By Sundar Ramanathan
In a short span of time, the Competition Commission of India (CCI) has been credited with being a key player in ensuring free play of market forces in our economy (see end note 1). The orders passed by the CCI have made the industry sit up and take notice (e.g. cement cartel case, DLF case). It appears that the CCI will play a decisive role in promoting competition and fair market practices. The recent ruling of CCI discussed below may have seminal implications on the jurisprudence of competition law in India as well as impact government intervention on commercial decisions of government companies.
The CCI in Royal Energy Ltd. v. IOCL and others, [MRTP Case No. 1/28], held that the decision by the Oil Marketing Companies (OMC) viz. Indian Oil Corporation Ltd, Bharat Petroleum Limited and Hindustan Petroleum Limited, to purchase bio-diesel at prices determined by themselves at prices less than the manufacturing cost was not in contravention of Section 3 (anti-competitive agreements) or Section 4 (abuse of dominant position) of the Competition Act, 2002 (‘the Act’).
The Ministry of Petroleum and Natural Gas issued the Bio-Diesel Purchase Policy to encourage use of alternate sources of energy, which envisaged supply of bio-diesel to the OMCs, for blending with the high speed diesel for use as vehicle fuel. Under this policy, the OMCs were to purchase the bio-diesel that met the BIS specifications at a uniform price determined by the OMCs. As the price of high speed diesel was fixed and regulated, the OMCs determined the purchase price of bio-diesel by backward integration. This price was considered less than adequate and below the manufacturing cost by the suppliers of bio-diesel. This was alleged to be an anti-competitive agreement by the OMCs. The CCI held that the OMCs could not be mandated to purchase the bio-diesel at a price higher than the price of the end product and make it commercially unviable for the OMCs to operate.
This raises an issue of the introduction of the commercial viability test as a defence in an investigation relating to breach of Section 3 of the Act. For example, if three non-dominant enterprises mutually agree to act in one of the ways determined under Section 3(3)(a) (by indirectly facilitating collusive bidding to get the contract to the disadvantage of the dominant enterprise) resulting in better competition and commercial viability of the colluding companies, whether such conduct will be regarded as having an appreciable adverse effect on competition for the purposes of Section 3(1). Such an action need not necessarily result in any of the benefits identified under Section 19(3) or may not have the effect of driving the dominant enterprise, and may be merely directed at meeting the competition posed by the dominant enterprise. Unlike the proviso to Section4(2)(a), Section 3 does not statutorily have the explicit 'meeting competition defence'. The action may merely result in promoting competition in the market in which the enterprises are operating - an action promoting the object of the Competition Act, 2002 and one of the duties of the CCI under Section 18. At least as held in the Royal Energy case, there seems to be a possibility for using the commercial viability test because the subject investigation pertained to fixation of prices by direct competitors under Section 3(3)(a).
Another question that arises is whether commercial viability / protection of commercial interests are adequate defences in a Section 4 contravention (apart from Section 4(2)(a) cases). In the past in Europe it has been held that even dominant undertakings can take counter action to protect their commercial interests, however, such counter action should be proportionate to the threat taking into account the economic strength of the parties. [Case 27/76, United Brands v. Commission, judgment delivered by European Court of Justice Para 189-190].
An important observation of the CCI is that “even if an anti-competitive conduct flows from any policy of the Government, the Commission will still have jurisdiction to examine the conduct and in case of any violation suitable orders can be passed”. The activity of policy determination by the government may be viewed as sovereign in nature (being an inalienable function of the government) and therefore, in light of Section 2(h) of the Competition Act, 2002 may be viewed as outside the purview of the CCI. Even if such government actions are not sovereign in nature, it needs to be seen whether the CCI would consider intervention or maintain a policy of deference on such matters to Parliament and therefore outside CCI’s purview. This case gives some indication that the CCI may be more inclined to opine on such mandated policy decisions of the government if it has an impact on competition.
This may lead to the CCI scrutinizing the actions of several PSUs that function under the operative directions of a particular Ministry, pursuant to policy decisions. In addition, actions taken pursuant to policy decisions of other sectoral regulators may also fall within the purview of the CCI. This only heightens the current debate on the overlap between the CCI and sector regulator, one relating to a pending proposal to oust the jurisdiction of CCI in matters pertaining to acquisition and mergers of banks (see end note 2), other sectors are also not too far behind in seeking for an exemption from the rigours of competition law (see end note 3). However, the power to exempt any enterprise from the purview of the Act is available with the Central Government (Section 52) only if it is necessary in public interest or in the security of the state or to comply with any of India’s obligations under an international treaty or for enterprises performing activities that are relatable to the sovereign functions of the state.
Furthermore, at a jurisprudential level, the CCI has also held in the case under discussion that the concept of collective dominance is not envisaged under Section 4 of the Competition Act. Collective dominance as accepted in Europe occurs where a group of unrelated entities that are united by economic links collectively hold a dominant position in a market (see end note 4). No reasons are set out for the same, but one reason may be that Section 4 provides that no ‘enterprise or group’ should abuse its dominant position, the word ‘group” was specifically added in 2007 but the definition of group is restricted to entities under the same management or control. Therefore, the legislature may not have intended unrelated groups to be considered as one for the purpose of the Act. Further, should a concept that has its genesis in Europe be accepted in India? On the other hand ordinarily it is a statutory rule that a singular word would also include a plural (see end note 5). Therefore, by that logic enterprise would also include enterprises and a group of enterprises can abuse their dominant position. However, these issues have not been effectively raised or decided by the CCI in the said case and therefore it will still remain to be seen whether the collective dominance concept is envisaged under Section 4.
Furthermore, this decision (and the principles enshrined therein) is still to be tested by the higher judicial echelons. It will be interesting to see, if and when, this decision (or the issues) reaches the Competition Appellate Tribunal or the Supreme Court, which way would the tide of competition sway.
End notes:
1. Views of Mr. Veerappa Moily, Minister of Corporate Affairs
2. Please see in this regard a news report in The Economic Times issue dated June 11, 2012 However, it will pertinent to note that recently in a policy u-turn, it appears that the Finance Ministry has decided to bring bank mergers within the purview of CCI. Please see in this regard a news report in The Hindu Business Line dated August 22, 2012.
3. Please see in this regard a news report in The Hindu Business Line issue dated May 29, 2012.
4. Case T-68, 77 and 78/89, Societa Italiana Vetra SpA v. Commission [1992] 5 CMLR 302, Para 358.
5. Section 13 of the General Clauses Act, 1897.
[The author is a Principal Associate, Corporate Practice, Lakshmikumaran & Sridharan, New Delhi]
In a short span of time, the Competition Commission of India (CCI) has been credited with being a key player in ensuring free play of market forces in our economy (see end note 1). The orders passed by the CCI have made the industry sit up and take notice (e.g. cement cartel case, DLF case). It appears that the CCI will play a decisive role in promoting competition and fair market practices. The recent ruling of CCI discussed below may have seminal implications on the jurisprudence of competition law in India as well as impact government intervention on commercial decisions of government companies.
The CCI in Royal Energy Ltd. v. IOCL and others, [MRTP Case No. 1/28], held that the decision by the Oil Marketing Companies (OMC) viz. Indian Oil Corporation Ltd, Bharat Petroleum Limited and Hindustan Petroleum Limited, to purchase bio-diesel at prices determined by themselves at prices less than the manufacturing cost was not in contravention of Section 3 (anti-competitive agreements) or Section 4 (abuse of dominant position) of the Competition Act, 2002 (‘the Act’).
The Ministry of Petroleum and Natural Gas issued the Bio-Diesel Purchase Policy to encourage use of alternate sources of energy, which envisaged supply of bio-diesel to the OMCs, for blending with the high speed diesel for use as vehicle fuel. Under this policy, the OMCs were to purchase the bio-diesel that met the BIS specifications at a uniform price determined by the OMCs. As the price of high speed diesel was fixed and regulated, the OMCs determined the purchase price of bio-diesel by backward integration. This price was considered less than adequate and below the manufacturing cost by the suppliers of bio-diesel. This was alleged to be an anti-competitive agreement by the OMCs. The CCI held that the OMCs could not be mandated to purchase the bio-diesel at a price higher than the price of the end product and make it commercially unviable for the OMCs to operate.
This raises an issue of the introduction of the commercial viability test as a defence in an investigation relating to breach of Section 3 of the Act. For example, if three non-dominant enterprises mutually agree to act in one of the ways determined under Section 3(3)(a) (by indirectly facilitating collusive bidding to get the contract to the disadvantage of the dominant enterprise) resulting in better competition and commercial viability of the colluding companies, whether such conduct will be regarded as having an appreciable adverse effect on competition for the purposes of Section 3(1). Such an action need not necessarily result in any of the benefits identified under Section 19(3) or may not have the effect of driving the dominant enterprise, and may be merely directed at meeting the competition posed by the dominant enterprise. Unlike the proviso to Section4(2)(a), Section 3 does not statutorily have the explicit 'meeting competition defence'. The action may merely result in promoting competition in the market in which the enterprises are operating - an action promoting the object of the Competition Act, 2002 and one of the duties of the CCI under Section 18. At least as held in the Royal Energy case, there seems to be a possibility for using the commercial viability test because the subject investigation pertained to fixation of prices by direct competitors under Section 3(3)(a).
Another question that arises is whether commercial viability / protection of commercial interests are adequate defences in a Section 4 contravention (apart from Section 4(2)(a) cases). In the past in Europe it has been held that even dominant undertakings can take counter action to protect their commercial interests, however, such counter action should be proportionate to the threat taking into account the economic strength of the parties. [Case 27/76, United Brands v. Commission, judgment delivered by European Court of Justice Para 189-190].
An important observation of the CCI is that “even if an anti-competitive conduct flows from any policy of the Government, the Commission will still have jurisdiction to examine the conduct and in case of any violation suitable orders can be passed”. The activity of policy determination by the government may be viewed as sovereign in nature (being an inalienable function of the government) and therefore, in light of Section 2(h) of the Competition Act, 2002 may be viewed as outside the purview of the CCI. Even if such government actions are not sovereign in nature, it needs to be seen whether the CCI would consider intervention or maintain a policy of deference on such matters to Parliament and therefore outside CCI’s purview. This case gives some indication that the CCI may be more inclined to opine on such mandated policy decisions of the government if it has an impact on competition.
This may lead to the CCI scrutinizing the actions of several PSUs that function under the operative directions of a particular Ministry, pursuant to policy decisions. In addition, actions taken pursuant to policy decisions of other sectoral regulators may also fall within the purview of the CCI. This only heightens the current debate on the overlap between the CCI and sector regulator, one relating to a pending proposal to oust the jurisdiction of CCI in matters pertaining to acquisition and mergers of banks (see end note 2), other sectors are also not too far behind in seeking for an exemption from the rigours of competition law (see end note 3). However, the power to exempt any enterprise from the purview of the Act is available with the Central Government (Section 52) only if it is necessary in public interest or in the security of the state or to comply with any of India’s obligations under an international treaty or for enterprises performing activities that are relatable to the sovereign functions of the state.
Furthermore, at a jurisprudential level, the CCI has also held in the case under discussion that the concept of collective dominance is not envisaged under Section 4 of the Competition Act. Collective dominance as accepted in Europe occurs where a group of unrelated entities that are united by economic links collectively hold a dominant position in a market (see end note 4). No reasons are set out for the same, but one reason may be that Section 4 provides that no ‘enterprise or group’ should abuse its dominant position, the word ‘group” was specifically added in 2007 but the definition of group is restricted to entities under the same management or control. Therefore, the legislature may not have intended unrelated groups to be considered as one for the purpose of the Act. Further, should a concept that has its genesis in Europe be accepted in India? On the other hand ordinarily it is a statutory rule that a singular word would also include a plural (see end note 5). Therefore, by that logic enterprise would also include enterprises and a group of enterprises can abuse their dominant position. However, these issues have not been effectively raised or decided by the CCI in the said case and therefore it will still remain to be seen whether the collective dominance concept is envisaged under Section 4.
Furthermore, this decision (and the principles enshrined therein) is still to be tested by the higher judicial echelons. It will be interesting to see, if and when, this decision (or the issues) reaches the Competition Appellate Tribunal or the Supreme Court, which way would the tide of competition sway.
End notes:
1. Views of Mr. Veerappa Moily, Minister of Corporate Affairs
2. Please see in this regard a news report in The Economic Times issue dated June 11, 2012 However, it will pertinent to note that recently in a policy u-turn, it appears that the Finance Ministry has decided to bring bank mergers within the purview of CCI. Please see in this regard a news report in The Hindu Business Line dated August 22, 2012.
3. Please see in this regard a news report in The Hindu Business Line issue dated May 29, 2012.
4. Case T-68, 77 and 78/89, Societa Italiana Vetra SpA v. Commission [1992] 5 CMLR 302, Para 358.
5. Section 13 of the General Clauses Act, 1897.
[The author is a Principal Associate, Corporate Practice, Lakshmikumaran & Sridharan, New Delhi]