Competition Compliance: Can’t discount Maruti’s dealer restrictions

September 02, 2021 4:15 AM

Vertical restraints are not per se an offence under the Competition Act. However, Maruti’s market-share cemented the foreclosure effects of resale price maintenance

The CCI concluded that a broad reduction in intra-brand competition would result in higher prices, depriving consumers of advantages that they would have otherwise reaped had the restrictions put in place and enforced by Maruti were not there.The CCI concluded that a broad reduction in intra-brand competition would result in higher prices, depriving consumers of advantages that they would have otherwise reaped had the restrictions put in place and enforced by Maruti were not there.

By Nisha Kaur Uberoi & Mathew George

The Competition Commission of India (CCI) passed yet another order against an automobile manufacturer over its business practices involving dealers, as Maruti Suzuki India Ltd was hit with a penalty of Rs 200 crore. The CCI decision came after an investigation by the director-general concluded that India’s largest carmaker had been restricting its dealers with a discount control policy.

The policy, along with dealership agreements, was held by the CCI to be facilitating a mechanism for resale price maintenance between Maruti operating in the upstream market and its dealers operating in the downstream market. The conduct was found to be in violation of Section 3(4)(e) of the Competition Act, 2002; the CCI imposed the Rs 200 crore penalty after factoring in auto sector recovery post-pandemic, while issuing cease-and-desist orders.

Previously, the CCI had found Hyundai Motor India Ltd to be operating a mechanism involving resale price maintenance on dealers, which effectively introduced a price floor for the sale of cars by Hyundai dealers. The CCI had imposed a penalty of Rs 87 crore amounting to 0.3% of the average turnover for the last three financial years against Hyundai at the time. In that instance, Hyundai was also found to have placed restrictions on dealers to use Hyundai co-branded lubricants through tying in arrangements in the aftersales market.

Interestingly, the anonymous ‘information’ against Maruti for its practices was received a few months after the CCI had passed its order against Hyundai, which is indicative of increasing competition law awareness amongst market participants who are awaiting the CCI’s rulings that are in rem or applicable to the market. Investigations are also ongoing in the two-wheeler market and commercial vehicle segment against Honda Motorcycles and Tata Motors, respectively, for similar vertical restraints placed on dealers.

Nonetheless, the Maruti decision is important, considering that the Hyundai decision was overruled by the appellate authority—the National Company Law Appellate Tribunal—due to procedural reasons, and the Hyundai decision is now pending appeal at the Supreme Court. While the Hyundai decision remains uncertain, the Maruti decision reinforces the CCI’s stand that resale price maintenance will be viewed as a ‘hard core’ vertical restriction.

Resale price maintenance agreements have been treated differently across jurisdictions. Some note the benefits in the market, as these incentivise a dealer to actively engage in non-price competition in an effort at improving their offerings and not ‘free-ride’ on capital investments of another dealer nearby. On the other hand, the case against such arrangements that is endorsed by the CCI is that it chills intra-brand price competition and that would broadly affect any existing larger inter-brand competition.

The CCI has largely relied on direct evidence comprising incriminating e-mails and evidence of penalties imposed against non-compliant dealers for enforcement of the discount control policy, to confirm the practice of resale price maintenance and contravention by Maruti. Maruti’s defence that it merely acted as a neutral party that appointed mystery shopping agencies to monitor discounts offered by its dealers to benefit dealers was rejected. The CCI disagreed with Maruti’s contentions, based on e-mail correspondence uncovered during the investigation, to conclude that Maruti was the ultimate enforcer of the policy. The CCI did not view the conduct as a hub-and-spoke cartel, though there was transmission of information between competing dealers through Maruti.

Vertical restraints are not a per se offence under the Competition Act. However, in Maruti’s case, its high market shares of 56% just served to cement the foreclosure effects arising from the imposition of resale price maintenance. In Maruti and Hyundai, the CCI has penalised the top two players who enjoy a market share of nearly 75% in the passenger car segment. The CCI concluded that a broad reduction in intra-brand competition would result in higher prices, depriving consumers of advantages that they would have otherwise reaped had the restrictions put in place and enforced by Maruti were not there.

The CCI has not found any noteworthy pro-competitive effects to offset the appreciable adverse effect on competition caused by the discount control policies. Such policies are generally geared towards fostering market discipline for operating a wider dealership network, with no self-preferencing, as company-run dealerships also adhere to them. Therefore, the decision shows the CCI ranking price over non-price competition metrics. Lately, the CCI has also prioritised the interests of smaller market participants in the downstream market that deal with non-negotiable conditions imposed by upstream market players.

Despite the focus on the auto sector—be it the auto parts cartels, the spare-parts market case that penalised 14 automakers Rs 2,545 crore and repeat instances of resale price maintenance—the Maruti principle will not be restricted to the auto sector. It will apply to industry on a sector-agnostic basis. The message from the CCI is loud and clear—a manufacturer cannot indulge in resale price maintenance by stipulating prices at which goods/services will be supplied by distributors/dealers. Recommending resale prices is acceptable, but enforcing those prices whether by incentive or disincentive (including using third parties like mystery shoppers) will be a clear contravention of the Competition Act. It’s interesting that the CCI didn’t stipulate the percentage of turnover of the penalty imposed, which is effectively at 0.2% and amongst the all-time lowest levied by the CCI.

Uberoi is national head (competition law practice), and George is senior associate, Trilegal

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