Whos afraid of competition

Updated: Jun 30 2009, 07:29am hrs
Seven years after its enactment, the Competition Act 2002 (as amended by the Competition Amendment Act 2007) is finally operational. The government has notified provisions regulating anti-competitive agreements and abuse of dominance. Competition advocacy was notified in 2007. India now has three of the four essential pillars of modern competition lawthe fourth, relating to regulation of mergers, has not been notified. Both the Competition Commission of India (CCI) and a Competition Appellate Tribunal (CAT) are in place. We take a look at the implications of this modern yet potent law on Indian industry and how it needs to reorient the way it does business.

Section 3 of the Act prohibits agreements that have or are likely to have an appreciable adverse effect on competition in a relevant market (product or geographic) in India, including cartels. Such agreements are void. Agreements are widely defined. They include an arrangement/understanding/action in concert, oral or in writingeven a wink and nod is included, and they need not be enforceable by law. A limited list of horizontal agreements is presumed to be anti-competitive. These include fixing prices, limiting production or supply, sharing markets or customers and bid-rigging. In such cases, the onus of proving innocence is on the defendant(s). All other agreementshorizontal or verticalare subject to the rule of reason. In other words, the negative effects on competition have to be balanced against the benefits, if any, of the agreement and the onus of proof is on the CCI.

Section 4 of the Act prohibits a dominant enterprise from abusing its market power. Dominance is defined qualitativelya position of strength enjoyed by an enterprise in the relevant market in India, which enables it to operate independently of competitive forces and affect its competitors/consumers/relevant market in its favour. Not dominance but its abuse is prohibited. Abuse occurs when an enterprise uses its dominant position in the relevant market in an exclusionary and/or exploitative manner. Examples of abuse include imposing unfair or discriminatory prices or conditions, limiting production or supply, denying market access, leveraging dominance in one market to gain advantages in another market, imposing unrelated conditions, and predatory pricing.

Sections 5 and 6 regulate combinationsacquisitions, acquiring control, mergers and amalgamations. There is a mandatory filing requirement before the CCI for transactions that are above prescribed filing thresholds within 30 days of the trigger event. These sections have been the subject of much controversy and have not been notified.

An important distinguishing aspect of the new Act is the penal provisions. The CCI has vast powers to issue cease and desist orders, impose fines (up to 10% of average annual turnover for preceding three years), disapprove or modify proposed combinations and even order division of dominant enterprises. Cartels, considered the most pernicious offences could be subjected to fines of the higher of thrice the annual profit or 10% of the turnover for each year of its existence. In case of companies, individuals can also be held liable. Besides, there is the damage to the corporate reputation to think of. This is a law that has to be taken seriously.

How then should the industry respond and prepare for the new law Compliance is better than cure. It is important that all companies initiate a comprehensive compliance programme. Its key ingredients would include a mission statement and a compliance policy indicating top management commitment, compliance procedures, appropriate HR (human resource) policies that incorporate disciplinary action for violations, education and training of relevant staff, preparing a manual and a code of conduct particularly for participation in industry association meetings etc. Conducting regular compliance audits would be an important aspect of such an initiative. A major advantage of being proactive is that in case there are inadvertent violations (as well can happen in a large company), these steps would help in establishing the companys bona fides before the CCI.

As mentioned earlier, cartels are viewed as the most serious infringement under the Act. However, the Act has leniency provisions for members of a cartel who provide full, true and vital information regarding the cartel. These have worked very well overseas and led to the exposure of most cartels. The CCI has listed a number of industries it views as being suspect of cartelisation. It would be expedient for companies to review and assess their situation and if necessary, utilise the leniency provisions. There is no stigma, particularly when the Act is so new and would save companies on litigation and reputation costs.

What about the Commission A law is as good as its implementation. Enforcing such a potent and complex economic law requires deep understanding of multiple disciplines: Finance, economics, accounting and law. It is essential that government and the CCI ensure that only people with the right background are recruited and then provided intensive training since this is a new law.

Finally, the government must notify Section 66, repealing the MRTPA (Monopolies and Restrictive Trade Practices Act), immediately as concurrent jurisdiction creates confusion and provides an opportunity for forum shopping.

The author is executive director, PricewaterhouseCoopers