WORKSHOP

ON

COMPETITION AND REGULATION POLICY WITH SPECIAL REFERENCE TO THE STATE GOVERNMENT
06 JULY, 2007

EVOLUTION OF COMPETITION POLICY AND LAW IN INDIA

By

AUGUSTINE PETER
ECONOMIC ADVISER COMPETITION COMMSSION OF INDIA
WWW.competitioncommission.gov.in

MONOPLIES INQUIRY COMMISSION (MIC)

MIC appointed under Commission of Inquiry Act, 1952 Scope of inquiry - extent and effect of concentration of economic powers in private hands. TOR excluded agriculture sector and public sector MIC to suggest legislation and other measures to protect essential public interest and also suggest agency for enforcement of the legislation

FINDINGS OF THE MIC - I

Adverse social effects of economic concentration Government policies one of the main causes of economic concentration
Managing agency system New technology scale of production Birth of equity culture increase in size War efforts of India Political largesse

FINDINGS OF THE MIC II

MIC used CR3 Studied 100 products 64 products were found having CR3 > 75%
Infant milk food, biscuits, chocolates, tea, coffee Dhoti, saree, shirting Kerosene, coal, petroleum Lantern, stove, fan, lamp, radio, refrigerator, geyser Tooth-paste, razor, blade, cigarettes Vitamins, penicillin Cars, commercial vehicles, tyres Cement, sanitary-wares etc

FINDINGS OF THE MIC III

MIC distinguished between industry-wise concentration and country-wise concentration Large number of industries had either single supplier or one supplier having large share of market. Collusive behaviour in certain sectors Entry barrier created by private players Evidence of predatory pricing Many public sector enterprises enjoyed monopoly

FINDINGS OF THE MIC IV

Many restrictive trade practices (RTP) prevalent
Hoarding Re-sale price maintenance Exclusive dealing Price fixing Boycott Price discrimination

Big business by its very bigness sometimes succeed in keeping out competitors

RECOMMENDATIONS OF MIC- I

Non-legislative recommendation
Setting up public sector enterprises in sectors which have little competition Promoting SMEs and Cooperatives to challenge private monopolies Continuation of license system and import restrictions

RECOMMENDATIONS OF MIC- II
Proposed an autonomous Commission headed by a Judge to implement a new law. The proposed commission to have an investigating arm Punitive powers to the Commission Scope of merger control limited to merger involving a dominant enterprise (at least 1/3 of share in production/ supply/distribution) All proposals for expansion by dominant enterprises to be approved by the proposed Commission IPRs to be under the purview of the proposed law.

MRTP ACT

Made some significant departures from the recommendations of MIC RTP prohibited MTP Government can refer to MRTPC for inquiry and recommendation M & As powers entirely with the Government Enterprises having Rs.200 million in assets and dominant enterprises having Rs.10 million in assets to seek prior approval of Central Government for expansion or setting up a new undertaking MRTPC had limited Civil Court powers enforcing attendance of witness and calling for documents these powers were not provided to the investigating agency Trial of offences in the domain of Courts

SACHAR COMMISSION

Set up in 1997 to consider the working of MRTP Act and recommend necessary changes.

FINDINGS OF THE SACHAR COMMISSION

Reviewed the working of MRTPC during the period 1970-77 Found that the actual role of MRTPC was limited and mostly advisory The Government had not made use of the expertise few references to MRTPC for opinion

RECOMMENDATIONS OF THE SACHAR COMMITTEE - I

Definition of dominant enterprise to be changed enterprises with market share to be termed dominant Harmonization of definition of goods in the MRTP Act with the Sale of Goods Act Inter-connected undertakings concept to be introduced to the MRTP Act Government Undertakings to be brought under purview of MRTPC Compulsory reference by the Central Government on MTPs to MRTPC

RECOMMENDATIONS OF THE SACHAR COMMITTEE - II

All M&As to be referred for advise of MRTPC, if the Central Government so desires. Division of enterprises- MRTPC to pass final orders if the Central Government referred the matter to it. Certain Unfair Trade Practices (UTPs) like misleading advertisements to be inserted in the Law Power to compensate against injury Power to grant interim injunction Power of contempt Investigating arm to be provided more teeth by powers of conducting down raids and limited Civil Court powers

1984 AMENDMENT TO MRTP ACT

Many deviations from the recommendations of the Sachar Committee Concept of deemed illegality to host of trade practices introduced
Exclusionary behaviour, tie in sale, re-sale price maintenance, bid rigging, allocation of market, boycott predatory pricing etc.

Registration of agreements by dominant enterprises made mandatory Mis-representation as well as misleading or disparaging advertisement included Provisions prohibiting UTPs introduced

1991 AMENDMENT TO THE MRTP ACT

Provisions dealing with monopolistic enterprises seeking prior Government approval deleted Government Undertakings, Government Corporations and Government owned Companies brought under the purview of the MRTP Act by notification Granting of injunction without issue of notice to the effective parties

PROVISIONS IN PRESENT MRTP ACT

Has jurisdiction in RTP & UTP 14 practices are deemed RTP, but there are gateways in S. 38 MTP if referred or suo moto, but can only recommend to Government M & A were deleted in 1991 Can grant temporary injunction Has powers of contempt For disobedience, MRTPC must complain to criminal court

RAGHAVAN COMMITTEE

A high level Committee on Competition Policy and Law set up in 1999. TOR inter-alia included recommending a suitable legislation framework which could either be a new law or appropriate amendments to the MRTP Act

FINDINGS OF THE RAGHAVAN COMMITTEE

Word competition used sparsely in the MRTP Act only twice Absence of precise definition e.g. Cartels Inadequate to deal with implementation of the WTO Agreements No specific powers under the MRTP Act to deal with mergers Inadequate in dealing with anti-competitive practices as in other modern competition law Expedient to have a new Competition Law

Competition Commission of India: Duties

Competition Act, 2002 notified in January, 2003 - Stated objective (as indicated in Preamble) is to establish the Commission to:
Eliminate practices having adverse effect on competition; Promote and sustain competition Protect consumers interests Ensure freedom of trade carried on by other participants in markets in India
[Section 18]

Preamble of the Competition Act, 2002 States:

keeping in view the economic development of the country, to prevent practices having appreciable adverse effect on competition; to promote and sustain competition in trade and industry: to protect the interest of consumers; to ensure freedom of trade carried on by the participants in markets in India; Objectives to be achieved through the establishment of the Competition Commission of India (CCI).

MAIN FEATURES OF COMPETITION ACT, 2002 With the above objective, the Act: Prohibits Anticompetitive
Agreements. Prohibits Abuse of Dominant Position. Provides for Regulation of Combinations, and Enjoins Competition Advocacy
[Sections 3, 4, 5, 6 and 49(3)]

Anti-Competitive Agreements - 1
Agreements having appreciable adverse effect on competition in market in India are void

Presumptive logic
Agreements between competitors - including Cartels(horizontal agreements) presumed to have appreciable adverse effect on competition
price fixing sharing of market limiting production, supply bid rigging/collusive bidding Presumption Vs per se Treatment of JVs; efficiency enhancing JVs: Treatment of Production for Exports (Section 3)

Anti-Competitive Agreements -2
(contd.)

Rule of reason
(i) (ii) Other Horizontal Agreements Vertical Agreements: Agreements between enterprises at different stages of the production, distribution etc. chain (burden of proof of appreciable adverse effect on competition lies on the prosecutor). These include: tie-in arrangement, exclusive supply agreement exclusive distribution agreement refusal to deal resale price maintenance List not exhaustive Treatment of IPRs in Section 3 on Agreements (3.5.1)

ABUSE OF DOMINANT POSITION

Dominant position means 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 relevant market; or (ii) affect its competitors or consumers or the relevant market in its favour Not dominance, but its abuse is prohibited Dominance not based on any arithmetical figure, but on factors prescribed in Section 19 of the Act

FACTORS TO BE CONSIDERED IN DETERMINING DOMINANCE - 1 Dominant position linked to a host of factors

Market share of enterprise Size and resources of enterprise Size and importance of competitors Commercial advantage of enterprise over competitors

FACTORS TO BE CONSIDERED IN DETERMINING DOMINANCE - 2

o Vertical integration o Dependence of consumers o Dominant position as a result of a statue o Entry barriers o Countervailing buying power o Market structure and size of market o Social obligations and costs o Contribution to economic development o Any other factor

ABUSE OF DOMINANCE - 1
Imposing unfair or discriminatory price or condition in purchase or sale Limiting production or scientific development to the prejudice of consumers Denial of market access in any manner Conclusion of contract subject to supplementary obligations Use of position in one relevant market to enter into or protect other relevant market

ABUSE OF DOMINANCE - 2
List of Abuses in the Act are exhaustive No action if an act(ion) is not covered in Abuse Abuses are of two types: > Exploitative (predatory pricing, e.g.) > Exclusionary (interference with competitive process) No concession in case of abusive use of intellectual property Appreciable adverse effect on competition (AAEC) need not be proved

Regulation of Combinations
Combination is a broad term: includes merger, amalgamation, acquisition of shares, acquiring of control Act takes a liberal view High threshold limits only big ticket combinations subject to regulation Voluntary notification regime Commission to decide in 90 working days, else combination is deemed approved Commission can take, upon its own knowledge or information, action within 1 year after combination

RELEVANT MARKET

Relevant market is based on: Relevant product market; and Relevant geographic market

RELEVANT MARKET

Relevant Product Market - 1 Relevant product market is the smallest set of close substitutes
Determination of substitutability of products:
Demand side substitutability- shift of demand to competing
product on price rise

Supply side substitutability- shift of production to meet demand

RELEVANT MARKET

Relevant Product Market- 2

(Competition Act, 2002)

In determining Relevant Product Market, CCI is required to consider:

Physical characteristics or end-use of goods Price of goods or service Consumer preferences Exclusion of in-house production Existence of specialized producers Classification of industrial products

RELEVANT MARKET

Relevant Geographic Market - 1

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 Elzinga - Hogarty test to determine relevant geographic market:
LIFO LOFI (Little In From Outside) (Little Out From Inside)

Usually both should be at least 90% to define the relevant geographic market shipment data required

RELEVANT MARKET

Relevant Geographic Market 2

(Competition Act, 2002)

In determining Relevant Geographic Market, CCI is required to consider:

Regulatory trade barriers Local specification requirements National procurement policies Adequate distribution facilities Transport costs Language Consumer preferences Need for secure regular supplies or rapid after-sales services

COMBINATIONS
Combination covers
Merger Acquisition Amalgamation Acquiring control

Any combination which causes or is likely to cause appreciable adverse effect on competition (AAEC) is void

VOLUNTARY NOTIFICATION & HIGH THRESHOLD

While Agreements and abuse of dominance are prohibited, combinations are regulated Indian Combination regulation liberal High threshold limits If combining parties are in India:
Combining parties assets in India > Rs 1000 cr or turnover > Rs 3000 cr If combining parties are a group, assets in India > Rs 4000 cr or turnover > Rs 12000 cr

If any of the combining parties are outside India:

Assets in India and outside India > US$ 500 m or turnover > US$ 1500 m

If any of the combining parties belong to a group and any one of them is outside India, assets > US$ 2 b or turnover > US$ 6 b

APPRECIABLE ADVERSE EFFECT ON COMPETITON (AAEC)

Market definition

AAEC has to be determined in the relevant market Relevant market determination depends upon determination of the relevant product market and the relevant geographic market

DETERMINING FACTORS - 1
Factors to be considered to determine AAEC in the Relevant Market (Competition Act, 2002):
Actual and potential competition through importsimports/trade agreements Entry barriers- sunk cost/technological lead Concentration level - CR, HHI Countervailing power Likelihood of increase in prices or profit margins Effective competition after combination

DETERMINING FACTORS -2
(Competition Act, 2002)

Substitutes actual or potential Market share Removal of vigorous and effective competitor or competitors in the market Extent of vertical integration Failing business Nature and extent of innovation Contribution to economic development Whether benefits outweigh the adverse impact

Competition Act, 2002 MRTP Act, 1969

Aims at promoting competition
Focus on effects on competition in the market

Aims at curbing monopolies

Focus on size (uptil 1991) and on behaviour from 1991 onwards Based on reformative philosophy only

Based on reformative-cumdeterrent theory Seeks to prohibit anti-competitive agreements, abuse of dominant Prohibit monopolistic, position and to regulate restrictive and unfair trade combinations practices Statutory Authorities can seek opinion No provision to seek opinion

Contd..

Competition Act, 2002 MRTP Act, 1969 (contd.)

Central government can seek
opinion on policy/law relating to competition Enjoins competition advocacy

No enabling provision to

render opinion to Central Government on such issues No provision to undertake competition advocacy No more requirement to file anti- Restrictive Trade Agreements are required to be filed within competitive agreement with DG 60 days with the DG (I&R) for registration Only restrictive clauses are held to be void Trade Agreement having appreciable adverse effect on competition in the market is Contd.. VOID

Competition Act, 2002 MRTP Act, 1969 (contd.)

Leans heavily on Rule of
Reason Appreciable adverse effect is a key factor Factors prescribed to determine AAEC Cartels explicitly defined Leniency programme exists

Obsessed with deemed

concept Prejudicial to public interest is a key factor parameters not mentioned in the law Implicit jurisdiction in respect of cartel. No leniency programme exists

Commission to exercise jurisdiction in case of No explicit power with the unreasonable restraints exercised MRTPC in respect of IPRs in respect of IPRs. Contd..

Competition Act, 2002 MRTP Act, 1969 (contd.)

Concept of Market is
rationalized Relevant Market=Relevant product market + Relevant Geographical market Primary duty to achieve the objectives of the Act devolves on CCI Combination a broad term, High threshold limits, only regulated and not prohibited, notification voluntary, 90 days time limit, suo-motu investigation within one year

Market has not been defined

nor factors to determine market have been prescribed

Act implemented partly by Central Government and partly by the MRTP Commission Combinations were regulated by the Central Government upto 1991.

Contd..

Competition Act, 2002 MRTP Act, 1969 (contd.)

Explicit jurisdiction in respect
of overseas acts having impact in India- provision for MoUs both complementary and supplementary Applicable to Government Departments performing nonsovereign functions Deterrent penalty provisions linked with turnover in case of cartel, the penalty has to be three times of profit or 10% of turnover whichever is more MoUs

No provision to enter into

Not applicable to Government Departments No penalty provisions.

Competition Act, 2002 MRTP Act, 1969

(contd.)

Consumer includes both

commercial buyer and ultimate user Comparatively more autonomous and independent-establishment of competition fund Multi-disciplinary body Delineation of relevant market No power of review / contempt

The consumer concept is not defined Lacked autonomy and independence Members from restricted number of fields No such delineation of relevant market Power of review / contempt exists
Contd..

Competition Act, 2002 MRTP Act, 1969

(contd.)

Exclusion of jurisdiction
in respect of export business

Implicit exclusion of
jurisdiction in respect of export

Inquiry to be preceded by investigation by DG DG does not have suomotu power for investigation

Inquiry not necessarily pursuant to investigation by DG Suo-motu power of investigation vested in DG (I&R)

DG vested with powers of DG does not have powers a Civil Court of a Civil Court

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 10% of turnover or three times of cartelized profit, whichever is higher. Compensation ( damages) To declare agreement having AAEC as void Order can modify agreement In case of Combination can be approved, approved with modification, or refused approval. In case of dominant enterprise order can recommend Central Government for division of dominant enterprise.

PRESENT ACTIVITIES OF CCI

Competition Advocacy (including Awareness creation and Training). Professional Work (preparatory and foundational). Capacity building & administrative work. Inquiries and regulation of combinations not commenced; concerned sections not yet notified. Present work is preparatory and foundational; objective is to commence inquiry and regulatory work after notification of sections, without further delay at that stage, and to build CCI into highly professional organization. Commission has been working with a small team of officials

PRESENT ACTIVITIES COMPETITION ADVOCACY

Advocacy with central government ministries: Advocacy with state governments Over 50 Seminars, workshops across the country Interaction with industry chambers, associations, professional

institutions, etc.
Advocacy literature Website, Advocacy booklets etc. Advocacy with about 150 universities/institutions.

PRESENT ACTIVITIES PROFESSIONAL WORK

Draft regulations. Market studies/research projects Preparation of reference materials Study of economic, legal concepts Competition Forum 39 sessions Close networking with experts through Advisory Committees etc

PRESENT ACTIVITIES CAPACITY BUILDING

Training of staff. Implementation of capacity building projects. Study on Organisational Structure. Library Website

DISCLAIMER
This presentation provides only an introduction to competition law, and should not be relied on as a substitute for the law itself.

Further, this presentation is subject to any amendments which may be made in the competition law at anytime in future.

Thank you THANK YOU

Website:

www.competitioncommission.gov.in