19 July, 2015
In a matter of a few years, India has gone from a jurisdiction without any competition law en- forcement, to a jurisdiction where antitrust violations are subject to very significant civil penal- ties. The Competition Commission of India (‘CCI’) has the power to impose substantial penalties on enterprises and individuals who contravene the Competition Act, 2002 (‘Competition Act’). For example in Builders Association of India v. Cement Manufacturers’ Association & Ors. (‘Cement Cartel case’) 10 cement companies and an industry association were cumulatively fined approximately US$1 billion; while Tata Motors was penalised approximately US$220 million in In re Shamsher Kataria v. Honda Siel Cars and Ors. (‘Auto Parts case’).
While the ability to levy significant fines is not particularly controversial, there is a per- ceived lack of transparency and haphazardness in how CCI levies fines. This perception and the magnitude of fines have ensured that a number of parties are appealing the determinations of CCI before the Competition Appellate Tribunal (‘COMPAT’). Thereafter, it is likely that a number of cases will be appealed to the Supreme Court of India (‘SC’). Given the significant fines and rights that are affected, COMPAT and SC are likely to take the opportunity to provide further guidance on levying of large monetary fines on enterprises in India in antitrust cases. Despite this, CCI should independently set out penalty guidelines. Developing penalty guidelines that set out clear principles and predictable fines, as well as factors that aggravate and mitigate fines are likely to engender a greater compliance culture and further encourage inward investment into India. There are a number of jurisdictions that provide guidance on the setting of penalties and so do a number of enforcement agencies in India. CCI should look to these jurisdictions and agencies when developing its own penalty guidelines.
The current law
With respect to cartels, CCI may impose on the relevant party, a penalty of the greater of (i) up to three times the profit; or (ii) 10% of turnover for each year of the continuance of a cartel. More generally, CCI has the power to impose such penalty as it deems fit, up to a maximum of 10% of the average turnover for the last three financial years of the person or enterprise that is party to an anticompetitive agreement or guilty of abuse of its dominant position.
CCI’s penalty practice
Till date CCI has not provided a systematic logic as to how it levies fines. It has yet to set out clearly in its decisional practice why a particular penalty was levied. CCI’s orders have until recently usually been silent on how a penalty amount was actually calculated, e.g. what factors (aggravating and mitigating) were analysed and how they were relatively weighed before arriv- ing at the final figure.
There is particular uncertainty and controversy in relation to how fines are levied on en- terprises supplying multiple products or services. CCI currently calculates penalties based on the entire turnover of an enterprise which is found to have contravened the Competition Act. This is inconsistent with COMPAT’s decision in M/s. Excel Crop Care Limited v. Competition Commission of India & Ors. (‘Excel Crop Case’). In that decision COMPAT stated that penal- ties levied on multi-product companies should only be calculated taking into consideration the ‘relevant turnover’ accrued on account of products to which the contravention related. Notably, COMPAT observed that doing otherwise would be against the principle of proportionality so integral to Indian judicial system. CCI has challenged COMPAT’s decision before SC. During the pendency of its appeal before SC (which has not issued a stay on the Excel Crop Case), CCI has continued to levy penalties on the basis of the entire turnover of the parties found in contraven- tion of the Competition Act.
Difficulties posed in discerning an underlying structure guiding CCI’s penalty jurispru- dence are magnified when considering that most penalties imposed by CCI have, till date, typi- cally been identical (in percentage terms) across all parties in one case. For example, in the recent Auto Parts decision, fourteen separate car manufacturers were penalised 2% of their respective average turnover for restrictive practices relating to their spare parts. This is despite substantial differences in conduct across these car manufacturers (e.g. some parties imposed blanket restrictions on the sale of spare parts over the counter, while others did not).
There also seems to be no underlying rationale governing CCI’s penalty practice across different cases. For example, in the Cement Cartel case, a cartel case involving 10 cement en- terprises and an industry association, CCI imposed a penalty of 50% of the profits for duration of two years. By comparison, in Coal India Limited v. GOCL Hyderabad & Ors. (‘Explosives Cartel Case’)6, a cartel case involving 10 explosives manufacturers and industry associations, CCI imposed a penalty of 3%of the average turnover over three years. It is unclear why CCI took two very different approaches in what otherwise appear to be two broadly similar cartel cases.
Nonetheless, from recent decisional practice, the beginnings of a coherent approach may be observed. For example, it appears that when the underlying turnovers/profits are relatively low (e.g. in the case of boycotts by trade associations), there is a greater tendency for CCI to impose a penalty up to the statutory maximum. The likelihood of CCI imposing comparatively higher penalties appears to increase for repeat offenders and in the case of industries that are per- ceived to be more sensitive from a public policy aspect (e.g. pharmaceuticals). Very recently, CCI has set out that certain facts would mitigate a penalty. For example, in Kerala Cine Exhibi- tors Association v. Kerala Cine Exhibitors Association v. Kerala Film Exhibitors Federation & Ors. (‘Kerala Film Exhibitor Case’), CCI took into account, as a mitigating factor, the fact that the Film Distributors Association of Kerela “succumbed to the diktats of [the Kerela Film Exhibitors Federation] to protect the commercial interest of its members”. Finally, CCI has also recently adopted pragmatic approach of not imposing any penalty on a bankrupt entity that has had all its assets liquidated.
Penalty guidelines that CCI can draw from
Apart from the trends set out in the above paragraphs, CCI has not set out an overarching, co- herent penalty framework. It is clear that CCI has the power to provide penalty guidelines. In particular, CCI has provided relatively detailed penalty guidance in its Leniency Policy. It is a widely accepted position that penalty guidelines are a key tool in engendering a culture of com- pliance with competition laws, by increasing transparency and good enforcement principles. The International Competition Network (‘ICN’) has recognised that penalty guidelines reduce uncertainty, encourage enterprises in arriving at a rational decision about whether or not to become involved in activities contravening competition laws.14 With the primary aim of deter- rence, it would enable enterprises to determine that the potential costs of participation in an- ticompetitive activities outweigh the potential rewards accrued. Therefore, penalty guidelines ultimately encourage greater and more efficient investments and competitive markets.
The generally accepted principles which inform penalty guidelines issued by mature an- titrust enforcement agencies (e.g. in the European Union and United States) include a consid- eration of statutory limits, gravity of offences, recidivism of contravening enterprises, and ex- tent of cooperation in investigations, among other factors. Apart from listing out appropriate mitigating and aggravating circumstances, penalty guidelines ideally contain a basic quantum which is determined with regard to the value of commerce affected by the impugned conduct of the relevant enterprise(s). This is subsequently adjusted on the basis of numerical multipliers corresponding to various mitigating and aggravating circumstances. Given that the ultimate rationale guiding the quantification of penalty is to negate any detrimental effect on commerce arising out of anticompetitive activities, some jurisdictions also take into account the likelihood of private compensation claims against enterprises while determining the quantum of penalty.
Indeed, the Ministry of Finance in India has put in place rules incorporating factors that adjudicating officers of the Securities and Exchange Board of India (‘SEBI’) must have due re- gard to when adjudging the quantum of penalty. These factors include the amount of dispro- portionate gain or unfair advantage made, the amount of loss caused, and the repetitive nature of the conduct. This approach, mandated on SEBI adjudicating officers in India, is similar to the approach mature jurisdictions take in relation to antitrust violations.
A reform of CCI’s penalty practice could start by granting concerned parties a right to a hearing specifically on determination of penalty amount. In fact, such a right existed in the earlier version of Regulation 48 of the CCI (General) Regulations, 2009 (‘General Regulations’), but was subsequently amended and removed . Allowing parties the right to be heard on pen- alties would serve to increase transparency in CCI’s penalty practice. A sustainable approach towards rectifying CCI’s current penalty jurisprudence should ideally also involve introduction of detailed penalty guidelines which channel the unfettered discretion enjoyed, and exercised, by CCI till date. In fact, CCI seems to have recognised the need for such guidelines for some time now, even though no progress has been made on this front.
CCI should consider the approaches both by SEBI and mature jurisdictions and use them in preparing and publishing its own penalty guidelines, whether by way of Regulations or by pub- lishing informal penalty guidance principles. Publishing penalty guidelines is likely to encour- age greater compliance with competition laws in India.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
Shuva Mandal, Partner, AZB & Partners
shuva.mandal@azbpartners.com
