What is competition? Competition is a process of economic rivalry between market players to attract customers. These market players can be multinational or domestic companies, wholesalers, and retailers. Market competition spurs firms to be more efficient, innovative, and responsive to consumer needs. Consumers enjoy more choices, lower prices, and better products and services. The economy as a whole benefits from greater productivity gains and more efficient resource allocation. Therefore, wherever appropriate, sectors are opened of the economy to market competition. Competition law and liberalization co-exists.
Liberalization without competition law is like a car without an engine. The success of liberalization depends on presence of strong and effective competition policy to drive the economy and regulate the conduct of operators in the relevant markets. Competition has innumerable advantages:
- It encourages manufacturers and service providers to be more efficient.
- Better response to the needs of their customers.
- Encourages the firms to continuously innovate.
- Encourages the firms to venture in new businesses.
- Competition reduces the prices of the goods.
- Competition increases quality with lower prices.
Competition has a deflationary effect on the economy. In professional words: it optimizes the allocation of resources at the firm level and as a result throughout the national economy. Competition benefits the economy, as a whole, the consumers and other producers; those who are not fit to survive die out and cease to waste the rare resources of humanity. Competition laws aim to establish fairness of commercial conduct among entrepreneurs and competitors, which are the sources of said competition and innovation. Free markets often fail or are unable or unwilling to provide goods, services, or competition.
The highly competitive environment and the increase in the unfair practices adopted worldwide gave birth to a need for some mechanism which would keep a check on all individuals or entities involved in trade. India too realized this in the late 1960s and thus the MRTP act of 1969 was formulated. There were few modifications that were done in the years that followed and later on a new Act entirely replaced the MRTP Act, 1969. It was called the Competition Act, 2002. Economic Phases in India The economic phases which led to the evolution of MRTP act and the Competition Act can be divided into 2 phases:
- Indian Economy between 1947 to 1990 and
- Indian economy between 1990 to 2010
Indian Economy between 1947 to 1990 During independence the economy was predominantly agrarian. Most of the population was employed in agriculture, and most of those people were very poor. Moreover, the structural economic problems inherited at independence was worsened more by the costs associated with the partition of British India, almost 12 million to 14 million crossed each other across the new borders between India and Pakistan. The settlement of refugees was a considerable financial strain.
Partition also divided complementary economic zones. Under the British, jute and cotton were grown in the eastern part of Bengal, the area that became East Pakistan (now Bangladesh), but processing took place mostly in the western part of Bengal, which became the Indian state of West Bengal in 1947. As a result, after independence India had to employ land previously used for food production to cultivate cotton and jute for its mills. Structural deficiencies, such as the need for institutional changes in agriculture and the slow growth of much of the industrial sector, also contributed to economic stagnation.
Wars with China in 1962 and with Pakistan in 1965 and 1971; a flood of refugees from East Pakistan in 1971; droughts in 1965, 1966, 1971, and 1972; currency devaluation in 1966; and the first world oil crisis, in 1973-74, all jolted the Indian economy. During this period the government had to rely heavily upon the private savings (financing from business houses like Tatas, Birlas etc) . This made these business houses very strong and they gradually started having a strong say in the nation’s policies and economic reforms due to the financial dependency on them.
The competition Law for India was triggered by the Articles 38 and 39 of the Constitution of India mandate i. e. the State shall strive to promote the welfare of the people by securing and protecting as effectively, as it may, a social order in which justice – social, economic and political – shall inform all the institutions of the national life, and the State shall, in particular, direct its policy towards securing . That the ownership and control of material resources of the community are so distributed as best to sub serve the common good.
That the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment. The MRTP act of 1969 was a very important but controversial piece of economic legislation. The act came into force from June 1970 and was amended in 1984 and 1991. Under the MRTP Act, a Regulatory Authority called the MRTP Commission (briefly, Commission) was set up to deal with offences falling under the statute.
The principal objectives sought to be achieved through the MRTP Act were:
- Prevention of concentration of economic power to the common detriment; 2. Control of monopolies;
- Prohibition of Monopolistic Trade Practices (MTP);
- Prohibition of Restrictive Trade Practices (RTP);
- Prohibition of Unfair Trade Practices (UTP).
Three main focus area of the regulatory provisions of the MRTP Act were concentration of economic power, competition law and consumer protection. A criticism was often voiced that the statute was designed to prohibit growth.
But the statute, till 1991 regulated growth but did not prohibit it. Even in its regulatory capacity, it controlled the growth only if it was detrimental to the common good. In terms of competition law and consumer protection, the objective of the MRTP Act was to curb Monopolistic, Restrictive and Unfair Trade Practices which disturb competition in the trade and industry and which adversely affect the consumer interest . The MRTP Act categorized trade practices into monopolistic trade practices, restrictive trade practices and unfair trade practices.
The MRTP Act required all agreements relating to restrictive trade practices to be registered with the Director-General of Investigation and Registration. Under the MRTP Act, most restrictive trade practices were treated as deemed violations, and the burden of proof lied on the party. But the MRTP Act was unable to deliver because of the inherent structural weakness and composition of the MRTP Commission. Economic Growth in 1980 The rate of growth improved in the 1980s. From FY 1980 to FY 1989, the economy grew at an annual rate of 5. percent. Industry grew at an annual rate of 6. 6 percent and agriculture at a rate of 3. 6 percent. Since private savings financed most of India’s investment but by the mid-1980s further growth in private savings was difficult because they were already at quite a high level. As a result, during the late 1980s India relied increasingly on borrowing from foreign sources. This trend led to a balance of payments crisis in 1990; in order to receive new loans, the government had no choice but to agree to further measures of economic liberalization.
This commitment to economic reform was reaffirmed by the government that came to power in June 1991. Indian economy since 1990 India embraced economic reform and started introducing liberalization policies from 1991. Since the open market plan in the 1990s, India has experienced favourable economic growth. Today it has become one of the fastest growing economies in the world with a GDP growth rate of around 6-7 %. Government regulation via manufacturing and marketing licenses only served to monitor the quality and safety of the final products arriving in the market.
Price control was eased in many cases, including drugs. Procedures to obtain foreign technology agreement (FTA), imports and exports were greatly streamlined and 100 per cent foreign ownership was permitted in most sectors. Excise duty was slashed on imports, while a value added tax was added on domestic product. In order to maximize the gains from globalization and promote its exports, India signed the Uruguay round of GATT, which concluded in 1994, to become a member of the World Trade Organization (WTO).
India was thereby obliged to meet all provisions of the Trade Related Aspects of Intellectual Property Rights (TRIPs) by 2005 including a return to a uniform product patent regime in all manufacturing sectors. Production, exports and imports increased greatly in many sectors. Between 1991 and 1999, the proportion of the population under the poverty line decreased from 37. 5 per cent to 26. 1 per cent when the population itself was growing at 1. 5 per cent. Thus India started seeing more and more Foreign players in its domestic market and Indian companies became highly competitive.
Amendments in MRTP act in 1991 With the growing complexity of industrial structure and the need for achieving economies of scale for ensuring higher productivity and competitive advantage in the international market, the thrust of the industrial policy shifted to controlling and regulating the monopolistic, restrictive and unfair trade practices rather than making it necessary for certain undertakings to obtain prior approval of the Central Government for expansion, establishment of new undertakings, merger, amalgamation, take over and appointment of Directors.
It has been the experience of the Government that pre-entry restriction under the MRTP Act on the investment decision of the corporate sector has outlived its utility and has become a hindrance to the speedy implementation of industrial projects. By eliminating the requirement of time-consuming procedures and prior approval of the Government, it was possible for all productive sections of the society to participate in efforts for maximization of production. Thus in 1991 the Chapter dealing with Mergers & Acquisitions was deleted.
As discussed earlier, Competition is a process of economic rivalry between market players to attract customers. These market players can be multinational or domestic companies, wholesalers, and retailers. Competition to capture the market drives firms to be more efficient, innovative, and responsive to consumer needs. Consumers in return enjoy more choices, lower prices, and better products and services. The economy as a whole benefits from greater productivity gains and more efficient resource allocation. When there is liberalization, it creates a need to keep a strong check on the market players.
The purpose is served by Competition law. The success of liberalization depends on presence of strong and effective competition policy to drive the economy and regulate the conduct of operators in the relevant markets. The need for a new law had its origin in Finance Minister’s, Mr. Yashwant Sinha budget speech in February, 1999: “The MRTP Act has become obsolete in certain areas in the light of international economic developments relating to competition laws. We need to shift our focus from curbing monopolies to promoting competition.
The Government has decided to appoint a committee to examine this range of issues and propose a modern competition law suitable for our conditions. ” Thus In October, 1999, the Government of India appointed a High Level Committee on Competition Policy and Competition Law to advise a modern competition law for the country in line with international developments and to suggest a legislative framework which may entail a new law or appropriate amendments to the MRTP Act. The Committee presented its Competition Policy report to the Government in May 2000.
The draft competition law was drafted and presented to the Government in November 2000. After some refinements, following extensive consultations and discussions with all interested parties, the Parliament passed in December 2002 the new law, namely, the Competition Act, 2002. The Competition Act, 2002 As against the aforesaid backdrop, the Competition Act, 2002 differs in many respects from the MRTP Act, 1969. The Act was enacted by Parliament in 53rd year of Republic of India & was passed in December, 2002. It extends to the whole of India expect the State of Jammu and Kashmir.
Preamble of the Competition Act, 2002:
- Eliminate anti-competitive practices.
- Promote and sustain competition.
- Protect interest of the consumers.
- Ensure freedom of trade.
Establishment of Competition Commission of India. Special Features of Competition Act, 2002:
- No discrimination between private and public enterprises.
- No discrimination between domestic and foreign enterprises.
- The scope of the act only excludes activities that are related to sovereign function of the government, eg. Atomic energy, defense, and space.
- An exemption is possible in case of treaty or agreement with any other country.
Constitution of the Competition Commission of India, which is a statutory body with functional autonomy and powers to regulate its own procedures. The Competition Act also empowers the Central Government to set up a Commission to be called the Competition Commission of India (CCI). The Commission shall be a body corporate and may sue or be sued in that name. It shall be a multidisciplinary body consisting of one Chairperson and ten other Members.
The rubric of the new law, Competition Act, 2002 has essentially four compartments:
- Anti – Competition Agreements (Sec 3)
- Abuse of Dominance (Sec 4)
- Combinations Regulation (Sec 5 & 6)
- Competition Advocacy (Sec 49)
- These four compartments are described in detail: Anti – Competition Agreements (Sec 3)
Firms enter into agreements, which may have the potential of restricting competition. There exists 2 types of Anti- competition agreements, namely – (1) Horizontal & (2) Vertical agreements between firms. “Horizontal agreements” – are those among competitors.
The most common agreements under Horizontal are as follows;
- Agreements regarding prices. These include all agreements that directly or indirectly fix the purchase or sale price.
- Agreements regarding quantities. These include agreements aimed at limiting or controlling production, supply, markets, technical development, investment or provision of services.
- Agreements regarding bids (collusive bidding or bid rigging). These include tenders submitted as a result of any joint activity or agreement.
- Agreements regarding market sharing.
It can impose a penalty of not more than 10% of the turnover of the enterprise. It can pass a “cease and desist” order, and pass such other orders as may be considered appropriate. It can also recommend to the Central Government for “division of dominant enterprise”. Thus, the Competition Commission of India would have the power to inter alia direct the enterprise to disclose information to its competitors or it can recommend division of an enterprise if these are considered appropriate. Regulations of Combinations (Section 6) Combinations Section 6 (1):
The basic governing principle: “Any combination which causes or is likely to cause appreciable adverse effect on competition is null and void. ” The Competition Act is designed to regulate the operation and activities of combinations, a term, which contemplates acquisitions, mergers or amalgamations. Thus, the operation of the Competition Act is not confined to transactions strictly within the boundaries of India but also such transactions involving entities existing and/or established overseas. Section 6 (2) – 2007 Amendment:
Mandatory pre-merger notification within 30 days of either approval of the proposal for a combination or execution of the agreement for an acquisition. Mergers and acquisitions are strategic decisions taken for maximisation of a company’s growth by enhancing its production and marketing operations. They are being used in a wide array of fields such as information technology, telecommunications, and business process outsourcing as well as in traditional businesses in order to gain strength, expand the customer base, cut competition or enter into a new market or product segment.
A merger is a combination of two or more businesses into one business. Laws in India use the term ‘amalgamation’ for merger.
ACQUISITION – Sec 2 (a) Directly or Indirectly acquiring or agreeing to acquire – shares, voting rights or control over assets of any enterprise. Three major types of Combinations:- Horizontal Combination:- is a combination of two or more firms in the same area of business. For example, combining of two book publishers or two luggage manufacturing companies to gain dominant market share.
Horizontal combinations are those that are between rivals and are most likely to cause appreciable adverse effect on competition. Vertical Combination:- is a combination of two or more firms involved in different stages of production or distribution of the same product. For example, joining of a TV manufacturing(assembling) company and a TV marketing company or joining of a spinning company and a weaving company. Vertical merger may take the form of forward or backward merger. When a company combines with the supplier of material, it is called backward merger and when it combines with the customer, it is known as forward merger.
Conglomerate Combinations:- is a combination of firms engaged in unrelated lines of business activity. For example, merging of different businesses like manufacturing of cement products, fertilizer products, electronic products, insurance investment and advertising agencies. L&T and Voltas Ltd are examples of such mergers. Conglomerate combinations are those that are between enterprises not in the same line of business or in the same relevant market and are least likely to cause appreciable adverse effect on competition. In case of Combinations, the threshold limits are- For acquisition –
- Combined assets of the firms more than Rs 1000 cr or turnover more than Rs 3000 cr (these limits are US$ 500 millions and 1500 millions in case one of the firms is situated outside India).
- The limits are more than Rs 4000 cr or Rs 12000 cr and US$ 2 billion and 6 billions in case acquirer is a group in India or outside India respectively. For merger/amalgamation –
- Assets of the merged/amalgamated entity more than Rs 1000 cr or turnover more than Rs 3000 cr (these limits are US$ 500 millions and 1500 millions in case one of the firms is situated outside India).
The limits are more than Rs 4000 cr or Rs 12000 cr and US$ 2 billion and 6 billions in case merged/amalgamated entity belongs to a group in India or outside India respectively. The Act regulates the various forms of business combinations through Competition Commission of India. Under the Act, no person or enterprise shall enter into a combination, in the form of an acquisition, merger or amalgamation, which causes or is likely to cause an appreciable adverse effect on competition in the relevant market and such a combination shall be void.
Enterprises intending to enter into a combination may give notice to the Commission, but this notification is voluntary. But, all combinations do not call for scrutiny unless the resulting combination exceeds the threshold limits in terms of assets or turnover as specified by the Competition Commission of India. The Commission while regulating a ‘combination’ shall consider the following factors :-
- Actual and potential competition through imports;
- Extent of entry barriers into the market;
- Level of combination in the market; Degree of countervailing power in the market;
- Possibility of the combination to significantly and substantially increase prices or profits;
- Extent of effective competition likely to sustain in a market;
- Availability of substitutes before and after the combination;
- Market share of the parties to the combination individually and as a combination;
- Possibility of the combination to remove the vigorous and effective competitor or competition in the market;
- Nature and extent of vertical integration in the market;
Nature and extent of innovation; Whether the benefits of the combinations outweigh the adverse impact of the combination. Thus, the Competition Act does not seek to eliminate combinations and only aims to eliminate their harmful effects. Procedure for investigation of combinations If the Commission is of the opinion that a combination is likely to cause or has caused adverse effect on competition, it shall issue a notice to show cause the parties as to why investigation in respect of such combination should not be conducted.
On receipt of the response, if Commission is of the prima facie opinion that the combination has or is likely to have appreciable adverse effect on competition, it may direct publication of details inviting objections of public and hear them, if considered appropriate. It may invite any person, likely to be affected by the combination, to file his objections. The Commission may also enquire whether the disclosure made in the notice is correct and combination is likely to have an adverse effect on competition.
Investigation Rules into Combinations:
- Mandatory Notification Regime – within 30 days.
- CCI can inquire into a combination on its own – within a year.
- Penalty for not notifying the CCI.
- Both parties should notify jointly except in the case of acquisition where the acquirer should notify.
- File information regarding Target Company. 6Notify when 15% or more equity or voting right are acquired. Notify when acquisition leads to control.
- Certain transactions are considered harmful under the Act. These include acquisition of current assets, bonus or rights issue, intra-group transfer of shares, acquisition by promoters, acquisition by underwriters, amended or renewed tender offer.
- The scope extends to all economic agents – producers, service providers, traders, sellers, and buyers. All enterprises, whether public or private, and government departments comes under the purview of combinations and mergers.
Competition Advocacy (Sec 49) Section 49 of the Competition Act, 2002 mandates advocacy by the Commission for promoting competition. Under this mandate the Commission organizes various interactions through interactive meetings, seminars, press etc with different trade organizations, consumer associations, stakeholders and the public at large to infuse trust for the Competition Law and the Commission, and to instill a culture of competition in the Indian market.
The Act extends the mandate of the CCI beyond merely enforcing the law. The Competition Commission of India (CCI), in terms of the advocacy provisions in the Act, is enabled to participate in the formulation of the country’s economic policies and to participate in the reviewing of laws related to competition at the instance of the Central Government. The Central Government can make a reference to the CCI for its opinion on the possible effect of a policy under formulation or of an existing law related to competition.
Establishing good media relations. Competition Commission Of India The competition Act, 2002 is “An Act to provide, keeping in view of the economic development of the country, for the establishment of a Commission to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets, in India, and for matters connected therewith or incidental thereto. ” Establishment of the Commission:
The Commission shall be a body corporate by the name aforesaid having perpetual succession and a common seal with power, subject to the provisions of this Act, to acquire, hold and dispose of property, both movable and immovable, and to contract and shall, by the said name, sue or be sued. Head Office: The head office of the Commission shall be at such place as the Central Government may decide from time to time. The Commission may establish offices at other places in India. Currently where is i Composition of Commission:
The Commission shall consist of a Chairperson and not less than two and not more than six other members to be appointed by the Central Government. The Chairperson and every other Member shall be a person of ability, integrity and standing and who has special knowledge and professional experience of not less than fifteen years in international trade, economics, business, commerce, law, finance, accountancy, management, industry, public affairs or competition matters, including competition law and policy, which in the opinion of the Central Government, may be useful to the Commission.
The Chairperson and other Members shall be whole-time Members. Selection of the Chairperson and Members: The Chairperson and other Members of the Commission shall be appointed by the Central Government from a panel of names recommended by a Selection Committee consisting of: The Chief Justice of India or his nominee – Chairperson; )The Secretary in the Ministry of Corporate Affairs – Member; The Secretary in the Ministry of Law and Justice – Member; Two experts of repute who have special knowledge of, and professional experience in international trade, economics, business, commerce, law, finance, accountancy, management, industry, public affairs or competition matters including competition law and policy – Member Terms of the Chairperson and other Members:
The Chairperson and every other Member shall hold office as such for a term of 5 years from the date on which he enters upon his office and shall be eligible for re-appointment: Provided that no Chairperson or other Member shall hold office as such after he has attained,— (a) in the case of the Chairperson, the age of sixty-seven years; (b) in the case of any other Member, the age of sixty-five years. The Chairperson and every other Member shall, before entering upon his office, make and subscribe to an oath of office and of secrecy in such form, manner and before such authority, as may be prescribed.
A vacancy caused by the resignation or removal of the Chairperson or any other Member under section 11 or by death or otherwise shall be filled by fresh appointment in accordance with the provisions of sections 8 and 9. When the Chairperson is unable to discharge his functions owing to absence, illness or any other cause, the senior-most Member shall discharge the functions of the Chairperson until the date on which the Chairperson resumes the charge of his functions. Resignation, Removal And Suspension Of Chairperson And Other Members: Section 11 makes provision for resignation, removal, suspension, of Chairman and other members of CCI.
In event of resignation, the resignation should be served to the Central Government in writing. A member or chairperson may be removed in event of: a)Adjudged as an insolvent. b)Engaged at any time, during his term of office, in any paid employment. c)Has been convicted of an offense, which in the opinion of the Central Government involves moral turpitude. d)Has acquired such financial or other interest as is likely to affect prejudicially his functions as a Member. e)Has so abused his position as to render his continuance in office prejudicial to the public interest. )Has become physically or mentally incapable of acting as a Member. A member or chairperson can also be removed on recommendation by the Central Government to the Supreme Court stating the grounds for removal. Administrative powers of Chairperson The Chairperson shall have the powers of general superintendence, direction and control in respect of all administrative matters of the Commission: Provided that the Chairperson may delegate such of his powers relating to administrative matters of the Commission, as he may think fit, to any other Member or officer of the Commission.
Salary and allowances and other terms and conditions of service of Chairperson and other Members The salary, and the other terms and conditions of service, of the Chairperson and other Members, including travelling expenses, house rent allowance and conveyance facilities, sumptuary allowance and medical facilities shall be such as may be prescribed. The salary, allowances and other terms and conditions of service of the Chairperson or a Member shall not be varied to his disadvantage after appointment.
Meetings of the Commission: The Commission shall meet at such times and places and shall observe such rules and procedure in regard to the transaction of business at its meetings as may be provided by regulations. If the chairperson, if for any reason, is unable to attend a meeting of the Commission, the senior-most Member present at the meeting, shall preside at the meeting.
All questions which come up before any meeting of the Commission shall be decided by a majority of the Members present and voting, and in the event of an equality of votes, the Chairperson or in his absence, the Member presiding, shall have a second or/casting vote. Duties and Powers of the Commission: Duty of the commission is to eliminate practices having adverse effect on competition, promote and sustain competition, protect the interests of consumers, and ensure freedom of trade carried on by other participants in arkets in India. Provided that the Commission may, for the purpose of discharging its duties or performing its functions under this Act, enter into any memorandum or arrangement with the prior approval of the Central Government, with any agency of any foreign country. Inquiry into certain agreements and dominant position of enterprise The Commission may inquire into any alleged contravention of the provisions contained in subsection (1) of section 3 or sub-section (1) of section 4 either on its own motion or on— [receipt of any information, in such manner and] accompanied by such fee as may be determined by regulations, from any person, consumer or their association or trade association; or (b) a reference made to it by the Central Government or a State Government or a statutory authority. Without prejudice to the provisions contained in sub-section (1), the powers and functions of the Commission shall include the powers and functions specified in sub-sections (3) to (7).
The Commission shall, while determining whether an agreement has an appreciable adverse effect on competition under section 3, have due regard to all or any of the following factors, namely:—
- creation of barriers to new entrants in the market;
- driving existing competitors out of the market;
- foreclosure of competition by hindering entry into the market;
- accrual of benefits to consumers;
- improvements in production or distribution of goods or provision of services;
- promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.
The Commission shall, while inquiring whether an enterprise enjoys a dominant position or not under section 4, have due regard to all or any of the following factors, namely:—
- market share of the enterprise;
- size and resources of the enterprise;
- size and importance of the competitors;
- economic power of the enterprise including commercial advantages over competitors;
- vertical integration of the enterprises or sale or service network of such enterprises;
- dependence of consumers on the enterprise;
- monopoly or dominant position whether acquired as a result of any statute or by virtue of being a Government company or a public sector undertaking or otherwise;
entry barriers including barriers such as regulatory barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or service for consumers;
- countervailing buying power;
- market structure and size of market;
- social obligations and social costs;
relative advantage, by way of the contribution to the economic development, by the enterprise enjoying a dominant position having or likely to have an appreciable adverse effect on competition;
any other factor which the Commission may consider relevant for the inquiry. The Commission shall, while determining the “relevant geographic market”, have due regard to all or any of the following factors, namely:—
- regulatory trade barriers;
- local specification requirements;
- national procurement policies;
- adequate distribution facilities;
- transport costs;
- consumer preferences;
need for secure or regular supplies or rapid after-sales services. The Commission shall, while determining the “relevant product market”, have due regard to all or any of the following factors, namely:—
- physical characteristics or end-use of goods;
- price of goods or service;
- consumer preferences;
- exclusion of in-house production;
- existence of specialised producers;
- classification of industrial products.
How the Competition act is better than the MRTP Act? Competition is the process of rivalry among businesses to win customers.
It is expected that the process of competition should bring in the best — what is best in terms of prices and quality — where the consumer should have either choice. Competition Act does not define competition in terms of market share. Nor is there a threshold except in the case of mergers and acquisitions. For instance, in section 5 of the Competition Act which deals with M&As, we have defined thresholds of Rs. 1,000 crores of assets or Rs. 3,000 crores turnover. It is not the concern of the CCI to check monopolies – that was the concept under the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP).
The Competition Act is a promotional, not a restrictive act. It punishes abuse of dominant position not dominance per se. A firm is free to grow as large as it pleases, or achieve as big a market share as it can. Firms can achieve dominant position legitimately through innovation or greater entrepreneurial effort, and many practices that on the surface look anti competitive can actually also serve very legitimate pro competitive functions. The goal of the CCI is to prevent practices that have a reverse effect on competition and ensure freedom of trade.
The whole structure of the Commission and the Act is based on how to promote economic development of the country. We undertake regulation only when it has failed. If a group of enterprises or persons enter into an agreement meant to block the entry of others, to us, that’s the definition of a cartel abusing its power. Or if there is a situation of predatory pricing, if a dominant entity starts selling wares costing Rs. 10 but sells them at Rs. 2, then it drives everyone out and finally then sells those same products at Rs. 0 — that would be something we would look into very seriously. Other benchmarks like limiting production or provision of services of other entities, “bid rigging” which is the manipulation of the process of bidding — any of these practices by a dominant enterprise is looked upon as abuse. Can Competition Act Replace MRTP ACT? In view of the policy shift from curbing monopolies to promoting competition, there was a need to repeal the Monopolies and Restrictive Trade Practices Act. Hence, the Competition Law aims at doing away with the rigidly structured MRTP Act.
The Competition Law proposed is flexible and behaviour oriented. The proposed Law provides for a Competition fund, which shall be utilised for promotion of competition advocacy, creating awareness about competition issues and training in accordance with the rules that may be prescribed. The extent MRTP Act 1969 has aged for more than three decades and has given birth to the new law (the Act) in line with the changed and changing economic scenario in India and rest of the world and in line with the current economic thinking comprising liberalisation, privatisation and globalisation.
Reliance has been working hard break into new markets and broadend its various businesses including refining, oil and gas exploration and petrochemicals, as well as expand its presence outside India. Reliance Industries Limited (RIL) bought 95% stake in Infotel Broadband for Rs 4,800 crore. Infotel Broadband is now a subsidary of Reliance Industries. Infotel Broadband Services (P) Ltd, is the only firm to win broadband spectrum in all the 22 circles of the auction for Broadband Wireless Access (BWA) Spectrum conducted by the DoT. The firm is paying Rs 12,848 crore ($2. billion) for the spectrum. RIL will invest about Rs 4,800 crore by way of subscription to fresh equity capital at par to be issued by Infotel Broadband. In the BWA space, no other player could bag pan-India spectrum. As many as 11 companies, including Bharti Airtel, Reliance, Idea Cellular, Aircel, Vodafone and Tata Communications Internet Services, participated in the auction for Broadband Wireless Access spectrum. BWA spectrum enables high-speed Internet access as well as Internet telephony and TV services. It can also be used for voice and high-speed data
India has witnessed substantial growth in the mobile subscriber base over the last decade. This provides a ready platform for offering various data services which is currently at a very nascent stage. Data communication volume per user has been growing exponentially in the last few years, with the spread of advanced services, and a richer line-up of contents. RIL sees the broadband opportunity as a new frontier of knowledge economy in which it can take a leadership position and provide India with an opportunity to be in the forefront among the countries providing world-class 4G network and services.
A single 20 MHz TDD spectrum when used with LTE (Long Term Evolution) has the potential of providing greater capacity when compared to existing communication infrastructure in the country. RIL’s initiative will usher in a wireless broadband revolution in both, the urban and the rural areas all across the country by providing end-to-end data solutions for business enterprises, social organizations, educational and healthcare institutions and Indian consumers.
This will give a fillip to rural upliftment by seamlessly connecting information and markets to the rural population on a real-time basis and will help bridge the rural-urban divide in terms of access to knowledge and information. Example of Vertical Combination 1. Reliance Natural Resources Ltd and Reliance Power Limited- July 5, 2010 Reliance Power, on its own and through subsidiaries, has a portfolio of almost 35,000 MW of power generation capacity, both operational as well as under development, including three ultra-mega projects.
Reliance Natural Resources is engaged in the business of sourcing and transportation of gas, coal and liquid fuels. It is the second largest player in the coal bed methane business in India in terms of acreage and has significant oil and gas blocks in Mizoram. In a mega Rs 500 billion deal, Anil Ambani announced the merger of RNRL with Reliance Power, which would now become a direct beneficiary of the gas deal signed with Mukesh Ambani-led Reliance Industries. RPL and RNRL merged with a share swap ratio of 1:4 (1 equity share of RPL for every 4 shares of RNRL).
RNRL shareholders will get one Reliance Power share for every four held. RNRL, which is as an intermediary to source gas from Reliance Industries (RIL) at a cheaper rate and supply to RPL, had been left with no business model after the revised gas supply master agreement (GSMA) with RIL provides for gas supply at higher rate of $4. 2/ mmBtu. Also, the government has indicated that gas supply will be made to end users first rather than to traders. The RPL management believes the deal will facilitate faster implementation of its 8000mw gas-based power projects as RNRL had recently signed the revised GSMA with RIL.
Also, RPL will get access to RNRL’s four coal bed methane (CBM) blocks that can support 2000 mw of distributed power generation capacity, and its logistics business for captive transportation purposes. RNRL brings RPL shareholders is the undeveloped gas assets. RPL, which is implementing several power projects with a combined capacity of over 35000 mw has very little operational capacity at the moment. Its operational projects include Rosa I (600 mw) apart from three other gas-based projects – Kochi (165 mw), Goa(48 mw) and Samalkot (220 mw). This is a move to restructure and review the business empire by Anil Ambani.
This will consolidate his group’s position and will help him take advantage of the synergies and become stronger. Through this, Reliance Power’s plans for setting up upto 10,000 MW gas-based power plants would be accelerated” and Reliance Power would derive substantial benefit from RNRL’s gas supply master agreement with RIL. R-Power expects to derive advantage from RNRL’s four blocks in Cambay basins off Gujarat. Example of Horizontal Combination 1. ICICI Bank and Bank of Rajasthan- May 24, 2010 Private sector lender Bank of Rajasthan merges with ICICI Bank, India’s second largest private sector lender.
BoR has a market value of $296 million. It was promoted by Tayals who acquired it almost ten years back. As of March’09, BoR has a network of 463 branches and 111 ATMs and a loan book of 77. 81 billion rupees ($1. 7 billion). About 60% of its branches are in Rajasthan. However, the bank has been in trouble with both the central bank and the securities market regulator. According to the Securities and Exchange Board of India, the Tayal family owned 55. 01% of the bank in December 2009, even though Tayal claimed his group stake was 28. 06%.
BoR has also been under the scanner of the Reserve Bank of India (RBI) for alleged violation of banking regulations, including those on corporate governance. India’s capital markets regulator in March banned BoR promoter Tayal and about 100 companies and people associated with his family from trading in securities for improper disclosure about their holdings in the bank. The move to merge BoR with ICICI Bank comes in the wake of regulatory pressure mounted on the Tayals, the main promoters of BoR. The acquisition of Bank of Rajasthan by ICICI bank is the first consolidation of country’s crowded banking sector since 2008.
This will be ICICI Bank’s third acquisition after Bank of Madura in 2000-01 and Sangli Bank in 2006-07. The first acquisition helped ICICI Bank step up its presence in the south and the second in the west. The BoR acquisition will strengthen its network in northern as well as western India. ICICI Bank, India’s largest private sector lender, has a network of 2,009 branches and 5,219 ATMs. Shareholders of the troubled Bank of Rajasthan Ltd (BoR) are set to get 25 shares of ICICI Bank Ltd for 118 shares of BoR in the ratio of 4. 72:1, after the boards of the two banks decided to go ahead with a merger.
The deal, which will give ICICI a sizeable presence in the northwestern desert state of Rajasthan, values the small bank at about 2. 9 times its book value, compared with an Indian banking sector average of 1. 84. It would combine Bank of Rajasthan’s branch franchise with ICICI Bank’s strong capital base. ICICI Bank will gain marginally from the merger as Bank of Rajasthan has a reasonable penetration in its home state. The deal will also help ICICI tackle increasing competition by HDFC Bank. It offers a strategic fit, as it adds to the ICICI network in north and western India.
It saves us about three years time to market. In the normal course, it takes about a year to set up 500 branches and then three years for the branches to come up to the kind of deposit levels. It gives synergies in the form of a larger customer base and the ability to offer other products to this customer base such as different loan products from ICICI Bank and other products. Jet Airways and Air Sahara Facts of the Case: In January 2006, Jet Airways announced its acquisition of Air Sahara for an estimated US$ 500 million in what was the biggest acquisition in Indian Aviation Industry.
The acquisition would create a monopoly for Jet Airways and it already enjoyed a dominant position in the Indian aviation sector and this would gain further market share post-merger. The deal made Jet Airways the largest airline with a 90 aircraft fleet. The buyout resulted in Jet’s market share rising from 40% to 53%. The deal puts it in an advantageous position in terms of the infrastructure that it has complete control over. The Sahara takeover allows Jet to control almost two-thirds of the parking bays available in the airports of Mumbai and Delhi.
The two airlines, put together would account for about 60% of the peak-hour air-traffic between the two cities, which is the most important and profitable sector. Why the Deal went through: The reasoning given by the DGIR and other government bodies to justify the merger was that there had been tremendous growth in the civil aviation sector in the past few years and the sector was subject to healthy competition. Moreover, new carriers like SpiceJet, Kingfisher and Air Deccan created a wider playing field for consumers, and, therefore, the Jet-Sahara merger would not affect public interest.
Clearly, the government authorities, including the MRTPC took a soft approach towards this merger between Jet and Sahara. When two companies garner almost 50% market share in an industry, this could have merited stricter scrutiny. Air Sahara’s assets are estimated at Rs. 50,000 crores and turnover of Jet Airways last year was estimated at Rs 14. 99 billion. The Jet-Sahara deal would have certainly triggered the relevant sections of the Competition Act, 2002 requiring the acquirer to get a clearance from CCI.
Under section 6(2) of the Act, details of the proposed combination (of Jet and Sahara) would have had to be filed with the commission. The commission (if functioning) would have had the power to approve of the proposal for the M&A or even to prevent it or give appropriate directions in case it did not approve of the deal. Thus the Jet-Sahara deal may have been delayed, prevented or even otherwise regulated if the Act was in force. As far as Indian enforcement for regulations of Competition Act goes, it still needs to go a long way and learn from other Competition Commission like European Union Competition Commission
European Union Competition Commission European Union competition law is one of the areas of authority of the European Union, regulates the exercise of market power by large companies, governments or other economic entities. In the EU, it is an important part of ensuring the completion of the internal market, meaning the free flow of working people, goods, services and capital in a borderless Europe. Four main policy areas include:
Cartels, or control of collusion and other anti-competitive practices which has an effect on the EU.
Monopolies, or preventing the abuse of firms’ dominant market positions.
Mergers, control of proposed mergers, acquisitions and joint ventures involving companies which have a certain, defined amount of turnover in the EU/EEA.
State aid, control of direct and indirect aid given by Member States of the European Union to companies. The EU is made up of independent member states, both competition policy and the creation of the European single market could be rendered ineffective were member states free to support national companies as they saw fit.
Primary competence for applying EU competition law rests with European Commission and its Directorate General for Competition, although state aids in some sectors, such as transport, are handled by other Directorates General. On 1 May 2004 a decentralised regime for antitrust came into force which is intended to increase the application of EU competition law by national competition authorities and national courts. Background One of the paramount aims of the founding fathers of the European Community- was the establishment of a Single Market.
To achieve this, a compatible, transparent and fairly standardized regulatory framework for Competition Law had to be created. . In order to avoid different interpretations of EC Competition Law, which could vary from one national court to the next, the Commission was made to assume the role of central enforcement authority. The first major decision under Art 101 (then Art 85) was taken by the Commission in 1964. They found that Grundig, a German manufacturer of household appliances, acted illegally in granting exclusive dealership rights to its French subsidiary.
The European economy steadily grew in size and anti-competitive activities and market practices became more complex in nature The central dominance of the Directorate-General for Competition has been challenged by the rapid growth and sophistication of the National Competition Authorities (NCAs) and by increased criticism from the European courts with respect to procedure, interpretation and economic analysis These problems have been magnified by the increasingly unmanageable workload of the centralised corporate notification system.
To all these challenges, the Commission has responded with a strategy to decentralise the implementation of the Competition rules through the so-called Modernisation Regulation. The Commission still retained an important role in the enforcement mechanism, as the co-ordinating force in the newly created European Competition Network (ECN). This Network, made up of the national bodies plus the Commission, manages the flow of information between NCAs and maintains the coherence and integrity of the system.
Cartels A cartel is a group of similar, independent companies which join together to fix prices, to limit production or to share markets or customers between them. Instead of competing with each other, cartel members rely on each others’ agreed course of action, which reduces their incentives to provide new or better products and services at competitive prices. As a consequence, their clients (consumers or other businesses) end up paying more for less quality. all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between member states and which have as their object or effect the prevention, restriction or distortion of competition within the common market. ” This is why cartels are illegal under EU competition law and why the European Commission imposes heavy fines on companies involved in a cartel. Since cartels are illegal, they are generally highly secretive and evidence of their existence is not easy to find. The ‘leniency policy’ encourages companies to hand over inside evidence of cartels to the European Commission.
The first company in any cartel to do so will not have to pay a fine. This results in the cartel being destabilized. In recent years, most cartels have been detected by the European Commission after one cartel member confessed and asked for leniency, though the European Commission also successfully continues to carry out its own investigations to detect cartels. Dominance & Monopoly “Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States.
- directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
- limiting production, markets or technical development to the prejudice of consumers;
- applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. First it is necessary to determine whether a firm is dominant, or whether it behaves “to an appreciable extent independently of its competitors, customers and ultimately of its consumer. ” Under EU law, very large market shares raise a presumption that a firm is dominant, which may be rebuttable. If a firm has a dominant position, because it has beyond a 39. 7% market share then there is “a special responsibility not to allow its conduct to impair competition on the common market. Mergers While companies combining forces (referred to below as mergers) can expand markets and bring benefits to the economy, some combinations may reduce ompetition. However, some mergers may reduce competition in a market, usually by creating or strengthening a dominant player. This is likely to harm consumers through higher prices, reduced choice or less innovation. Increased competition within the European single market and globalisation are among the factors which make it attractive for companies to join forces. The objective of examining proposed mergers is to prevent harmful effects on competition. Mergers going beyond the national borders of any one Member State are examined at European level.
This allows companies trading in different EU Member States to obtain clearance for their mergers in one go. If the annual turnover of the combined businesses exceeds specified thresholds in terms of global and European sales, the proposed merger must be notified to the European Commission, which must examine it. These rules apply to all mergers no matter where in the world the merging companies have their registered office, headquarters, activities or production facilities. This is so because even mergers between companies based outside the European Union may affect markets in the EU if the companies do business in the EU.
However, not all mergers which significantly impede competition are prohibited. Even if the European Commission finds that a proposed merger could distort competition, the parties may commit to taking action to try to correct this likely effect. They may commit, for example, to sell part of the combined business or to license technology to another market player. If the European Commission is satisfied that the commitments would maintain or restore competition in the market, thereby protecting consumer interests, it gives conditional clearance for the merger to go ahead.
It then monitors whether the merging companies fulfill their commitments and may intervene if they do not do so. State Aid The objective of State aid control is, as laid down in the founding Treaties of the European Communities, to ensure that government interventions do not distort competition and trade inside the EU. It is only after the approval by the Commission that an aid measure can be implemented. Moreover, the Commission has the power to recover incompatible State aid.
Four Directorate-Generals are carrying out effective State aid control: while sector-specific services safeguard fair competition in Transport (aid to companies in the road, rail, inland waterway, sea and air transport sectors), Coal, Fisheries (the production, processing and marketing of fisheries and aquaculture products), and Agriculture (the production, processing and marketing of agricultural products). DG Competition deals with all other sectors. The Commission aims at ensuring that all European companies operate on a level-playing field, where competitive companies succeed.
It ascertains that government interventions do not interfere with the smooth functioning of the internal market or harm the competitiveness of EU companies. Companies and consumers in the European Union are also important players who may trigger investigations by lodging complaints with the Commission. Furthermore, the Commission invites interested parties to submit comments through the Official Journal of the European Union when it has doubts about the compatibility of a proposed aid measure and opens a formal investigation procedure. Anti Trust
Competition is a basic mechanism of the market economy and encourages companies to provide consumers