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The Case Of Mixed Signals
Alawyer’s nightmare is not being able to give a clear answer when a client comes calling with a query. Answers like those of Harry Truman’s economists (“All my economists say, ‘on the one hand... and on the other hand…’”) won’t do. After all, if a lawyer cannot interpret the law, who can? But lawyers can and do face such a situation; nowadays, to queries from firms on how they should go about complying with competition laws, they have no answer.
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Towards the end of October, the Competition Commission of India (CCI), charged with removing anti-competitive practices in India, exonerated tyre manufacturers of allegations of cartelisation. But just a few months prior to that, it had come down heavily on 11 cement firms for a similar offence, imposing a combined penalty of over Rs 6,000 crore. While evidence was also stacked against the tyre makers, somewhere down the road, the CCI concluded that the tyre manufacturers, though they displayed cartel-like behaviour could not be conclusively proven to be a cartel.
The decision baffled competition lawyers. On the face of it, almost every aspect that nailed the cement manufacturers was present in the case of tyre makers. But, as Ashok Chawla, CCI chairman, pointed out, the evidence available with the commission was not clinching. That is, there was no smoking gun!
What the order seems to have done is threaten a legacy that the CCI was building for itself — that of a fearless and strong regulator which pulled no punches. Amitabh Kumar, a former director general of investigations at the CCI, and currently a partner with law firm J. Sagar Associates (JSA), says, “Any quasi-judicial authority creates a precedent, whether by its pronouncements or by its judgments that are supposed to serve as a reference in the future.
Unfortunately, no precedent seems to have been created here due to a lack of consistency in the parameters used to arrive at a decision.” And blow hot, blow cold was never a tactic for regulators anyway. Without a reliable precedent, companies are left groping in the dark on how to approach competition issues, in the absence of clarity on how the CCI will treat a given issue.
Pallavi Shroff, who heads the litigation practice at law firm Amarchand Mangaldas, concurs, “The commission needs to be more consistent, in terms of interpretation of the evidence as well as in fining.”
Making Presence Felt
A little under four years after the spruced up commission replaced the toothless Monopolies and Restrictive Trade Practices Commission (MRTPC) in 2009, it has done a commendable job. The director general handling investigations has submitted around 125 reports in this period. After a few orders like the Rs 630-crore penalty against DLF last year (which was a case of abuse of dominance, rather than cartelisation), and the cement cartel this year, industry has begun to take the CCI seriously. Its earlier avatar, the MRTPC, did not have the powers to levy penalties.
The film producers’ association was the first to get hauled up before the CCI. Multiplexes alleged that the producers were withholding films, bargaining for a higher share in revenues. Among others, there was the Deutsche Postbank case on the prepayment penalty imposed on home loan borrowers who wanted to change lenders, and the beverages case where Inox and Coca-Cola were accused of having an exclusive tie-up that allowed multiplexes to sell Coke products at higher-than-market prices. All significant allegations, but never really resulting in a serious indictment (the film producers were found guilty, but fined only Rs 1 lakh each).
In between, the National Stock Exchange got stung when it was ordered to start charging traders on its currency derivative platform after rival Multi-Commodity Exchange alleged that the NSE was running it to the ground (and by extension, killing its only serious competitor). The CCI held that NSE was able to do that only because of its almost 90 per cent share of the equities segment. As a result, it could wean away MCX’s market share, which was yet to get an equities trading licence at that time.
But people sat up and took notice only after the DLF ruling. The CCI found the real estate major guilty of abusing its dominant position by imposing unfair terms on customers who had already invested in one of its projects, the Belaire housing complex in Gurgaon. What was significant was the quantum of the penalty. Under the rules, the CCI could fine companies three times the profits of the last three years, or 10 per cent of the average turnover, whichever is higher. DLF was fined Rs 630 crore in August (7 per cent of its average turnover).
After that came the cement cartel order in June 2012. CCI found the cement makers guilty of keeping prices high by mutual agreement. It interrogated executives of companies, corroborated evidence by pitting them against each other, and got details of clandestine meetings facilitated by industry body, the Cement Manufacturers Association (CMA). The investigators found evidence of a price hike by the participant companies within days of the meetings.
And perhaps in an exhibition of its powers, the CCI levied a combined penalty of Rs 6,300 crore on 11 companies and the association — unprecedented by any standards. This was 50 per cent of the net profit of the individual companies. Suffice to say, competition compliance became the new mantra among legal heads. Lawyers began advising clients to keep meetings with members of industry bodies to a minimum.
When it came to tyre makers, no evidence of such meetings (apart from regular association meetings) was uncovered. Price variations of 6-12 per cent were noticed, but the CCI said that the prices were not parallel. On the other hand, price variations effected by cement companies were at times over 8 per cent. Incidentally, tyre companies have had brushes with the competition law in the past. Officials say that the companies were on the verge of being censured by MRTPC back in the 1970s.
“What led to the CCI reaching diametrically opposite views on similar sets of circumstances in the two cases is difficult to understand,” says JSA’s Kumar. “Competition law never requires that price movements need to be identical. All that is needed to be established is that they moved in the same direction as a result of some concerted effort.” Even if it did, how would you factor in the brand value of tyres? Unlike a global cement company, a global tyre maker can command a slight advantage in prices.
The dichotomy in its decisions has put the CCI on the back foot. For one, it exposes the commission to criticism regarding some of its earlier decisions (as also providing a great defence at appeal stage for the cement companies) — have the cement and tyre cartels been approached with the same yardstick?
Suhail Nathani, partner at law firm Economic Laws Practice, explains that cement and tyres are both homogenous products and thus amenable to cartelisation. “In both the cases, there were active industry associations, and regular meetings were held between the manufacturers. Plant capacities were much higher than what was being produced, but still companies were not cutting costs (in fact, in the tyre makers’ case, it was found that the excise duty reduction was not passed to customers). In both cases, there was price parallelism. But only the cement companies were found guilty of cartelisation. The tyre companies seem to have been let off because large-scale imports kept prices in check.”
|A FEW ONGOING INVESTIGATIONS|
|Auto parts manufacturers: Component manufacturers are accused of facilitating abuse of dominance by dealers by making parts available only through their exclusive distributors who sell at very high prices|
Sports associations: Hockey players were restrained by Hockey India, which is affiliated to the International Hockey Federation, from participating in the World Series Hockey tournament organised by rival association Indian Hockey Federation. A similar scenario prevails in chess.
Real estate: Developers accused of agreeing not to sell below a certain price to maintain real estate rates even while inventories pile up.
T-Series: The company is accused of using its dominance in the film music market to dictate unfair terms to FM radio stations on royalty payments.
Public sector general insurance companies: The finance ministry has issued an advisory to state-owned insurers asking them to share data regarding claims and prices, and not undercut each other at the time of renewal.
Internet: Google is fighting two charges against abuse of its dominant position in the search engine market.
The CCI, in its order, argued that the profit margins of the companies were different; asking what the incentive was for a low-margin company to collude with some of the more established players.
And what of another imminent decision: automobile parts manufacturers? The CCI is in the final stages of hearing automobile companies which allow only their dealers to sell parts of their products. The dealers, allegedly, abuse this to set prices higher than what market rates ought to be. Real estate companies accused of not cutting prices even when home sales have bottomed out are also being investigated for an agreement not to sell below a certain price.
And therein lies the rub. Doesn’t the CCI have to be consistent while wielding a heavy stick? There is a case for more transparency in imposing fines. And nobody is in greater agreement than the CCI chairman Chawla, who took over in October last year. The former finance secretary, who observers credit for the new-found enthusiasm within the CCI, admits that the biggest criticism it faces is that “it is not very apparent on what basis the decisions have been taken”. He goes on to say, “The commission considered putting out formal fining guidelines, but decided against it since it was too early in its evolution. But the conscious intention is to be more transparent and explicit in laying down the rationale for decisions in the future.”
So it comes down to the quality of evidence that was unearthed. It is true that in the cement makers case, the CCI director general A.K. Chauhan had an eight-member team working for several months and uncovered far more evidence — separate meetings facilitated by the CMA in hotels; even ACC and Ambuja Cements (which withdrew from CMA after they were acquired by Holcim, ostensibly to stay clear of the European competition regulations) attended these meetings. There was also corroborating evidence to show that some companies lied about attending these meetings. In the case of tyre manufacturers, the companies admitted to colluding to try and keep cheaper imports from flooding the Indian markets, and divided up the export market among themselves (an anti-competitive practice, but outside the reach of Indian laws). But that was just about all the evidence that the director general was able to gather regarding collusion.
K.K. Sharma, who has set up his own law firm, K.K. Sharma Law Offices, after a stint as a director general of the commission, wonders whose task it is to plug gaps in evidence-gathering. The CCI has the power to direct the director general to reinvestigate a case, if it so desires. After all, Sharma says, “It is the commission’s duty to ensure healthy competition in the market. (So) isn’t it its responsibility to take ownership of the investigation done by its official, or get a separate investigation done, which again is permitted by the law?” In the case of the tyre makers, the director general had found the companies to be guilty. Sharma argues that if the commission disagreed, “it had to be on the basis on new facts and findings”.
In fact, one CCI member, R. Prasad, a former chairman of the Central Board of Direct Taxes (CBDT), disagreed with the findings of his colleagues. In his dissenting order, Prasad, working backwards, concluded that if there was similarity in price movements of tyres, if production was at less than optimal capacity, and that if none of the companies passed on the twin benefits of excise duty relief and lower rubber prices to consumers, then that indicated a probable collusion. If companies collude to divide foreign markets, it can be reasonably assumed that they could have had a tacit agreement to influence prices in India as well, he argued.
To Catch A Thief
Eventually, the CCI will be judged by the quality of its investigation, either in terms of analysis of economic data or even in terms of hard-nosed snooping for clues and digging the truth out of battle-ready company executives.
The most fascinating tale of a cartel being busted is perhaps that of the vitamin cartel in Europe. The cartel, led by Swiss drug maker Roche and German chemical giant BASF, and supported by regional players including Japanese companies Daiichi and Takeda, agreed to divide the global market among itself for 10 years, and orchestrate simultaneous price increases, thereby jacking up prices of packaged food globally.
That the cartel managed to sustain it for a decade, roping in smaller players along the way, is a story by itself. But how they got caught is a lesson for any competition regulator. According to accounts, investigators trailed company executives for months, from airports to hotel rooms, sometimes even posing as waiters with hidden cameras on their lapels, to gather the necessary proof. But even that was not enough. Eventually, one of the companies, Rhone Poulenc, which had got an inkling, came forward offering to give crucial evidence in exchange for leniency. It is believed that the investigators made Rhone executives attend subsequent meetings with hidden recorders. Once caught, the companies had no option but to pay the over `850-million penalty.
What does the CCI need to do to get such leads? A functioning whistleblower programme, in which a member of a suspected cartel is encouraged to provide investigators with vital evidence in exchange of an assurance that he will get a lesser penalty, or even no penalty, is the obvious answer. Only, the Competition Act already provides for a leniency programme. And by the accounts of lawyers, there are several clients, mainly multinationals, keen to squeal at the first given opportunity.
But as opposed to foreign jurisdictions (like in Europe, where the programme is said to constitute the biggest treasure trove of evidence for enforcers), in India, the law does not guarantee full immunity to a whistleblower. In fact, it was diluted in 2007 to say that the CCI ‘may’ give immunity from the earlier ‘shall’. Farhad Sorabjee, another partner with JSA, says that the government has emasculated the efficacy of the programme in India by not giving certainty of protection to whistleblowers.
|Leading into the weeks before 1 June 2011, the date the merger control provisions - which would look into whether a proposed merger transaction would have an anti-competitive outcome, such as creating a monopoly - of the Competition Act were to kick in, the industry's sense of apprehension was palpable. Corporate lawyers worked even longer than the long hours they are known to put in to ensure as many deals were pushed through before that date. |
Eighteen months on, most agree that the fears were unfounded. A look through the orders passed by the Competition Commission of India (CCI) under merger control provisions would show that not even one deal was rejected due to competition concerns. Pallavi Shroff, senior partner at Amarchand Mangaldas, says the CCI has been very much on the ball, with most deals being approved within 30 working days. But the biggest positive, she says, is its approach. "It has been willing to meet with the lawyers, accept their explanations along with the documents called for, not adversarial, and makes an effort to understand the market."
Of course, India saw few complicated transactions during the period; most were internal restructurings. But that could change next year as the markets pick up. Also, the feeling was that the commission was cutting companies some slack in its initial year. The CCI got a fresh boost with the government introducing an amendment to the Competition Act which gives it powers to look into competition issues in all sectors, with inputs from sectoral regulators.
So it comes down to the efficiency of the investigation team, and its ability to build a proper case, which essentially is what gives the commission its teeth. Indeed, it is the dual role of police and judge that similarly empowered regulators such as the Securities and Exchange Board of India and RBI play that makes them so feared. Chauhan, the director general of investigations, currently has a team of just 18 officers under him. The sanctioned strength is 40. But even 40 is grossly inadequate. A study done by IIM-Bangalore at the behest of the CCI concluded that the ideal strength of the commission should be around 480 — one half on the investigation side and the other in the commission proper. Of the 480, the government approved a strength of 197. The CCI currently operates with 103 staff.
The CCI has come a long way from its frail predecessor, the MRTPC. While it has evoked dread among some corporates, it has largely preferred to adopt a pragmatic approach, cracking the whip only when absolutely necessary. The order in the case of tyre makers, however, runs the risk of undoing all that the CCI has stood for until now. It is, therefore, important that the CCI recalibrates its functioning to ensure it is still respected for being an effective regulator.
(This story was published in Businessworld Issue Dated 31-12-2012)
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.