competition law in india-latest developments and emerging professional opportunities for cas
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Competition Law in India-Latest Developments and emerging professional opportunities for CAs. Presented to Institute of Chartered Accountants of India G R Bhatia Partner & Head of Competition Law Practice Luthra & Luthra Law Offices New Delhi 23.08.2014. Table of Contents:. - PowerPoint PPT PresentationTRANSCRIPT
© 2008 Luthra & Luthra Law Offices www.luthra.com
Competition Law in India-Latest Developments and
emerging professional opportunities for
CAs.
Presented toInstitute of Chartered Accountants of India
G R BhatiaPartner & Head of Competition Law Practice
Luthra & LuthraLaw Offices
New Delhi23.08.2014
Table of Contents:
Why Competition? The New Regime – Background &
Introduction The Competition Act, 2002 - Key
Provisions Impact of competition law in
distributorship model. Risk Mitigation - Critical Steps
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Competition in market is BENIGN:
Reduces prices
Improves quality
Boosts choice
Facilitates better governance
Promotes efficiency
Encourages innovation
Punishes THE LAGGARDS
Ensures AVAILABILITY OF GOODS in abundance of acceptable
quality at affordable price (AAA)
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Five Dimensions of the Act:
Anti-competitive Agreements (ACAs) [Sec. 3]
Abuse of Dominance (AOD) [Sec. 4] Combinations, include acquisition of shares,
voting rights, assets/control, mergers, amalgamations and takeovers [Secs. 5 & 6]
Advising, on a reference, to Government in respect to its policies/law
Advocacy – creating awareness
(All these dimensions of law are in force)www.luthra.com
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Powers of the CCI: Issue directions to discontinue or not to re-enter (Cease
& Desist orders) in relation to ACA/AOD);
Grant interim relief during enquiry;
Impose penalty on producers, distributors, suppliers of up to three times of average profits or up to ten percent of average turnover for each year of continuance of agreement, whichever is higher, in case of cartel like behavior;
Impose penalty which shall be not more than ten percent of the average of the turnover for the last years , for other violations.
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Contd… Impose penalty on delinquent directors and functionaries
who are delegated with requisite powers; Declare anti-competitive agreements void;
Order division of dominant enterprise or groups;
Approve/approve with modifications or block combinations;
Any other orders which the CCI may deem fit.
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Institutional Framework: The CCI – Primary body to implement the law;
Office of the DG – to assist the CCI in carrying out investigation
The COMPAT- For appeals against CCI Orders and to adjudicate Claims for Compensation.
Supreme Court of India – For appeals against orders of COMPAT.
Central Government – Vested with power to supersede the CCI; issue directions; grant exemptions from applicability of the Act.
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Powers of the DG:
Requisition of information from the parties Requisition of information from ex-employees,
distributors etc. The DG can summon and record evidence
during investigation. DG can exercise the powers of ‘Search and
Seizure’ (“Dawn Raids”). DG are vested with the powers of a Civil Court
to aid Inquiry/Investigations
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‘Relevant Market’ includes relevant product market and relevant geographic market.
Relevant Product Market – comprises all those products or services which are regarded as interchangeable or substitutable by the consumer.
United Brands v. Commission – It was argued that bananas were in the same market as other fruit. The ECJ held that the banana constitutes a separate market since it has special features distinguishing it from other fruits, like it is the only fruit which can be consumed by infants and the elderly.
Relevant Market
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Contd… Relevant Geographic Market – refers to market
comprising the area in which the conditions of competition are distinctly homogenous.
This could be a ‘small town’, ‘state’, across the nation or even global.
For instance, relevant geographic market in the DLF case has been considered as Gurgaon on the basis that the conditions of competition between Delhi and Gurgaon and distinctly homogenous and they cannot be treated as the same (pending appeal). Further, in the cement cartel case, the relevant geographic market is considered as India since the same conditions are prevalent pan-India regarding sale of cement.
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Section 3 prohibits agreements in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition (AAEC) within India.
The Act declares that agreements entered into in contravention of the above prohibition shall be void.
Anti-Competitive Agreements (ACAs):
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Horizontal and Vertical Agreements
Raw Material Supplier
Raw Material Supplier
Raw Material Supplier
Manufacturer Manufacturer Manufacturer
Retailer
Wholesaler WholesalerWholesaler
Retailer Retailer
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Horizontal Agreements (Presumption of AAEC): Agreements between enterprises or persons engaged in
similar trade of goods or provision of services. Agreements including cartels that:
(a) fix prices, (b) limit or control production, (c) allocates markets or customers, and (d) rig bids/collusive bidding are presumed to have an appreciable adverse effect on competition (AAEC)
The prosecutor needs to prove existence and not the harm caused.
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e.g. DISCUSS ABOUT PRICE INCREASE, TIMING OF PRICE INCREASE WITH COMPETITORS
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Retail price is too cheap. Why don’t we increase the wholesale price by 5%?
Retail price is too cheap. Why don’t we increase the wholesale price by 5%?
I agree. Let’s implement the price increase next month.
Competitors Sales PersonMedtronic’s
Sales Person
e.g. DISCUSS ABOUT CUSTOMERS AND TERRITORY WITH COMPETITORS
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West district of A city is our territory. Do not sell your products in our territory.
Okay. East district is our territory. Promise to us that you will not sell your products at our territory.
Medtronic’s Sales Person Competitor’s Sales Person
Contact with former boss (Fictional Case)
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What should you say? Think of a script.
Ex Medtronic Sales Person working at Competitor
Medtronic sales person
Long time no see. I did not know you were working to get this business for Medtronic. Why don’t we keep in touch and exchange information?
Answer
" I agree. Give me your contact details so that we can exchange information.”
" It is really nice to see you again. Why don’t we go out for dinner tonight. There are lots of things that we should talk.”
Leave the place after saying "It is nice meeting you again. But we are competitors now, and competing with each other for this deal. It is against our company’s policy to interact with competitors. I am afraid I will have to say “I have to go.”
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Vertical Agreements(Rule of Reason)
Agreements between enterprises at different stages or levels of the production chain.
What is the Rule of reason analysis?
A rule of reason analysis involves determining whether conduct can be justified on the basis that its pro-competitive gains outweigh its anti-competitive effects.
Agreements are not deemed anti-competitive unless if they cause or are likely to cause AAEC in India.
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Examples of Competition issues in vertical relationships
Vertical agreements include:
(a) tie-in arrangements – any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods.
(b)exclusive supply- any agreement restricting in any manner the purchaser in the course of his trade from acquiring or otherwise dealing in any goods other than those of the seller or any other person.
(c) exclusive distribution agreement- any agreement to limit, restrict or withhold the output or supply of any goods or allocate any area or market for the disposal or sale of goods.
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Contd…
(d) refusal to deal- any agreement which restricts, or is likely to restrict, by any method the person or classes of persons to whom goods are sold or from whom goods are bought;
(e) resale price maintenance- any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser shall be prices stipulated by the seller unless it clearly stated that prices lower than those prices may be charged.
The scope and ambit of above concepts is broad as the definition has been made “inclusive”.
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Factors for Determination of AAEC:
Creation of barriers to entry; Driving existing competitors out of market; Foreclosure of competition by hindering entry
into market; Accrual of benefits to consumers; Improvements in production or distribution of
goods or supply of services; Promotion of technical, scientific and economic
development;
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The Act provides for imposition of lesser penalty by the CCI in cases of violation of Section 3 where a person makes FULL, TRUE and VITAL disclosure of a cartel to the CCI; for e.g. Samsung Electronics received full immunity (100%) from fines under the Commission's leniency programme in the LCD Cartel case. LG got a 50% reduction.
The Leniency System is targeted at cartel participants and seeks to induce participants to break rank and turn approver against other cartel members.
A successful applicant can avail the benefit of a reduction in penalty in the range of up to 100% or 50% or 30% keeping in view the first mover advantage.
Risks – The Leniency Provision
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Exclusions:
Section 3 does not:- restrict right of IPR holder to prevent infringement of IPR or impose ‘Reasonable Conditions’ on use of such IPR;- restrict right of a person to export goods from India.
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The Act does not prohibit dominant position – it only frowns upon the ‘abuse’ thereof.
Dominant Position refers to a position of strength enjoyed by an enterprise or group in the relevant market, in India, which enables it to -
Operate independently of competitive forces prevailing in the relevant market; or
Affect its competitors or consumers or the relevant market in its favor.
‘Group’ is open ended.
Abuse of Dominant Position
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Contd…
Determination of ‘Abuse of Dominant Position’ involves:
Identifying the ‘relevant market’
Establishing the ‘dominant’ status of the enterprise or group; and
Evaluation of the conduct to determine whether it falls within ‘abuses’ listed under the Act.
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EXPLOITATIVE ABUSES – i.e., conduct which results in exploitation of others in the value chain, for e.g., - imposition of unfair or discriminatory conditions - imposition of unfair or discriminatory prices e.g., predatory pricing.
EXCLUSIONARY ABUSES – conduct which interferes with the competitive process, for e.g.,- Denial of market access;- Making conclusion of contract subject to acceptance of
supplementary obligations- Limiting production of goods, provision of services;
scientific development; - Using dominance in one relevant market to enter into or
protect other relevant market ;
Types of Abuses
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Market share of the enterprise
Size and resources of the enterprise
Size and importance of the competitors
Economic power of the enterprise
Vertical integration of the enterprises
Dependence of consumers on the enterprise
Determination of Dominant Position - Factors
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Contd… Dominant position as a result of statute
Barrier to entry
Countervailing buyer power
Market structure and size of market
Social obligations and social costs
Contribution to the economic development
Any other factor (residuary factor)
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Regulation of Combinations – Merger Control:
The Act regulates combinations (merger control) which involves an ex ante assessment of changes in the structure of the relevant market.
No combination can take effect unless the transaction is approved by the CCI.
Combination Regulations sets out the procedure of filing notice, fee payable and timelines.
Failure to file notice of a reportable transaction attract penalty.
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Contd…
‘Combinations’ include:
- Acquisition of control, shares, voting rights, or assets of another enterprise; or
- Acquisition of control where the acquirer already has control over a similar/identical business’ or
- Merger or amalgamation of enterprises
where such transactions cross the asset or turnover thresholds set out in the Act.
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Risks – Impact on Companies
High penalties/liability for compensation; Possible extra fine and/or imprisonment for
breach of CCI orders; Legal Expenses; Loss of Reputation; Agreements rendered null and void; Division of dominant enterprise; Loss of business from the harmed parties;
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A word of caution in communication?
Email, SMS, FAX, Communication in any e-mode are admissible evidence.
Skillful communication is imperative. Do not sound guilty . Do not use expression like “destroy after reading”. Avoid the exaggerated use of “power” words(e.g.
“we’ll destroy them”, “we will nail them to the wall”)
Avoid giving the false impression that a customer is being given favored treatment( e.g. “None of our other customers is getting this special discount”).
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Contd…
Do not give false impression that some action is being taken as a result of an agreement between competitors ( e.g. “Everyone in the industry agrees that prices are too low”).
Be carful with the use of the word “market” (e.g. “we are dominant”).
Marking a document “personal and confidential” or keeping it in your “personal” files or home office or computer does not mean that it won’t be discovered.
Do not use the term “market” when referring to distribution channels.
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Role of Chartered Accountants
Sensitize the client about the need for and usefulness of having competition compliance program
Review all purchase and sale agreements Prepare customised competition compliance manual Prepare ready recokner of Do’s and Don’ts Impart training on Competition Regime Have due diligence of transaction from competition
law
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Thank you
Luthra & Luthra
Law offices103, Ashoka Estate
24 Barakhamba Road
New Delhi – 110001
Tel No. 011-41215100
Email: [email protected]
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