1 September 2021
In an order published on August 23, 2021, the Competition Commission of India (CCI) penalised Maruti Suzuki India Limited (MSIL) to the tune of INR 2 billion (approx. USD 27 million) for restricting and controlling the discounts offered by its dealers to the end consumers. Such conduct by India’s leading passenger vehicle manufacturer was held to be anti-competitive resale price maintenance (RPM), and thus violative of the provisions of the Competition Act, 2002 (as amended) (Competition Act).
The investigation in this case commenced when the antitrust regulator received an anonymous complaint alleging that MSIL was preventing its dealers in the West-2 Region (that includes the state of Maharashtra, excluding Mumbai and Goa) from giving discounts to their customers beyond what is prescribed by MSIL in the announced ‘consumer offer’. As an aside, it is pertinent to note that while the investigation commenced on receipt of a complaint from Western region, it expanded and covered all geographies in India. If a dealer was found giving extra discounts, a penalty was to be levied upon the dealer by MSIL under its ‘Discount Control Policy’ (Discount Control Policy). On July 4, 2019, the CCI had passed its prima facie order under Section 26(1) of the Competition Act, directing the Director General, CCI (DG) to investigate this conduct and assess the impact on the relevant market(s).
Background
The Competition Act allows the CCI to look into anti-competitive agreements that may take place between entities that are considered to be competitors (for instance, two companies manufacturing the same product) as well as agreements that may be between entities at different levels of the value chain (for instance, a manufacturer of a product and a dealer or retailer of the product). Agreements of the latter kind are commonly referred to as vertical agreements. In case of such agreements, the CCI looks into the effects that have occurred / may occur as a result of such agreements, and whether it led to / had the potential to lead to any appreciable adverse effect on competition (AAEC). Thus, agreements such as exclusive supply or distribution agreements, or agreements leading to resale price maintenance would be considered to violate the provisions of the Competition Act if they led to any AAEC.
RPM occurs where the manufacturer specifies the resale price for goods or services that distributors or dealers will charge. This directly impacts the price that a consumer pays for a product that they purchase.
The present case picks up from the CCI’s order from 2017 involving Hyundai Motors India Limited (Hyundai),[1] where it had first analysed how RPM affects intra-brand competition in the automobile sector. To contextualize, in the Hyundai case, the CCI had defined the markets as (i) the upstream market for all passenger cars in India; and (ii) the downstream level of sale and distribution of Hyundai passenger cars to end consumers in India. The discount control mechanism put in place by Hyundai required the dealers to adhere to the discount policy of Hyundai. Any deviations by the dealers would lead to penalties. The CCI found that this policy led to a collusive outcome at the level of the distributors and held that Hyundai had contravened the provisions of the Competition Act. The facts examined by the CCI in the Hyundai case are similar to the case at hand.
Proceedings before the CCI
In line with the Hyundai case, the DG found the relevant market of MSIL to be the upstream market of manufacturing of passenger vehicles with dealerships and distributorships operating in the downstream market of distribution and sale of passenger vehicles across India.
The investigation showed that MSIL framed guidelines and gave instructions to its dealers to not offer discounts without its permission over certain pre-decided levels. Additionally, Mystery Shopping Agencies (MSAs) were appointed by MSIL to check whether such instructions were followed. MSIL even tracked the penalty imposed on a particular dealer for violation and recovery as well as utilisation of the penalty amounts. This made it clear that MSIL indulged in the practice of RPM through the implementation of its Discount Control Policy on its dealers across India, which led to AAEC within India. It lowered inter-brand and intra-brand competition and led to products not being offered to the consumers at best prices and such conduct is in contravention of Section 3(4)(e) of the Competition Act.
MSIL contended that there was no Discount Control Policy or any agreement to impute liability in place and the dealers in some regions themselves set in place such a policy to ensure that they are not affected by the varying discounts of other dealers. MSIL stated that dealers were free to offer any additional discounts such as direct cash discount, additional unofficial discount and additional freebies like extra free services; numerous extra accessories; extension of the regular warranty period; etc.
The CCI explained that agreements could be tacit and need not always be in writing, and that a discount control policy could exist despite the primary dealership agreement allowing dealers to provide discounts as they deem fit. The investigation unearthed evidence in the form of multiple e-mails that proved that MSIL was actively involved in imposing, as well as enforcing the Discount Control Policy through sanctions such as penalty or stoppage of supplies to dealers.
The CCI held that the imposition of maximum discount limits by MSIL upon its dealers amounts to RPM and considered whether any AAEC was caused or is likely to be caused. The CCI noted:
“…RPM can prevent effective competition both at the intra-brand level as well as at the inter-brand level. When a minimum RPM is imposed by the manufacturer upon the distributors, the distributors are prevented from decreasing the sale prices beyond the imposed limit. In other words, the mechanism does not allow the distributors to compete effectively on price.”
According to the CCI, the imposition of RPM by MSIL led to:
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denial of benefits to the consumers in terms of competitive prices being offered by MSIL dealers;
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thwarting of intra-brand competition and lowering of inter-brand competition in the passenger vehicles market; and
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creation of barriers to new entrants/dealers in the market as the new dealers would take into consideration restrictions on their ability to compete with respect to prices in the intra-brand competition of MSIL cars.
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While trying to establish whether there were any pro-competitive effects, the CCI found that there was no accrual of any consumer benefit and no improvements in production or distribution of goods or provision of services.
Hence, the agreement perpetuated by MSIL in implementing the RPM foreclosed intra-brand price competition for its dealers as well as stifled inter-brand competition. The CCI clarified:
“…even if a benefit in the form of improved complementary services may be resulting from RPM, the same does not outweigh the harm caused to the market due to significant reduction in intra-brand competition and softening of inter-brand competition, leading to higher prices for the consumers.”
In certain orders passed during the peak of the COVID-19 pandemic, the CCI desisted from imposing penalties despite holding that the parties had contravened the provisions of the Competition Act.[2] However, in the present case, the CCI took into consideration the nature of the infringing conduct and the post–pandemic phase of recovery of the automobile sector and imposed a penalty of INR 2 billion upon MSIL. The CCI also directed that MSIL should cease and desist from indulging in RPM directly and/or indirectly.
Conclusion
The order passed by the CCI exemplifies its approach to RPM read along with its previous order in the Hyundai case. The underlying assumption is that a player with significant market share engaging in RPM not only restricts intra-brand competition (i.e., between distributors of the said brand), but also lowers inter-brand competition. The assumption of lowering intra-brand price competition having a chilling effect on inter-brand price competition is based on the premise that a market leader such as MSIL will inevitably serve as the price benchmark for various categories of products. Other competing brands will take cue from the prevailing retail prices of MSIL at various dealerships across India in order to remain competitive with MSIL’s price positioning, thus leading to an unvirtuous cycle of discount control across brands.
In India, car showrooms are usually exclusive dealerships and non-multi brand dealerships, and RPM policies such as those put in place by MSIL may deter dealers from entering into a dealership agreement with certain manufacturers. Such RPM agreements are likely to impair the dealers’ ability to provide low prices and ultimately lead to AAEC.
Interestingly, both the Hyundai case as well as the case at hand also briefly looked into the role of MSAs to understand pricing, quality and other parameters of their product at the retail level. While engaging MSAs per se is not problematic, acting on their inputs and penalising dealers for not adhering to any kind of discount control policy is where the trouble lies.
For further information, please contact:
Anshuman Sakle, Partner, Cyril Amarchand Mangaldas
anshuman.sakle@cyrilshroff.com
[1] In Re: Fx Enterprise Solutions India Pvt. Ltd. v. Hyundai Motor India Limited (Case No. 36 of 2014) dated June 14, 2017.
[2] In Re: Cartelization in Industrial and Automotive Bearings (Suo Moto Case No. 05 of 2017) order dated June 5, 2020 and Railway Brake blocks Cartel (Reference Case Nos. 3 of 2016, 5 of 2016, 1 of 2018, 4 of 2018 and 8 of 2018) order dated July 10, 2020.
