Defanging the CCI

If Indian economic regulators were birds of prey, then the Competition Commission of India (CCI) was the eagle, the king of the skies. If you were in its grasp, you paid for it dearly.

Last month, the Supreme Court of India clipped the CCI's claws.

The appeal in the Supreme Court was brought by the manufacturers of Aluminium Phosphide Tablets, an oral pesticide. For eight years, four manufacturers of APTs (one of them dropped out in between) had quoted identical prices in response to tenders floated by the Food Corporation of India, or collectively abstained from bidding.

The Commission found them guilty of collusion, an offence under Section 3 of the Competition Act 2002, and fined the three remaining players a total of over Rs 315 crore. Now, neither the Competition Appellate Tribunal (COMPAT) nor the Supreme Court found them not guilty of the offence. However, in penalising them, it adopted a novel approach with specious reasoning, bringing down the penalty to around Rs 10 crore for all the three companies cumulatively.

The Most-feared Regulator

But some background first. The CCI compared to its peers, had an unenviable job. Unlike the Securities and Exchange Board of India, it does not have a monitoring mechanism to survey potential violators. Nor, like the Reserve Bank of India, does it have a regulatory stranglehold over its hemisphere that compels acquiescence with its diktats.

What it had, instead, was the power to punish. And punish it did. Be it the Rs 630 crore fine on real estate major DLF for saddling some of its flat-buyers with unilateral and unfair changes to their flat-purchase agreements, the cumulative penalty of Rs 6,714 crore on 10 cement majors for colluding to keep prices artificially high, or the Rs 2,545-crore penalty on 14 automobile manufacturers for making spare-parts prohibitively expensive while prohibiting buyers from purchasing them from the open market at lower prices.

And many would argue that was just as well. In its fight against market manipulation, often its only ally, is the fear it induces in potential violators. Very rarely do victims of anti-competitive practices come forward to complain - either because they continue to have commercial dealings with the abuser, or sometimes because of the economic might of a dominant enterprise or a cartel (which, by the very fact, controls a large part of the potential market). And even then, convictions are few and far between, since often practices take the nature of a wink and a nod, leaving no trail of evidence that an investigator can haul up in court.

Therefore, more often than not, effective implementation of competition law relies on self-policing by monopolistic organisations, out of fear of harsh penalties, as well as disclosures by members of cartels in exchange for immunity.

And that is under threat now. The Supreme Court granted sanctity to a new formula evolved by the COMPAT, Relevant Turnover, under which the penalties imposed by the CCI would not consider the entire turnover of an enterprise, but only the turnover of the business vertical that was engaged in the actual violation. On the face of it, that is welcome. If, for instance, a company like ITC - only hypothetically - formed a cartel with other manufacturers of notebooks, and were found guilty, it should not be fined a percentage of its entire turnover, including the money it made from selling cigarettes, because their cigarette business has nothing to do whatsoever with its standing in the notebooks business.

Specious Reasoning

In arriving there, the Tribunal, as well as the apex court, relies on two main arguments. Firstly, fining on the basis of Relevant Turnover is a global practice, and secondly, otherwise, penalties would become too harsh for companies to bear, and thus, would dissuade investment. Nothing could be more fallacious.

But to understand that, it is essential to look at two other cases where the Tribunal has similar reasoning. Firstly, where manufacturers of LPG cylinders were found to be engaged in price rigging, the Tribunal modified the penalty imposed by the CCI to consider only the turnover of "14.2 litre cylinders" manufactured by the company. Similarly, in the auto-parts case, car manufacturers were found to be abusing their dominance over their consumers by prohibiting them from approaching an independent dealer to get their parts repaired or replaced, and while doing that, marking up the price at which they sold these components to the consumer, sometimes by as much as 20 times, and making a huge profit. Here the Tribunal computed relevant turnover as the turnover from just the sale of spare parts, even though the order clearly recognises the fact that the position of dominance came from having sold the car in the first place, thus making the buyer a "captive consumer". In the present case, the COMPAT considered the sales from only Aluminium Phosphide Tablets, disregarding the other products for which the same companies may have similarly bid to government companies.

So, how does foreign law look at this? The EU fining guidelines use the concept of Relevant Sales, but includes within its reach, both direct and indirect sales, that contributed to the infringement. Therefore, the regulator would not look merely at the turnover to which the actual violation relates, but also the turnover on the basis of which the dominance was achieved - in the auto-parts example, the sale of cars.

Neither is the argument that penalties cannot be harsh tenable, especially for legislation that is intended to be preventive. For example, the penalty for insider trading is a minimum of Rs 25 crore, and can go up to three times the profits made from the trading. Similarly, under the Narcotic Drugs and Psychotropic Substances Act, 1985, a second conviction for the same offence can sometimes bring with it the death penalty. Both SEBI laws, as well as the Competition Act permit the regulator discretion to impose a smaller penalty in case the infringement was not serious, or had limited damage to the wider public, but it is unwise to strip the Regulator of that discretion.

Finally, the argument that huge fines will dissuade investment is just the familiar bogeyman. Anti-trust violations, or lacerating fines, are not unique to India. Further, the whole purpose of Competition law is to protect consumers from the abusive power of large corporations. So, for the court to side with the potential violator defeats the very purpose of the law.

It's the Thought That Counts

Violation of Competition law (either monopolistic behaviour or cartelisation) is never entered into for small profits. In fact, any upsetting of the market equilibrium is intended to gain super-normal profits. If that be the case, then is 10 per cent of affected turnover a strong enough deterrent? If the companies are threatened with only a 10 per cent of their turnover, which could often be a fraction of the profits they make out of the unlawful activity, then indulging in such practices can suddenly become more attractive.

Secondly, often the relevant business, which is the "affected business" need not be the one where the abusive power comes from. In fact, it is not even necessary that the benefit that an enterprise derives from an abuse of dominance is monetary. Take for example, a leading car manufacturer that imposes onerous conditions on trucks that are engaged to carry newly manufactured cars to the showroom. What would be the relevant turnover in this case? Going by the judgment, it would be the amount that pertains to the business of transporting cars, miniscule. But what if the trucks were forced to agree to tracking mechanisms that revealed its whereabouts when it serviced rival carmakers? Now that would be invaluable information, beyond the reach of the regulator.

(The writer is an advocate practising in the Supreme Court)