“Opportunities for Company Secretaries under Indian Competition Act, 2002” ANNUAL REGIONAL CONFERENCE OF NIRC at GURGAON on 26 TH September, 2015 M.M. SHARMA Head-Competition Law & Policy
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“Opportunities for Company Secretaries under Indian Competition Act, 2002”
ANNUAL REGIONAL CONFERENCE OF NIRC
at
GURGAON
on 26TH September, 2015
M.M. SHARMAHead-Competition Law & Policy
COMPETITION LAW-AN ECONOMIC LAW- BRIEF INTRO
WHAT IS “PERFECT COMPETITION”-
1. MULTIPLE BUYERS.
2. MULTIPLE SELLERS
3. AVAILABILITY OF DIVERSE SUBSTITUTABLE PRODUCTS/ SERVICES
4. BOTH BUYERS AND SELLERS HAVE PERFECT INFORMATIONS
5. NO BARRIERS TO ENTRY/EXPANSION/EXIT
6. FREE MARKET ECONOMY DRIVEN BY COMPETITION ALONE
7. AN UTOPIAN CONCEPT
COMPETITION LAW-AN ECONOMIC LAW- BRIEF INTRO
WHAT IS UNFAIR COMPETITION- ADOPTION OF ANTI-
COMPETITIVE PRACTICES-
1. COLLUSIVE PRICE FIXING – CARTELS
2. DELIBERATE REDUCTION IN OUTPUT – TO CREATE ARTIFICIAL DEMAND AND TO INCREASE PRICES
3. CREATION OF BARRIERS TO ENTRY FOR NEW PLAYERS.
4. ALLOCATION OF MARKETS.
5. TIE- IN SALES, EXCLUSIVE SUPPLY AND DISTRIBUTION AGREEMENTS, REFUSAL TO DEAL, RESALE PRICE MAINTENANCE
6. PREDATORY PRICING – SELLING BELOW COST
7. DISCRIMINATORY OR UNFAIR PRICING
8. DENIAL OF MARKET ACCESS
9. CONTRACTS WITH SUPPLEMENTARY OBLIGATIONS ETC.
OBJECTIVES OF COMPETITION LAW
To promote economic efficiencyPromotion and maintenance of effective competition in markets. Competitive markets to achieve a more efficient allocation of resources.
To promote, preserve and sustain competition in markets
To prevent creation of excessive market power by preventing abuse of dominance in market.
To protect fair competition in market (and not competitors).
To prevent practices having adverse effect on competition.
To protect the interest of consumers.
To ensure freedom of trade carried on by other participants in markets. (Fundamental right guaranteed under Article 19(1)(g) of the Constitution Of India)
COMPETITION ACT, 2002 - OBJECTIVES
Competition Act, 2002 notified in January, 2003. Stated objective in Preamble is to provide “for the establishment of a Commission” to:
Eliminate practices having adverse effect on competition.
Promote and sustain competition.
Protect interests of consumers.
Ensure freedom of trade carried on by other participants in markets in India.
[Section 18]
COMPETITION ACT, 2002 - MAIN FEATURES
I Prohibits Anti - Competitive Agreements.
II Prohibits Abuse of Dominant Position.
III Provides for Regulation of Combinations.
IV Enjoins Competition Advocacy.
[Sections 3, 4, 5, 6 and 49 ]
*Off-market, not in-market. Ex-post, not ex-ante,, except in combinations.
I - ANTI-COMPETITIVE AGREEMENTS
Agreement amongst competitors (horizontal agreement), including cartels – presumed to have appreciable adverse effect on competition. Cartels most pernicious violation-subject to per se rule
Price fixing, sharing of market, limiting production, supply, etc., bid rigging, collusive bidding.
Agreement such as between manufacturer and distributor (vertical agreement) – subject to Rule of Reason; burden of poof lies on prosecutor.
Tie-in arrangement, exclusive supply/distribution agreement, refusal to deal, resale price maintenance.
Agreement includes arrangement or understanding, oral, or in writing, not necessarily enforceable by law
[Section 3]
II - ABUSE OF DOMINANCE
Not dominance, but its abuse is prohibited by any enterprise or group.
Acts deemed to be abuse are (Sec.4):
Unfair or discriminatory pricing (including predatory pricing).
Limiting production or technical development
Denial of market access.
Conclusion of contracts subject to supplementary obligations.
Use of dominant position in one market to enter into or protect the other market.
Dominance not based on arithmetical figure, but on several factors listed in Act (Sec. 19).
False or misleading facts disparaging the goods, services or trade of another by a dominant enterprise needs to be included amongst ‘Abuses’
III-REGULATION OF COMBINATIONS
Combination is a broad term: includes
Mergers
Amalgamation
Acquisition of shares
Acquiring of control, etc.
High threshold limits – only large combinations subject to regulation. [Section 5]
Mandatory notification regime.
Commission to decide in 210 days, else combination is deemed approved. [ Section 6]
However, Commission can take suo moto action within 1 yr after combination. [ Section 20]
THRESHOLDS FOR NOTIFICATION TO CCI
Current thresholds for the purpose of Section 5 of the Act are
as follows:
Criteria Assets Turnover
Only withinIndia
These thresholds are at revised value enhanced by fifty percent vide Govt. Notification S.O. 480(E), dated 4th March 2011.
10
TRIGGERING EVENTS FOR NOTIFICATION
11
•If the threshold limits are met, then a “Notice” is required tobe given to the CCI , in the “form” and with the “fee”(prescribed by Combination Regulations by CCI) , within 30 daysof the occurrence of the following event under Section 6 (2):
Approval of a proposal relating to the merger oramalgamation by the “board of directors” (term explained nowin Combination Regulations) of the enterprises concerned.[relates to section 5( c).]
ORExecution of any agreement or “other document” (termexplained now in Combination Regulations) for acquisition ofshares, control, voting rights or assets [relates to Section 5(a)and 5(b)].
•Notified by CCI on 11th May, 2011.•Major Provisions of Combination Regulations:
Regulation 31 – provides certainty on the applicability of the law.Only those mergers or amalgamations or acquisitions, where theproposals have been approved by the respective boards or bindingdocuments have been executed on or after June 1, 2011 arerequired to make a filing to the Commission.
Regulation 19 – provides for an initial review period - “prima facieopinion” on whether the combination is likely to cause or hascaused AAEC within 30 days of receiving a valid Form, regardless ofForm I or Form II; also provides for modifications which can beproposed by the parties for an early decision on the matter, in thisinitial review period.
COMBINATION REGULATIONS,2011
12
• Regulation 9 - provides for obligation to file details of the combination. Incases of merger and amalgamation, the notice has to be filed by both theinterested parties. In cases of acquisition of control, shares, voting rights orassets, the notice has to be filed by the acquirer. The regulation also laysdown the framework for seeking information from other parties ofcombination even in the case of hostile takeovers.
• Regulation 5* – provides for two Forms i.e. Form I & Form II in which theparties intending to enter into a combination may file notice of thecombination to the Commission. Form I is a short Form whereas Form II is acomplete Form- the parties have the option to file the notice in eitherForm.
• Regulation 11 – provides for the fee payable along with the notice in eitherForm I or Form II. The fee for filing notice in Form I is Rs. 15,00,000($23,076) while the fee for filing notice in Form II is Rs. 50,00,000 ($ 76,923).(1 USD = INR 65.00)
COMBINATION REGULATIONS, 2011
13
• Stopping of Clock – Under regulation 5 and regulation 19, a direction may begiven by CCI to the parties to file notice in Form II instead of Form I orremove defects in the notice or furnish additional information- the timetaken by the parties to comply with the directions of the Commission forthe same is to be excluded from the relevant review period i.e. the clockwill stop during this period.
• Regulation 8 - provides for suo- motu action by the Commission to call fornotice from the parties who failed to comply with the mandatory filingrequirement.
• Regulation 28(6) – provides that the Commission shall endeavor to make itsfinal determination on the combination notice within 180 days of filing ofthe notice.
COMBINATION REGULATIONS, 2011
14
•Regulation 4 – Certain transactions ordinarily not likely to cause anAAEC in India, and the parties need not normally file a notice with theCommission-
Acquisitions of less than 15%* of the shares or voting rights in theordinary course of business provided no other controlling rights areacquired;
Acquisition of shares or voting rights, where the acquirer prior toacquisition has 50% or more shares and voting rights except when itresults in transfer from joint to sole control;
Intra-group acquisition relating to control, shares, voting rights orassets (Mergers & Amalgamations not included)
* (Amended now)
EXEMPTIONS-SCHEDULE I CATEGORIES
15
Combinations taking place entirely outside India with insignificantlocal nexus
Acquisitions of stock-in-trade, raw materials, stores, spares orcurrent assets in the ordinary course of business;
Acquisitions of shares or voting rights by a securities underwriter orpursuant to a bonus issue, stock split/consolidation, or rights issue, tothe extent of the entitled proportion, provided no control is acquired;
Acquisitions of assets "not directly related to the business activity and not leading to control” except where the assets acquired are substantial;
EXEMPTIONS-SCHEDULE I CATEGORIES
16
Central Government has , on 4 March,2011, also notified certain specific exemptions ,in public interest, from the definition of combination under the Act, for a period of 5 years , as under :
An enterprise, whose control, shares, voting rights or assets are being acquired (“target enterprise”) having assets of the value of not more than Rupees 250 Crores (INR 2.50 billion) in India or turnover of not more than Rupees 750 crores (INR 7.50 billion);
A ‘Group’ exercising less than 50% of voting rights in other enterprise.
OTHER EXEMPTIONS-BY GOVERNMENT
17
IV-COMPETITION ADVOCACY
The Commission shall take suitable measures to:
Promote competition advocacy.
Create public awareness.
Impart training about competition issues.
The Commission shall render opinion on a reference from the Central Government or a State Government on a policy / law on competition within 60 days though the opinion is not binding on such government .
[Section 49]
POWERS OF COMMISSION
Cease and desist order
Penalty up to 10% of average turnover for last three preceding financial years
In case of cartels, penalty up to 3 times of the cartelized profit for each year of continuation of the cartel or 10% of its turnover for each year of the continuance of the cartel agreement, whichever is higher.
To declare agreement having AAEC as void
Order can modify agreement { Section 27}.
In case of Combination – can be approved, approved with modification, or refused approval. { Section 31}.
In case of dominant enterprise – can order for division of dominant enterprise. { Section 28}.
ROLE OF COMPANY SECRETARIES IN COMPLIANCE
Section 35 authorizes a company secretary holding a certificate of practiceunder Section 6(1)of the Company Secretaries Act, 1980 to appear before CCI.
Company Secretary is responsible for ensuring all legal compliances includingcompliance of all statutes.
Clause 49 of the Listing agreement of SEBI includes compliance of CompetitionAct, 2002.
It becomes a duty of a company secretary to advise the company to complywith provisions of the Competition Act, 2002.
Company Secretary is best suited to be appointed as “Compliance Officer”under the Competition Compliance Program (CCP)
COMPETITION COMPLIANCE PROGRAMME –BENEFITS TO CORPORATES
COMPLIANCE WITH EVERY LAW IS A DUTY OF EVERY PERSON INCLUDING COMPANIES. IGNORANCE OF LAW NO EXCUSE. ADVANCE COMPLIANCE BY CO. SAVES IT FROM AVOIDABLE CONSEQUENCES INCLUDING PENALTIES.
A SPECIFIC COMPETITION COMPLIANCE PROGRAMME (CCP) MAKES IT EASY FOR ENTERPRISE TO REMAIN COMPLIANT.
CCP PROVIDES INTERNAL FRAMEWORK BY IDENTIFYING ACTUAL AND POTENTIAL INFRINGEMENTS BY MANAGEMENT AND EMPLOYEES AT EARLY STAGE ,ENABLING THEM TO TAKE REMEDIAL STEPS IN ADVANCE THROUGH CO. CIRCULARS ETC.
CCP INVOLVES ACTIVE EFFORTS BY AN ENTERPRISE TO ENSURE COMPLIANCE ,THROUGH CONCRETE STEPS TO PREVENT ANY VOLIATION OF THE COMPETITION ACT , KNOWINGLY OR UNKNOWINGLY.
COMPETITION COMPLIANCE PROGRAMME –BENEFITS TO CORPORATES
OBJECTIVES OF CCP-
1. PREVENT VIOLATION OF LAW, i.e. THE COMPETITION ACT, 2002 AND ALL RULES, REGULATIONS & ORDERS MADE THERE-UNDER.
2. PROMOTE A CULTURE OF COMPLIANCE.
3. ENCOURAGE GOOD CORPORATE CITIZENSHIP.
BENEFITS OF CCP –
HELPS AVOID FINES OR MITIGATE THE LEVEL OF THE FINE.
POTENTIALLY VOID AGREEMENTS CAN BE AVOIDED.
POTENTIAL ACTION FOR COMPENSATION CAN BE AVOIDED.
A NUMBER OF INDIRECT COSTS, THAT MAY OTHERWISE BE AVOIDABLE, CAN BE AVOIDED.
IN CARTELS-HELPS BENEFIT FROM ‘LENIENCY’ PROVISIONS IN THE ACT.{ Section 46}. CCI’s “ LENIENCY PROGRAMME”
HELPS INCREASED AWARENESS ON COMPANY LAW AMONG EMPLOYEES.
COMPETITION COMPLIANCE PROGRAMME –BENEFITS TO CORPORATES
ESSENTIAL FEATURES OF CCP – EXPLICIT STATEMENT OF THE COMMITMENT OF SENIOR MANAGEMENT TO THE COMPLIANCE PROGRAMME. THROUGH PERSONAL MESSAGE FROM CEO/TOP MANAGEMENT INCLUDING COMPLIANCE POLICY IN CO.’S “MISSION STATEMENT” DESIGNATING A SENIOR OFFICER AS “COMPLIANCE OFFICER”TO
DESIGN COMPLIANCE PROGRAMMEMONITOR ITS IMPLEMENTATION REGULAR AND PERIODIC REPORTING ON IMPLEMENTATION TO BOARD .
AVAILABILITY OF AN ENTERPRISE’S COMPLIANCE POLICY ( BY LINKING IT WITH CO.’S HR POLICY AND DISCIPLINARY POLICIES.)
TRAINING & EDUCATION OF EMPLOYEES.
COMPLIANCE MANUAL.[ SOURCE: CCI WEBSITE- WWW.CCI.GOV.IN]
COMPETITION COMPLIANCE PROGRAMME –BENEFITS TO CORPORATES
ESSENTIAL FEATURES OF CCP –EXPLICIT STATEMENT OF THE COMMITMENT OF SENIOR MANAGEMENT TO THE COMPLIANCE PROGRAMME. THROUGH PERSONAL MESSAGE FROM CEO/TOP MANAGEMENT INCLUDING COMPLIANCE POLICY IN CO.’S “MISSION STATEMENT” DESIGNATING A SENIOR OFFICER AS “COMPLIANCE OFFICER”TO
DESIGN COMPLIANCE PROGRAMMEMONITOR ITS IMPLEMENTATION REGULAR AND PERIODIC REPORTING ON IMPLEMENTATION TO BOARD .
AVAILABILITY OF AN ENTERPRISE’S COMPLIANCE POLICY ( BY LINKING IT WITH CO.’S HR POLICY AND DISCIPLINARY POLICIES.)
TRAINING & EDUCATION OF EMPLOYEES.
COMPLIANCE MANUAL.[ SOURCE: CCI WEBSITE- WWW.CCI.GOV.IN]
COMPETITION COMPLIANCE PROGRAMME –BENEFITS TO CORPORATES
DISCLAIMER
This presentation provides only an introduction tocompetition law, and should not be relied on as asubstitute for the law itself.
Further, this presentation is subject to anyamendments which may be made in the competitionlaw at anytime in future.
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