- An Overview of India's New Competition Act
- July 2, 2009 | Author: K. Shiek Pal
- Law Firm: Mayer Brown LLP - Washington Office
By the end of 2009, India is expected to finally begin enforcing its 2002 Competition Act1 (the “Act”), which, while introducing a new paradigm of merger review, will enhance India’s prior regulation of cartels, anticompetitive agreements, and abuses of dominant positions.
India’s regulation of competition began in the late 1960s with the 1969 passage of the Monopolies and Restrictive Trade Practices Act (MRTPA). Although the stated purpose of the act was to address concentrations of economic power, it was largely ineffective because it did not provide adequate remedies and wholly failed to stem the growth of cartels.
In 2003, the Indian legislature passed the current 2002 Competition Act (replacing the MRTPA), the intent of which was to create and implement a more comprehensive and robust antitrust regime. Soon thereafter, in accordance with Indian law, the Supreme Court of India issued interpretations (also known as “rules”) of the 2002 Competition Act. But those rules were not adopted as amendments to the Act until October 2007 (the “Amendments”). As a result, the “complete notification” of the 2002 law (which, under Indian law, is necessary prior to implementation) was delayed and, during the interim period, the Competition Commission was unable to engage in any actual investigations. The Commission, however, was not idle and spent the intervening years focused on administrative functions, including competition advocacy, organizational capacity-building, and developing a professional network for future enforcement activities.
Notwithstanding the adoption of the 2007 Amendments, there remain several steps that must be completed before the Act can be fully implemented—and enforcement activities initiated—including the appointment of the Chair and other members of the Commission, the hiring and training the Commission’s professional staff, and the issuance of the Act’s implementing regulations. Drafts of these regulations were published in 2008 and circulated to other global competition authorities, lawyers, and academics for comment; the appointment of the commissioners was announced in early March 2009.2 It is expected that the commissioners shortly will undertake the required recruitment and training of the full professional staff, and that this process will be complete, and enforcement will begin in earnest, by the end of the year.
Overview of Competition Act Provisions
The amended Competition Act covers four primary competition concerns: (i) prohibition of cartels and anticompetitive agreements, (ii) abuses of dominant positions (including predatory pricing, tying, etc.), (iii) regulation of horizontal and vertical mergers, and (iv) competition advocacy — which is defined as raising private sector awareness of the Commission and its intended role. As a result of the delay in the adoption of the Amendments to the Act, only the competition advocacy has been implemented thus far.
Notably, the Competition Act does not regulate unfair trade practices (which the MRTP did). Instead, the 1986 Consumer Protection Act now regulates these practices. Moreover, Section 32 of the amended Act specifically provides for the Act’s application to foreign firms and individuals whose actions may have an anticompetitive effect within India, which is a significant departure from the MRTP.3
The conduct provisions of the Competition Act cover both per se violations and those that are to be tested under a rule-of-reason analysis. Section 3 of the Act governs cartels and anticompetitive agreements, and prohibits “agreements involving production, supply, distribution, storage, acquisition, or control of goods or provision of services, which cause or are likely to cause an ‘appreciable adverse effect on competition’ in India.”4 Both horizontal and vertical agreements are covered by this provision.
For example, Section 3(3) delineates four specific types of horizontal agreements between persons engaged in similar business activity that are per se prohibited. These include agreements directly or indirectly establishing sale or purchase prices; agreements limiting output; all types of market allocation agreements; and bid rigging or collusive bidding agreements.5 This rule differs from the American per se rule in that the statute itself carves out an exception for joint ventures, which are scrutinized under a rule of reason analysis.6
Section 3(4) of the Act deals with vertical agreements, including tying, resale price maintenance (RPM), refusals to deal, and distribution agreements, all of which are reviewed under the rule of reason, i.e., the operable standard of having an appreciable adverse impact on competition in India. Section 3(5) of the Act establishes exceptions for intellectual property claims and export cartels, but, unlike the MRTP, does not include an exception for collective bargaining by organized labor.
Section 4 of the Act applies to the abuse of dominant positions by firms that enjoy a “position of strength” which enables them to “operate independently of competitive forces prevailing in the relevant market.”7 Importantly, the amended Act does not rely on a statistical measure of dominance in defining what constitutes a “position of strength”; that measure had previously been set at 25 percent market share under the MRTP. The Act does, however, define the relevant market for purposes of determining whether a dominant position exists using an analysis of the relevant product and geographic markets.8 Five categories of conduct constituting abuse of dominance are enumerated: (i) imposing unfair or discriminatory conditions or prices in purchase or sale of goods/services (including predatory prices); (ii) limiting or restricting production, provision, or technical/scientific development of goods/services; (iii) denying market access; (iv) making the conclusion of contracts subject to other parties accepting supplementary obligations which are unrelated to the subject of the contracts; and (v) using a dominant position in one market to enter or protect another market.9
The remedies available under the Act vary depending on the violation. For abuse of a dominant position remedies include Cease & Desist Orders and penalties of up to 10 percent of turnover. With respect to cartels, penalties can include up to three times the illegal profits if such amount exceeds 10 percent of the turnover.10 The Commission is empowered to reduce these penalties for any (not just the first) firm that cooperates with a Commission cartel investigation.11 The Commission is also empowered to issue temporary injunctions pending inquiries into potential violations of the Act.12
Penalties assessed by the Competition Commission can be appealed to the Competition Appellate Tribunal, with final appeal to the Supreme Court.13 The Competition Appellate Tribunal can itself also adjudicate claims on compensation brought directly to the Tribunal by any government, entity, or person, and can order compensation for losses or damages sustained from violations of the Competition Act.14 These decisions by the Appellate Tribunal can also be appealed to the Supreme Court.
The Merger Control provisions contained in Sections 5 and 6 of the amended Competition Act are perhaps the most noteworthy elements of the new law, insofar as mergers were not specifically addressed under the MRTP. Section 5 defines “combinations” and lays out the relevant thresholds for regulation. Section 6 authorizes the Commission to investigate combinations above certain size thresholds, which includes mergers, amalgamations, and acquisitions of shares, assets, voting rights, or control. Section 6(1) states that combinations that cause, or are likely to cause, an appreciable adverse effect on competition are prohibited. Section 6(2), as amended in 2007, provides for mandatory pre-merger notification within 30 days of either approval of the proposal for a combination or execution of the agreement for an acquisition.
There are two thresholds that must be met for a transaction to be reportable. The first is total assets/turnover, with separate measurements for international and domestic firms. The second is the domestic nexus with India. Transactions that involve only Indian firms require a combined $250 million in assets or $750 million in turnover in order to be reportable.15 Cross-border transactions involving both Indian and international firms require a combined $500 million in assets, or $1.5 billion in turnover.16 Additionally, an aggregate domestic nexus of $125 million in assets or $375 million in turnover is also required for the combined parties. For groups (conglomerates) all of these threshold amounts are quadrupled.17 No notification is required for acquisitions of voting securities up to 26 percent provided that the acquisition is only for investment purposes made in the ordinary course of business, and that the acquisition does not confer control. There is a similar exclusion for asset acquisitions. Following pre-notification, the Commission can approve, disapprove, or suggest modifications to the transaction.
Currently, the Act allows for a maximum 210-day waiting period, but an initial 30-day period is also available and most transactions are expected to be cleared within a 30-60 day window. There has been considerable commentary regarding the maximum waiting period, and it is likely that there may be some modification or clarification of this in the final Implementing Regulations. For transactions where there are no overlaps of competing products or other competitive issues, a short form can be used — but use of this abbreviated form requires a mandatory 60-day waiting period.18 Commentators have noted that a longer waiting period for transactions with no apparent competitive issues seems incongruent, such that it is also possible that this rule may be modified when the final Implementing Regulations are issued.
As noted above, as a result of the delay in the full “notification” of the bulk of the Competition Act and the appointment of the full Commission and staff, the only aspect of the Act that has been implemented to date is the competition advocacy piece. In particular, Commissioner Vinod Dhall has been actively engaging with domestic and international lawyers, regulators, and bar associations in an effort to explain the new law, solicit feedback and comments, and advocate for more robust competition enforcement in India.19 One of the central features of this portion of the Act is Section 49, which allows the Central Government of India, as well as all state governments, to request opinions from the Commission on the formulation of competition or other policies. The Commission is obligated to provide such opinions within 60 days of the request, although the opinions are not binding upon the government.
The Commission ultimately will consist of seven members (a chairperson plus six members), supported by two officers: the Secretary responsible for all official administrative functions, and the Director General who conducts all investigations. All complaints and information submitted by the public are filed with the Secretary so that the investigatory arm is kept separate and independent. The Commission and the officers, in turn, are supported by the Commission Staff, which has yet to be selected. Forty percent of the Commission staff will be economists, 40 percent will be lawyers, and the remaining 20 percent will be accountants. As previously noted, it is expected that the Competition Commission will be fully staffed and ready to initiate enforcement activities by the end of 2009.
The Competition Appellate Tribunal is composed of three judges and is chaired by a current or retired Supreme Court Judge or Chief Justice of a High Court. The members of the Tribunal are selected by a committee composed of the Chief Justice of the Supreme Court and various cabinet secretaries. Secondary appeals of decisions by the Tribunal can be made directly to the Supreme Court. The powers and procedures of the Appellate Tribunal are to be spelled out in the Implementing Regulations, such that the normal Indian civil court procedures do not apply. Indian courts have no jurisdiction over competition matters, which are reserved exclusively for the Competition Commission. Similarly, the Commission has exclusive jurisdiction over competition claims of private individuals and firms.
Concerns Expressed by the Private Bar
The private bar in India has had an opportunity to review and offer comments on the Amendments to the Act since their adoption in 2007. Some of the primary concerns have involved changes in the language of the Amendments that appear to move the Competition Commission away from a judicial function, resulting in uncertainty about how the Commission will function in its investigatory and prosecutorial capacities. In addition, the Director General of the Commission is only required to provide investigation reports to the state governments, as opposed to the involved parties, so there is some concern surrounding transparency and accountability. There also has not been much information released regarding the recruitment and training of the professional staff of the Commission; given the reliance of the Director General and the Commission members on this staff, there is some concern about whether there will be sufficient staff resources and adequate training to ensure that the Commission is able to execute its duties in a timely, efficient, and accurate manner. Finally, there is a concern that the current Commission procedures do not provide adequate opportunities for stakeholders and parties to be heard.
More generally, there are some concerns regarding certain ambiguous language in the merger sections of the Amendments that arguably prevent parties from understanding the specific obligations they must satisfy in completing a merger. For example, Section 6.2 does not define the term “agreement”—which is a triggering event for a merger filing. The consensus of the private bar appears to be that a Letter of Intent or a Memorandum of Understanding would be sufficient to constitute an agreement, but that a confidential letter would not. Other ambiguities include the exact nature of the role of the Director General (ability to segregate investigatory and prosecutorial functions)—which may present a constitutional problem—and the amount of the filing fees in terms of how the size of a transaction will be measured.
Comments from the International Competition Network
The 2007 Amendments were also circulated to the International Competition Network (ICN) for comment and feedback. Many of the ICN concerns regarding merger notification were addressed by the subsequent issuance of the draft implementing regulations. For example, the ICN identified a need for differential thresholds for different sized transactions so that resources and waiting periods for review could be allocated appropriately. On this issue, the ICN noted that the largest and most complex mergers can take longer than 210 days to fully investigate and clear, and that many smaller transactions should be cleared more quickly. The ICN also noted that the bright-line test for “change in control” must clarify and define the term “control” as opposed to the de minimus tests contained in the current 2007 Amendments. Finally, the ICN took issue with the fact that, although penalties for violations of the Act generally are set forth in the statutory text, the applicable guidelines to administer those penalties have not been delineated, and that it may be premature to issue any such guidelines until the commissioners, commission staff, and implementing regulations are finalized.
India’s remarkable emergence as an economic power over the past decade has made it attractive for foreign direct investment, cross-border mergers, and other international corporate activity. As India engages the global economic community, it is imperative that its markets function in a competitive manner consistent with the norms of its major business partners. The 2002 Competition Act and its 2007 Amendments are a significant step in that direction, and a substantial improvement over the prior law. While the Act has yet to be fully implemented, the efforts of the Competition Commission to solicit feedback from the international community have resulted in a legal and regulatory scheme that shows promise. Together with the forthcoming Implementing Guidelines, it is expected that this law will ensure that India has a first-rate competition regime to regulate its growing economy.
1 The Competition Act of 2002 was passed in January 2003, and the Competition Commission was established in October 2003, although the full slate of commissioners was not appointed until recently and the professional staff has yet to be hired.
2 The new Chairman of the Competition Commission is Dhanendra Kumar, a former executive of the World Bank. The other commissioners are HC Gupta, Geeta Gauri, Ratneshwar Prasad, and Prem Narayan Parashar.
3 The Supreme Court of India has ruled that the MRTP had no extra-territorial application.
4 Section 3(1).
5 Section 3(3).
6 Section 3(3).
7 Section 4.
8 Chapter 1, Section 2, Subparts (R), (S), and (T).
9 Section 4.
10 Section 27.
11 Section 46. Note that the Implementing Regulations also contain separate Leniency Provisions. There are three elements that the Leniency Provisions seek to maintain: (i) accountability, (ii) transparency, and (iii) confidentiality. The first to file receives 100 percent leniency, the second receives 50 percent, the third receives 30 percent, and subsequent filers each receive 10 percent. The Commission will retain its discretionary power to reduce penalties in addition to these leniency provisions.
12 Section 33.
13 Section 53A(1).
14 Section 53N.
15 Section 5(a)(1)(A).
16 Section 5(a)(1)(B).
17 Section 5(a)(2).
18 Comments by Commissioner Vinod Dhall to the American Bar Association, February 2008.
19 Although Commissioner Dhall was the first appointment to the Commission and its most prominent spokesperson, he has recently resigned his post and will be replaced when the full commission is named.