Calibrating penalty

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Published: May 12, 2017 6:01:16 AM

Fair to fine on basis of turnover relevant to case, but fines must be punitive, too

Penalising the company based on its overall turnover punishes it for revenue it could have earned in a legitimate manner. (PTI)

The Supreme Court upholding the Competition Appellate Tribnal (Compat) order that penalties on businesses violating competition norms have to be imposed on the turnover relevant to the case in dispute and not their overall turnover seems fair. To the extent a company benefits from anti-trust practices in one area of its business, the penalty should be imposed on its earnings from this alone. Penalising the company based on its overall turnover punishes it for revenue it could have earned in a legitimate manner. At the same time, the penalty has to punish an infraction and not be a mere slap on the wrist. In the present case, the Competition Commission of India (CCI) had imposed a penalty of 9% of the average three-years’ turnover on Excel Corp, United Phosphorus and Sandhya Organic Chemicals for striking an agreement that raised the procurement cost of aluminium phosphide tablets by FCI. While Excel and United were multi-product companies, Sandhya was not. Compat, however, reduced the penalties for all three, bringing it down to a tenth of the CCI-ordered one for Sandhya—for participating and benefiting from an anti-trust deal, it will now be fined just under 1% of its turnover.

CCI, Compat et al must consider many factors to determine the quantum of penalty. For instance, if the company is a listed one, it has to be ensured the management gets penalised adequately and not just the shareholders. In an extreme case, penalising on the basis of the ‘relevant’ business could result in companies dividing up their businesses into smaller parts to avoid the possibility of large fines—a real estate firm could have separate subsidiaries for operations in different cities for instance, or even projects. Some years ago, CCI used a similar formula to put a `630 crore fine on DLF in a case related to its Belaire building project. Imagine how small this could be if the relevant business or market principle had been applied and only the turnover of Belaire was to be considered—a fine, at the end of the day, has to be large enough to hurt.

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