Author: Shweta Pandey Student, Bharati Vidyapeeth, New Law College, Pune
There is an increasing awareness of the need for a versatile, diverse, and productive private sector to promote sustainable economic growth. Fostering rivalry offers greater choice of goods of higher quality at a lower price. Competition also leads to greater accountability and transparency, reducing corruption and lobbying. Competition is an efficient market mechanism which facilitates research and development in the market. It also encourages new entrants to enter into the market and provide varied goods for consumers. The Economic theory suggests that prices and quantities in a competitive market are balanced to rates which produce efficient results. More developed markets tend to be vulnerable to the custom of anti-competitiveness. Competition law and policy does not destroy competition but encourages competition by penalizing anti-competitive conduct, such as anti-competitive agreements and abuse of market dominance.
Overview of the Competition Act, 2002
The Competition Act was passed in 2002, and entered into force on January 13, 2003. The objectives of the act were set out in its preamble, which states that the act would provide for the establishment of a Commission (i.e. Competition Commission of India) to avoid anti-competitive practices, promoting and maintaining market competition, protecting consumers and ensuring that other market participants are free to trade. Three anti-competitive activities are governed by the Act, namely Anti-competitive Deals, Misuse of Dominant Position and Mergers & Acquisitions through Combination.
The main criteria used to control anti-competitive activities are that these practices should not have a major adverse effect on competition within India. Section 3 of the Act defines what agreements are of an anti-competitive nature and classifies such agreements into two categories: Horizontal agreements and Vertical agreements. It states that, subject to certain exceptions as provided for in section 3(5), all anti-competitive agreements which can cause significant adverse effects on competition in India shall be void. Section 4 deals with issues of abuse of dominant position in markets, it provides a list of actions that could lead to abuse of dominant position. Furthermore, Sections 5 and 6 have prescribed for combinations and have provided certain guidelines to regulate competition.
Key Concepts of the Act
The Competition Act, 2002 deals with mainly three concepts:
Abuse of Dominant Position
Combinations and their regulation
Anti-Competitive agreements are those agreements among the persons involved in a business transaction which have the tendency to harm the Competition in a particular market or which results in undue benefit to one person or group over the loss of others. Such anti-competitive agreements are prohibited under the Competition Act, 2002. The term ‘agreement’ as defined under section 2(b) of the Act provides that the agreement does not necessarily have to be in the form of a formal document executed by the parties. It may or may not be in writing. Clearly, the definition so provided is inclusive in nature and not exhaustive and is a wide one. The main reason for adopting a wide connotation for the term ‘agreement’ in Competition law is because the persons so involved in anti-competitive activities may not enter into formal written agreements so as to keep it a secret affair. For example, Cartels are usually shrouded in secrecy. Section 3 of the Act prohibits any agreement with respect to production, supply, distribution storage, acquisition or control of goods or provision of services which causes or is likely to cause appreciable adverse effect on competition within India. Further section 3(2) provides that any agreement in contravention of this provision shall be void. On the basis of the provisions of Section 3 of the Act, anti-competitive agreements are divided into two categories namely horizontal agreements and vertical agreements.
(a) Horizontal Agreements: These are the agreements which generally occur between two or more entities or enterprises that stand at par with each other in terms of production, supply distribution etc. in the same market. For example, an agreement between manufactures of a particular commodity of not selling a particular product below agreed price or for not to supply a product to a particular market would be deemed as horizontal anti-competitive agreements. Competition Act, 2002 prohibits following types of horizontal agreements namely:
(i) Agreements regarding fixing of purchase or selling prices of a product either directly or indirectly.
(ii) Agreements with regard to limit, control production, supply, investment, provision of services of particular products and for a particular quantity.
(iii) Agreement regarding sharing of market
(iv) Bid-Rigging Agreements.
(v) Agreements in the form of Cartels.
(b) Vertical Agreements: According to Section 3(4) of the Act ‘vertical agreements’ are those agreements which take place among enterprises or persons at different stages or levels of production in respect of production, supply, distribution, storage, sale or price of goods etc. For example, any agreement between manufacturer and wholesaler which can adversely affect competition in the market will be termed as a vertical anti-competitive agreement. Competition Act, 2002 envisages various types of Vertical agreements. These are:
(i) Tie-in-Arrangement: This arrangement includes any agreement that requires the purchaser of the goods to purchase some other goods along with the required goods as a condition mandate. Such kind of agreements is usually entered into by the sellers so as to increase their sales and earn more profit. A tie-in arrangement will become illegal when an enterprise uses its market power that it has on a particular product and by taking advantage does not sell or lease that product to the customer until and unless he agrees to buy another product that the enterprise wants him to buy.
(ii) Exclusive Supply Agreement: Such an agreement imposes restrictions on purchaser of the goods of not to acquire or deal in goods other than those of the seller or any other person. Such agreements are usually entered into by using dominant position in the market. For example buyer of a particular commodity enters into an agreement with the manufacturer of not making the same product for any other buyer. However, such agreements should not be confused with arrangement between the buyers and sellers or manufacturers with regard to specifications, quality, size etc. which is legal and not anticompetitive in nature.
(iii)Exclusive Distribution Agreement: Such agreement usually imposes conditions that limit, restrict or withhold the output or supply of any goods. Sometimes, restrictions with regard to allocation of any area or market for disposal or sale of goods are also covered under this part. Such an arrangement may violate the competition law if their effect substantially lessens or tends to create a monopoly in any line of commerce.
(iv)Refusal to Deal: Agreements which, by any method, restrict, or are likely to restrict the persons or class of persons to whom goods are sold or from whom goods are bought are prohibited under the Act as such agreements have anti-competitive tendencies.
(v) Resale Price Maintenance: Resale price maintenance includes any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged. In other words, resale price maintenance refers to any attempt by an upstream supplier to control or maintain the minimum price at which the product is resold by its customer. This prevents the resellers from competing too fiercely and thereby drives down its profits. Insisting that a product be resold at a specific margin, or limiting the discounts that a reseller may offer, in essence restricts the reseller’s ability to set a price and is accordingly prohibited.
(c) Permitted Agreements: Competition Act, 2002 provides for certain exceptions which meant for the protection of Intellectual Property Rights (IPRs). As per section 3(5) prohibition for anti-competitive agreements will not affect the right on any person to restrain any infringement of, or to impose reasonable conditions as may be necessary for protecting, any rights under the following legislations:
(i) The Copyright Act, 1957,
(ii) The Patents Act, 1970
(iii)The Trade and Merchandise Marks Act, 1958
(iv)The Geographical Indications of Goods (Registration and Protection) Act, 1999
(v) The Designs Act, 2000
(vi)The Semi-Conductor Integrated Circuits Layout-Design Act, 2000
Similarly, exemption against anti-competitive agreements is also provided in cases of export. Section 3(5)(ii) lays down that prohibitions of anti-competitive agreements shall not apply to the right of any person to export goods from India to the extent to which the agreement relates export of goods or services
Abuse of Dominant Position
An individual or a corporation shall be deemed to be in a dominant position if that entity is in a position of strength and if that position enables that entity to operate independently of the competitive forces that exist in the relevant market or affects its rivals or customers or the relevant market in its favour. Section 4 of the Act provides for prevention of market dominance by huge enterprises. It notes that its dominant position is not violated by any firm or party. For instances it also offers what actions amounts to abuse of dominant position. The behaviour amounting to abuse of dominant position has been explained as under:
(i) Direct or Indirect imposition of unfair or discriminatory condition in purchase or sale of goods or services or prices in purchase or sale (including predatory price) of goods and services. ‘Predatory price’ means selling of goods at a price which is below the cost of production of goods or provisions of service in order to eliminate competitors or to reduce competition. The Competition Commission of India (Determination of Cost of Production) Regulations, 2009 have been enacted for the determination of predatory pricing cost. According to Regulation 3(1), average variable cost will generally be taken as a proxy for marginal cost.
(ii) Limiting or restricting the production of goods or services or putting restrictions on technical or scientific development relating to goods or services to the prejudice of consumers.
(iii) Indulging in practices which result in denial of market access in any manner.
(iv) Using Dominant position in one relevant market to protect or to enter into another relevant market.
Regulations of Combinations
The Competition Act regulates mainly three types of combinations namely:
(i) Acquisition of shares, voting rights or assets of another entity by a person or an enterprise.
(ii) Acquiring control by a person over enterprise.
(iii) Merger or amalgamation between or amongst enterprise.
Section 5 of the Act defines combination by providing certain threshold limits below which combinations would not be covered under the scanner of Competition Act. The main justification behind prescribing such limits can be the reason that combination between small enterprises or entities may not have appreciable adverse effect on competition in Indian markets.
(a) In case of acquisition of share, voting rights or acquiring the control: The person acquiring the shares and the enterprise whose shares, assets or voting rights are being acquired jointly have:
Assets in India: – More than 1000 crores Turnover: – More than 3000 crores
Aggregate assets in India or Outside India: – More than 500 million dollars including at least 500 crores in India. Turnover shall be more than 1500 million dollars including at least 1500 crores in India.
In case of acquisition by group, the joint assets and such acquiring group should be:
Assets in India: – More than 4000 crores Turnover shall be more than 12000 crores
Aggregate assets in India and outside India: – More than 2 billion dollars, including at least 500 crores in India. Turnover shall be more than 6 billion dollars, including at least 1500 hundred crores in India.
(b) In case of merger or amalgamation, the remaining enterprise after merger or the enterprise so created after amalgamation should have:
Assets in India: More than 1000 crores Turnover: – More than 3000 crores
Aggregate assets outside India: 500 million dollars, including at least 500 crores in India, or Turnover of more than 1500 million dollars, including at least 1500 hundred crores in India.
If the enterprise so created after amalgamation or remained after merger belongs to a group, then such group should have:
Assets in India: – More than 4000 crores. Turnover of more than 12000 crores.
Aggregate assets in India and outside India: – 2 billion US dollars. Turnover shall be more than 6 billion US dollars, including at least 1500 crores in India.
Further, Section 6 of the Act deals with the provisions of regulations of Combinations. It provides for a compulsory notice of details of proposed combination to the Commission along with prescribed fees within 30 days of execution of any document of acquisition or approval of the proposal of amalgamation or merger by the Board of Directors. The time period prescribed for the combination to take effect is 210 days after giving of notice to the
commission or the date on which any order has been passed by the commission with regard to that notice, whichever is earlier. However, exception has been provided in favour of public financial institution, foreign institutional investors, bank or venture capital fund in case of any covenant of loan agreement or an investment agreement.
The Competition Act, 2002 is a measure taken by the government to balance the evolving and changing economic conditions and is aligned with the changing economic outlook of liberalization, privatization, and globalization. This shows the country’s willingness to move from regulated economy to free market economy but with sufficient checks and control measures. In addition to concentrating on the regulatory aspect, the Act has also adopted the principle of’ Competition Advocacy’ as a commission’s social duty to promote competition, raise awareness etc. But there are still some issues that require consideration from both the government and the Commission itself to make India’s Competition regime more successful. The downside of Indian Competition Law as a late entrant was that it embraced selected features of other countries Competition Laws. Increasing backlog of cases due to staff crunch is another concern that is needed to be dealt by the Government. Another area where the Commission needs to rethink is the role of the competition laws in the overlap between Intellectual Property Laws and competition laws. Such matters have to be taken up for serious consideration by the concerned authorities to achieve the desired objectives with which the Competition Act was enacted.