Commentary
Amending India’s Competition Act
In March this year the government tabled the Competition (Amendment) Bill 2006, which has been referred to the parliamentary standing committee on finance. Wider discussion is called for, considering that the bill proposes to amend no less than 42 of the 61 sections of the Competition Act, replacing 13 and deleting five sections in their entirety, and introducing what amounts to 21 new sections. These changes not only attempt to address the Supreme Court’s objections, but also modify several of the substantive provisions of the act dealing with anti-competitive practices.
ADITYA BHATTACHARJEA
F
The then CJI made his displeasure with the executive’s attempt to bypass the judiciary quite evident.1 The government subsequently filed counter-affidavits promising to introduce an amending bill that would enable the chairman and members of the CCI to be chosen by a committee headed by the CJI or his nominee, but stuck to its position that the chairman should be an expert who need not be a judge. The SC passed its orders in January 2005, declining, in the context of a hypothetical amendment, to answer the questions that had been raised in the petition, leaving them open until Parliament actually amended the act.2But the government seems to be in no hurry. Although its affidavits filed in 2004 had indicated the nature of the changes being contemplated, only in March this year did it table the Competition (Amendment) Bill 2006, which has now been referred to the parliamentary standing committee on finance. Wider discussion is called for, considering that the bill proposes to amend no less than 42 of the 61 sections of the original act, replacing 13 and deleting five sections in their entirety, and introducing what amounts to 21 new sections. These changes not only attempt to address the SC’s objections, but also modify several of the substantive provisions of the act dealing with anti-competitive practices. This provides an opportunity to revisit a subject I have dealt with in detail in an earlier paper.3
Sensible Proposals
Many of the proposed amendments are actually quite sensible. A change proposed in Section 12 increases from one year to two years the “cooling-off” period for which the chairman and members of the CCI are debarred from accepting employment with any (private) enterprise that has been party to any proceedings before it. Amendments to Sections 19 and 26 allow the CCI to act on information received, not just a formal complaint. Also welcome is a phrase added to Section 32, explicitly allowing the CCI to pass orders against acts of firms outside India that adversely affect competition in India. The original phrasing seemed to suggest that the CCI could only inquire into such acts. And I am not sure that officials in the ministry of company affairs are in the habit of reading EPW, but they have moved one and a half step in the direction I had suggested in my earlier article. In particular, the bill proposes to delete the illadvised clause that allowed the CCI to issue temporary injunctions to restrain any party from importing goods. I had pointed out that countering an anti-competitive practice involving imports by shutting out the imports amounts to chopping off one’s head to cure a headache, and would also be inconsistent with WTO rules.
Another proposal moves in the direction I had recommended, but not far enough. Section 46 of the act had a provision that allowed for a reduced penalty on the first firm to disclose vital information on its participation in a cartel prior to an investigation by the CCI’s director general. I had argued, on the basis of international experience, that this opportunity should remain available even after the commencement of an investigation, and not just to the first applicant. The proposed amendment allows for a reduced penalty on any firm (not just the first) that provides vital information up to such time that the director general submits his report to the commission. However, it does not lay down the extent of reduction or what kind of information will be considered to be “vital”, nor does it require the firm’s continued cooperation in prosecuting other cartel members.
The drafters of the amendment do not seem to have understood the basic rationale for such leniency programmes. They are not meant to replicate the “voluntary disclosure” or “regularisation” schemes with which India’s central and state governments have repeatedly condoned massive illegalities, whether in tax evasion, power theft, or unauthorised construction of buildings. In dealing with cartels, the appropriate analogy is with the provisions for allowing a person to “turn approver” in criminal cases. A leniency programme is meant to take the form of the famous “prisoner’s dilemma”, in which the incentives should be structured in such a way as to make confessing a dominant strategy
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for each cartelist. The idea is not to let offenders off with a slap on the wrist and a promise of good behaviour, but to induce each one to provide sufficient evidence to convict the others, knowing that the latter have the same incentives. The logic of the scheme requires both leniency to firms that provide evidence and deterrent penalties on the rest. Each cartelist should then be in a hurry to be the first to come forward with the necessary evidence before others do so, thus destabilising the cartel. Anticipating this, firms might think twice before forming a cartel in the first place.
In the EU and US, leniency programmes were revised (in 1993 and 2002, respectively) so as to guaranteecomplete amnesty to the first firm that gives enough evidence to commence an investigation, and reduced penalties for those providing useful evidence subsequently – provided they continue to collaborate in investigations against the remaining cartelists. This led to a substantial increase in the number of firms willing to provide information, and record fines, usually running into millions of dollars and euros, on those that were successfully prosecuted with the help of that evidence. But if there is no certainty of the pay-off to any firm, as in the proposed amendment to Section 46, the very purpose of the provision is defeated, and cartelists will not be induced to provide information. On the other hand, as the clause stands, a substantial reduction in penalty can be awarded to all firms that provide information regardless of its evidentiary value, again defeating the purpose of the provision, but certainly bringing it in line with the “soft” Indian state’s attitude to law enforcement, especially with respect to white-collar malfeasance. A leniency programme of this kind is more likely to legitimise cartels than to discourage them. As it is, the CCI has not been given powers of search and seizure, which are crucial in obtaining evidence in cartel cases in Europe and the US, and are even available in Section 12(5) of the outgoing MRTP Act.
The consequences of some other proposed changes have also not been adequately thought through. First, Section 21 of the act is to be amended so that when the CCI is asked by a statutory authority (such as a sector regulator like the Telecom Regulatory Authority of India) to give its opinion on any decision that might infringe the Competition Act, the authority is now required to record its response to the CCI’s opinion. While giving a reasoned response may seem to be better than ignoring advice, this requirement might actually discourage the regulator from asking questions to which it expects answers that might conflict with its own views. (Reference to the CCI continues to be discretionary.) On the whole, the relationship between the CCI and the sector regulators has not been thought out very well, either in the Competition Act or in the legislation setting up those regulatory bodies.4
Second, Section 49, which allowed the central government to seek the CCI’s opinion on formulating a policy on competition, is now to be extended to state governments. It was explicitly provided that the advice so given would not be binding on the central government, but presumably by a drafting oversight, this provision has not been extended to state governments. Surely Parliament does not intend to empower the CCI to dictate policy to state governments.
A third halfway measure is in the transition arrangements for dealing with cases pending before the MRTP Commission (MRTPC). The Competition Act originally envisaged their immediate transfer to the CCI, whose members would then have had to develop a split personality in adjudicating two very different laws affecting the same range of business practices. The new bill sensibly proposes to give the MRTPC two years to clear the backlog, so the CCI can concentrate on the Competition Act. But no change is proposed in the clauses transferring ongoing investigations for these MRTP cases to the CCI. Thus, the staff of the CCI will still have the problem of split personality. Similarly, the MRTPC will now have two years to adjudicate pending cases relating to “unfair trade practices” (except those relating to allegations of false disparagement of a rival’s goods or services), which in the original act were to be immediately transferred to the national commission constituted under the Consumer Protection Act. This too makes sense – but no change has been proposed in the corresponding clauses transferring investigations relating to such cases to the latter commission. Considerable institutional disharmony thus seems to be on the cards.
Placating the Judiciary?
Some comment is also required on the extensive changes with which the bill proposes to get around the SC’s strictures. In order to restore the role of the judiciary, the bill creates a competition appellate tribunal which must be headed by a current or former judge of the SC or chief justice of a high court, and provides that the CJI or his nominee will chair the selection committee for appointments to both the CCI (which need not itself be headed by a judge) and the tribunal. The CCI is to be divested of the power to adjudicate between parties, to award compensation, to decide applications ex parte, and to award jail terms; these powers have been reserved for the tribunal. The bill also provides for the CCI to execute monetary penalties through the income tax authorities, and to file complaints with civil courts when its orders are not complied with.
However, in order to create the tribunal at no extra cost to the exchequer, the bill proposes to reduce from 11 to seven the maximum number of members (including the chairman) that had been provided for the CCI, which will now take decisions collectively as a collegium, rather than in benches of at least two members as originally intended. Consequently, the provisions for regional benches and at least one specialised merger bench in the original act are to be deleted, which is unfortunate.5 A body sitting only in Delhi is inaccessible to parties elsewhere in such a vast country, and mergers do require specialised expertise. Moreover, the collegial approach now required for the CCI, and the interposition of the appellate tribunal, income tax authorities and civil courts for the enforcement of its orders, will inevitably slow down the wheels of justice.
These arrangements might be indispensable in the Indian constitutional scheme of separation of powers, into which I am not competent to go.6 However, it does seem to me that while allowing a judge to head the tribunal might appear to be a major concession to the judiciary, the proposed amendments actually allow the government to reduce the judicial presence quite substantially. The act had provided that at least one member of each bench should be a judicial member, defined as a member “who is, or has been, or is qualified to be, a judge of a high court”. If the 11-member CCI as originally envisaged had sat in twomember benches, at least half the appointees would have had to be judicial members. But all mention of judicial members is being deleted by the new bill, along with the system of benches. If this is passed, then given the propensity of the government to appoint bureaucrats to all regulatory bodies, there may not be any members with a judicial background on the CCI,
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Moreover, the SC had indicated while disposing of the writ petition that it might look favourably on a scheme whereby the CCI was replaced by two bodies, one regulatory and advisory, the other adjudicatory, followed up by an appellate body. The amendment bill attempts to conflate the first two bodies in the form of the CCI, divesting it of a range of judicial powers but retaining important adjudicatory functions. Whether this restructuring of the act will satisfy the SC remains to be seen.
Question of Expertise7
Even if the amended act gets the approval of the SC, there are many problems that I had discussed in my 2003 article which are yet to be addressed.8 The meaningless and dangerous “development criterion” is still there, as is the indefensible “meeting the competition” defence for predatory pricing, which will give firms with “deep pockets” a licence to destroy more efficient but financially less secure rivals. Sections 54 to 56 authorise the government to exempt any “class of enterprises” from the application of the act, to issue policy directives to the CCI, and to supersede it altogether. Even apart from these threats to its autonomy, the functioning of the CCI will be hampered by various sections of the act, which lay down multifarious criteria that it has to take into account while adjudicating on a variety of business practices. These criteria require considerable proficiency in modern industrial economics, as well as statistical analyses of the economic conditions of the industry under consideration. Such expertise is scarce in India. Multinational firms, with far greater experience in fighting competition cases in countries where such criteria have been employed for many years, will be able to draw on the necessary expertise, while Indian firms and the CCI will have to hire expensive lawyers and consultants.
Thanks to an amendment proposed to Section 66, the staff of the MRTPC is now to be transferred to the CCI or the appellate tribunal, rather than put at the disposal of the central government. However, expertise gained during the MRTP regime will not be of much relevance in enforcing the Competition Act. First, even on matters where its coverage overlaps with that of the latter act, the MRTP Act uses very different criteria for adjudication. Second, the MRTPC often sidestepped these criteria by resorting to the overarching concepts of “public interest” and “manipulation of prices”, which proved decisive in many cases. As pointed out in my earlier paper, the SC has set aside several MRTPC decisions that had erroneously treated business conduct as a “restrictive trade practice” even when it had nothing to do with restricting competition.9 Third, the MRTPC record on cartel investigations – the central focus of any antitrust agency – is very poor. Fourth, after the amendment of 1991, the MRTP Act has had no provision for merger review, which is being reintroduced in the Competition Act. And finally, the MRTPC’s major area of activity, in which it has provided a valuable service, has been in dealing with thousands of cases of individual consumer dissatisfaction regarding defective goods or deficient services. But the Competition Act does not cover such cases, nor does it deal with “unfair trade practices” (UTP) on which there is an entire chapter in the MRTP Act. All this means that experience in the MRTPC will be largely redundant, and intensive retraining will be required for staff assigned to the CCI.
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Therefore, in order to minimise the institutional disharmony referred to above, perhaps the MRTPC should retain its staff to service pending cases for two years. Thereafter, as most such cases fall under UTP or consumer compensation applications, which have no counterpart in the Competition Act but are very similar to the coverage of the Consumer Protection Act, the expertise of the MRTPC staff would be more suited for the national commission that deals with cases under the latter act. According to a recent news report, however, the government is now thinking of keeping the MRTPC alive even after two years to deal with fresh UTP and consumer cases, in which case it will retain its staff.10 The CCI will then induct personnel who are unencumbered with the legacy of the MRTP Act.11
The composition of the CCI and its staff are thus uncertain at this point of time. But I have tried to show in this article that there is an urgent need to develop their technical skills, whatever their backgrounds, and to look again at several other substantive provisions of the Competition Act. The remaining flaws in the act, combined with inadequate professional resources in the CCI, will lead to vexatious and costly litigation, inconsistent verdicts, and legal uncertainty. The CCI, and also the government, should wake up to these problems before enforcement begins so as to avoid more serious ones in future.
EPWEmail: aditya@econdse.org
Notes
[I would like to thank Manish Agarwal for helpful comments on an earlier draft. All opinions and remaining errors are my own.]
1 ‘Bureaucrat as CCA Chief: SC Displeased with Government’, Economic Times, November 21, 2003, http://economictimes.indiatimes.com/ articleshow/295200.cms.
2 Brahm Dutt vs Union of India (2005) 2 SCC 431.
3 Aditya Bhattacharjea, ‘India’s Competition Policy: An Assessment’, Economic and Political Weekly, August 23, 2003. Some of these arguments have been restated in my chapter ‘Potential Problems in the Implementation of the Competition Act’ in JaivirSingh (ed), Understanding Regulation:Institutional and Legal Dimensions, Social Sciences Press, New Delhi, forthcoming.
4 For a useful discussion of the issues involved and practice in other countries, see T C A Anant and S Sundar, ‘Interface between Regulationand Competition Law’ in Pradeep S Mehta (ed),
Towards a Functional Competition Policy forIndia, Academic Foundation, New Delhi, 2006. 5 The financial memorandum annexed to the bill actually makes a virtue of this, pointing out that the reduced expenditure on the CCI will morethan compensate for the increased commitments
on account of the appellate tribunal, thereby saving nearly Rs 113 lakh per annum.
6 For a discussion of this issue, see T C A Anant and Jaivir Singh, ‘Structuring Regulation: Constitutional and Legal Frame in India’, Economic and Political Weekly, January 14, 2006.
7 Some of the following observations are spelt out in greater detail in my chapter in the book referred to at fn 3 above.
8 See fn 3 above. The NGO CUTS International in its ‘Bill Blow-Up’, available at http:// www.cuts-international.org/pdf/Bill-Blowup2-2006.pdf, has discussed a different range of problems.
9 The SC had as long ago as 1979 laid down the principle that “only when a trade practice hasthe effect of restricting, lessening or destroying competition” could it be regarded as a RTP (Mahindra and Mahindra vs Union of India, (1979) 2 SCC 529), but has had to reiterate it periodically. Apart from the two cases mentioned at fn 8 of my 2003 article, the following more recent cases are relevant: Hindustan Lever Ltd vs Director General (I and R) (2001) 2 SCC 474 and State of UP vs Gir Prasad (2004) 3 SCC 152.
10 ‘MRTPC May Face a Restricted Existence’,Economic Times, July 27, 2006. Interestingly, the report also indicates that the CCI is not keen to absorb the MRTPC staff.
11 The handful of officers already working in the CCI have been organising regular workshops to develop their own skills, but thanks to the legal impasse regarding appointments to the commission, most of them have already completed almost half their term without beingable to take up any investigations. In any case far more staff will need to be appointed and trained from scratch once the CCI begins its regulatory activities.
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