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REGULATORY
Global Competition Law
India Turns up the Heat on Cartel Enforcement with First Fines in the Energy Sectors
Suzanne Rab

The Competition Commission of India (CCI) has fined 48 liquid petroleum gas (LPG) cylinder makers 1.65 billion rupees (approximately USD 33 million/EUR 25 million) for bid rigging during tenders invited by Indian Oil Corporation (Indian Oil). The case marks the first energy sector fines by the CCI for breach of the Indian competition law provisions in its modernised competition law.

Background on competition law enforcement in India

India’s modern competition law, introduced by the Competition Act 2002 (Competition Act), has had a long and often troubled history. Although the Competition Act was enacted by the Indian Parliament and published in 2003, it has been dormant over a number of years and seen a piecemeal implementation including a challenge to the Supreme Court.

In May 2009, the legal provisions on anticompetitive agreements (section 3 of the Competition Act) and abuse of a dominant position (section 4 of the Competition Act) came into effect.

The Competition Act regulates two main categories of commercial behaviour: agreements and abuse of market power.
Section 3 of the Competition Act prohibits two categories of agreements: horizontal agreements (between businesses at the same level in the supply chain such as two producers) and vertical agreements (between businesses at different levels in the supply chain such as a producer and distributor). The provisions are broadly analogous to the provisions on anticompetitive agreements under Article 101 of the Treaty on the Functioning of the European Union and section 1 of the Sherman Act in the U.S. The CCI has sufficiently wide jurisdiction to bring under its ambit agreements and arrangements taking place outside India, provided that they have an “appreciable adverse effect” (AAE) on competition in India.

Section 4 of the Competition Act prohibits companies with market power (a dominant position) from abusing that position. Market share is a starting point for determining dominance, but neither the Competition Act nor specific guidance from the CCI provides a ‘bright line’ market share test for determining when a company may be considered dominant for Indian competition law purposes. As in the EU, it is not the holding of a dominant position that is unlawful; only its abuse can be unlawful. Examples of such abusive conduct include predatory (below cost) pricing, discriminatory pricing, denial or restriction of market access, and tying or bundling.

Market manipulation in tenders

On 24 February 2012, the CCI imposed the penalty after finding the LPG manufacturers guilty of manipulating bids through what it found to be identical rates in groups through an understanding and collusive action. The CCI initiated its investigation in this case following a complaint by Indian Oil. Indian Oil invites bids for empty LPG cylinders from private parties. The cylinders are filled at the company’s facilities and dispatched for retailing. According to the CCI, at present only 37 large players out of 48 entities control the supply of LPG cylinders and act as a cohesive group making it difficult for new players to enter the market.

The CCI decided to impose a penalty on each of the infringing companies at the level of 7 per cent of their average turnover. This level of fine is close to the maximum level of fine permitted under Indian competition law for violation of the prohibition on restrictive agreements. The Competition Act sets the maximum penalty for a cartel violation at three times the company’s profit or 10 per cent of turnover, whichever is the higher. The penalty for other types of anticompetitive agreements and abuse of a dominant position must not exceed 10 per cent of the average turnover of the company in the last three financial years.

In the CCI’s Order, it stated that “supply at higher prices would definitely impact the Indian Oil Corporation Ltd and end consumers adversely.” Implicit in this statement is the CCI’s desire to address issues that directly address consumers or where there is likelihood of consumer harm. The relative level of the fine imposed may, perhaps, be seen as motivated by this goal.

Comment and future prospects

The CCI’s decision in the LPG case coincided with a separate decision on the same day fining seven film distributors 46 million rupees (approximately USD 900,000/ EUR 697,000) for banning screenings of Bollywood films in different local markets in India. In this case, the fine represented 10 per cent of turnover – the maximum level permitted.
It will be recalled that in the early days of the CCI’s enforcement it imposed more nominal fines. In the first reported cartel case, the CCI found an infringement of section 3 of the Competition Act involving United Producers/Distributors Forum, The Association of Motion Pictures, and TV Programme Producers. The three parties collectively comprise 27 film producing entities and were each fined 100,000 rupees (approximately USD 2,000/ EUR 1,500) after the CCI found that they had unlawfully engaged in anticompetitive agreements collectively to stop distribution of films, thereby, depriving consumers of choice as new films were not released.

In most mature competition law jurisdictions, cartel behaviour is considered the most offensive anticompetitive practice. However, a notable feature of the CCI’s initial case record has been the weighting of abuse of dominance cases relative to cartel cases. For example, a case involving abuse of dominance represents the most substantial penalty to date, where the real estate company DLF Ltd was fined 7 per cent of average turnover, equating to 6.3 billion rupees (approximately USD 126 million/ EUR 94 million). The CCI received a complaint from real estate association Belaire Owner’s Association (BOA) against DLF. DLF was to build a new apartment block for BOA in the outskirts of New Delhi. According to the agreement, the building was to have 19 floors and be completed in 36 months. BOA alleged that DLF changed the terms of the agreement by building 29 floors which delayed completion. BOA alleged that the result of the delay was that hundreds of apartment allottees incurred financial losses since they had to wait indefinitely for occupation of their apartments. An appeal is pending to the Indian Competition Appellate Tribunal.
Whilst preventing and sanctioning abuse of market power is a key plank of the Indian competition legislation, as in most other competition laws, the controversial nature of these cases can raise questions about the appropriate deployment of the CCI’s resources where budgets are tight. The recent cartel cases send a clear signal that the CCI will not tolerate cartel-like behaviour and that it is moving towards more significant fines.

Of concern, however, is the lack of transparency in the CCI’s approach to the appropriate level of fine. The CCI has not yet provided any clarity on how it determines penalties other than to say that the fine must be “commensurate” to the violations. The CCI is urged to issue guidance on the CCI’s finding methodology. This would promote transparency and predictability of its decision-making and also add to its credibility as a new enforcement agency. In the meantime, companies with operations in India, whose activities affect India, and who are considering investing in India should stay abreast of the enforcement activities of the new competition regulator.


Suzanne Rab
London
+44 20 7551 7581
srab@kslaw.com
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