, pharmaceuticals, financial sector, publishing, manufacturing, mining and entertainment.

• With regard to mergers and acquisitions the century mark has been crossed. The Commission has passed final orders pertaining to Section 3 & 4 in more than 400 cases.

• Penalties have been imposed where warranted –

• Structural modifications also have been orders more so in cases of M&A

Elements of Competition Act

• The elements of the Competition Act:

• Section 3 : Prohibiting anti-competitive agreements - Agreements that cause or are likely to cause appreciable adverse effects on competition within India are anti-competitive agreements

• Horizontal Agreements – largely per se• Vertical Agreements – efficiency and innovation dimension covered• Exemption to those covered under intellectual property rights, trade marks, design exceptions considered

• Section 4:Prohibiting abuse of dominant position –dominance defined in terms of position of strength in a relevant market which enables it to:

• Operate independently of the competitive force prevailing in the relevant market• Affect its competitors or consumers or the relevant market in its favor

• Section 5&6: Regulating combinations – which cause or likely to cause AAEC on competition – ex ante clause

• There is a fourth element : competition advocacy.

Economic Tools

• Analytics of competition relies on economic theory of micro-economics and industrial organisation

• Problems of AoD and of Combinations are to take note of possible abuse in conditions of monopoly, oligopoly

• Price and quantity estimates are required for• Defining the relevant market

• For quantifying unilateral effects

• For estimating the strength of these effects

• Behavioural analysis and games of strategy using game theory techniques have come to the forefront

• A lot to be said for the use of ‘common sense’ and of counterfactuals’

Section 3 – Prohibition of Agreements

Section 3 – Anti-competitive Agreements

3 (1): Any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which cause or likely to cause an appreciable adverse effect on competition AAEC

3(2): Such agreements are prohibited by law.

3(3): Agreements are defined very widely between enterprises or persons - shall be presumed to have ‘(AAEC) if they

Directly or indirectly , determines purchase or sale prices;

Limit or control production, supply, markets, technical development, investment or provision of services .

Shares the market or source of production or provision of service by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way;

Directly or indirectly results in bid-rigging or collusive bidding

Provided that nothing contained in this sub-section shall apply to any agreement entered into by way of joint ventures, if such agreement increases efficiency

Vertical agreements- Section 3(4)

• Section3(4) are agreements between enterprises at different stages or levels of the production chain indifferent markets if such agreements cause or is likely to cause an AAEC on account of :

Tie-in arrangement; Exclusive supply agreement; Exclusive distribution agreement;Refusal to deal; Resale price maintenance

• Where vertical agreements are concerned:• No presumption of AAEC• Rule of Reason test• Preponderance of probability• Burden shifts to the Commission

• Vertical restraints reduce intra-brand competition but promote inter-brand competition by allowing efficiencies in the distribution of products – hence Rule of Reason approach

• In determining AAEC the Commission takes into account both positive and negative factors – Section 19 (3)

IPR - Section 3(5)

Sec 3( 5) Nothing in this section shall restrict –

i) the right of any person to restrain any infringement of, or to improve reasonable conditions as may be necessary for protecting any of his rights which have been or may be conferred upon under :

• Agreements involving 6 IPR laws that impose reasonable restrictions are out of purview of the general prohibition

• Copyright Act• Patents Act• Trade and Merchandise Marks Act• Geographical Indications of Goods Registration and Protection Act• Design Act• Semi-conductor Integrated Circuits Layout Design Act

(ii) the right of any person to export goods from India to the extent to which the agreement relates exclusively to the production, supply distribution or control of goods or provision of services for such report.

How to establish a Cartel

• Cartels are:• Regarded as most pernicious form of anti-competitive behavior.• Fix Prices; fix quantities; divide the market;• Economics and Data Analysis critical.

• Cartels are normally associated with industries where:• technology is homogenous and not subject to change• were demand is relatively inelastic • more often in what can be termed as industries fawned by the earlier protected and licensed regime

• Use of concentration indices – most popular the HHI Index. Limitations of the Index:• May not apply in oligopolistic industries• Few numbers with a high HHI not necessarily a cartel

• Price parallelism to establish cartels but requires careful analysis• Price parallelism in most oligopolistic industries• Cartel is a temporary phenomenon • Spontaneous market response of prices falling in line. • Reference to capacity utilisation and cost conditions

• Concrete evidence of an ‘agreement’ to fix prices/quantities is critical - legal requirement

Section 4 – Prohibition of Abuse of Dominance (AoD)

Section 4 Dominant Position

Section 4 :

4(1) No enterprise or group shall abuse its dominant position

4(2) There shall be an abuse of dominant position if an enterprise or group-

a) Directly or indirectly, imposes unfair or discriminatory

I. condition in purchase or sale of goods or services, or -

II. price in purchase or sale (including predatory price) of goods or services or

(shall not include such discriminatory conditions or prices which may be adopted to meet the competition)

b) Limits or restricts;

i. production of goods or provision of services or markets

ii. technical or scientific development relating to goods or services to the prejudice to the consumer

c) Indulges in practice or practices resulting in denial of market access (in any manner): or

d) Makes conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts; or

e) Uses its dominant position in one relevant market to enter into, or protect, other relevant market

Determination of dominant position

Determination of dominance is important it requires defining the market in which abuse has supposedly occurred.

Dominance itself is defined under Explanation to Sec.4 and after considering factors in 19(4)

a) Dominant position means a position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to –

i) operate independently of competitive forces prevailing in the relevant market; or

ii) affect its competitors or consumers or the relevant market in its favor.” b) “predatory” price means the sale of goods or provision of services at a price which is below the cost, as maybe determined by

regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors.

• Relevant market has two aspects• Relevant product market• Relevant geographic market

• The commonly used test is the SNNIP test for setting the limits of the market – Small but non-transitory increase in prices

• Own and cross-price elasticity of demand - Price is a critical factor

• Dominance rests on market definition – but presence of dominance is under question as regards abuse –importance of competitive constraints

• Difference in approach between a high tech industry and traditional industry

Product Market Definition – Some Issues• Relevant product market is defined as the smallest set of close substitutes

“.. regarded as interchangeable or substitutable by the consumer, by reason of characteristics of the products or services, their prices and intended use”

• Relevant geographic market can be defined as the area in which products are available at approximately the same price given transport costs and any increase in demand can be met from neighbouring areas profitably.

• Standard practice is to define the geographic market within the boundaries of the nation

• In the global world and in the world of internet geographical boundaries do not match national boundaries

Competition Law – Evolving Frontiers of Market and Dominance

• New industries especially high tech industries and digital business required new ways of assessing anti-competitive effects

• Large size of firms are normal as in networks and platforms• Low on capital cost – more on developing networks –social networks – knowledge based –

costs have got slashed further • Internet space – vast potential of unlimited market spaces , pervasive markets, spontaneous

collaboration

• Dominance does not get captured in terms of traditional tests of • Market• Market share and dominance

• Redefining market both product market and geographic market comes to the forefront

•

• Emphasis no longer on price indicators but on non-price indicators of competition

• primarily innovations that tend to be disruptive and benefit consumers

• Test is on consumer benefits as consumers shift with new innovations

Challenge to Competition Law

Big Picture:• Continuous innovation and new entrants

• 315 million internet users of which 213 million also access from mobile devices

• Spread of communication and access to jobs

• Third largest base of internet uses in terms of queries from India

• Rough count projected by 2020 11500 start-ups on internet

• India’s strength in algorithms – how to facilitate

• Networks and platforms features encourage new entrepreneurs –market for ideas and space

• Competition Commission look at exclusionary practices on account of illegal means or with malafide intentions

Section 5 & 6 -Combinations

Section 5&6 CombinationsMergers & Acquisitions (M&A)

• Section 5 Combination covers (M&A) –

• Acquisition of shares/voting rights/assets; Merger; Amalgamation; Acquiring control over another enterprise in the same line of business

• Combinations are ex ante provisions as against ex poste assessment of dominance

• Combination notification mandatory above defined threshold in terms of total assets of turnover plus domestic nexus

• Section 6 any combination which causes or is likely to cause appreciable adverse effect on competition is void

• Unilateral Effects

• Coordinated Effects

• Commission reference is to section 20 (4) for purpose of defining whether the combination is likely to have an AAEC

• Remedial measures can be mandated by the Commission

Thank You