International Context and the Indian Copetition Policy An Analysis

1. INTRODUCTION
Trade has been one of the primary factors that have played a fundamental role in the development of civilisation. Theorists have coined new theories and concepts to increase trade, commerce and profits. With time it has grown more and more intricate and complex, with the inclusion of additional knowledge, methods and practices of trade. Starting with the fundamental theory of mercantilism, Adam Smiths Classical Theory of Economics, Theory of Comparative Advantage to the balance of a laissez faire and protectionist economy, promoted by John Stuart Mill, theories and practices of trade have abounded, and gone through a lot of transmutations. But the essential principle in every one of these theories is ensuring the profits of the country concerned, and preventing their economies from exploitation and expanding their trade to newer markets. Exploitation would not occur in that environment where there is a code of conduct or standards of behaviour laid down. Also access to newer markets occurs when there is an ethical mode of functioning. This is where competition laws of different countries have come into the picture. There can be no standard unless its the same everywhere and for everyone. This has lead to the debate over the formulation and adoption of a global competition policy. This project seeks to outline the international political and economic activities which have shaped the competition policies at the international level. The issues of competition policy in the international context and the debates in WTO with respect to this, has been dealt with in Part 2 of the project. The international scenario would obviously have an effect on domestic legislations of any economy. Part 3 of the project gives a brief outline of the evolution of competition policies in India, along with the need for changes in the MRTP Act, 1969. Part 4 analyses and discusses the Indian Competition Act, 2002 in a detailed manner, apart from elucidating upon its salient features. In Part 5 I have concluded the project with a few observations of mine and need for changes in certain sectors of the Competition Act.

International Context and the Indian Copetition Policy An Analysis

1. ISSUES

OF

COMPETITION

POLICY

IN

THE

INTERNATIONAL CONTEXT AND THE WTO DEBATE

The idea of an international competition policy figured for the first time in 1946, in the Havana Charter, which had laid the groundwork for the establishment of the International Trade Organisation [ITO]. Article 46 of the Havana Charter had stated Each member shall take appropriate measures and to cooperate with the Organisation to prevent, on the part of private or public commercial enterprises, business practices affecting international trade which restrain competition, limit access to markets or foster monopolistic growth. The ITO never came into existence due to opposition from the United States of America [USA], and the General Agreement on Trade and Tariffs [GATT], which was the progeny of the Havana Charter never dealt with competition policies. So the idea of establishing the ITO was disbanded and the opportunity for developing a new competition policy was also shelved.1 There had been frequent complaints by the developing countries about the Restrictive Business Practices [RBPs] of Multi National Enterprises [MNEs] in the 1950s and 1960s, at the GATT, UN and the United Nations Conference on Trade and Development [UNCTAD], but all to no avail as the developed countries were against taking any measures controlling or regulating the same. Finally the UNCTAD Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices [UNCTAD RBP] was adopted in the 1980s. But this was retained as a non-binding instrument, despite calls for making it binding by the developing countries, due to the opposition of the advanced countries in making it binding, as a result of which the UNCTAD RBP did not have much of an impact on the competition policies at the international level. The WTO discussed competition policies related issues for the first time in the Singapore Ministerial Conference, 1996, where the link between trade and
1

Aditya Bhattacharjea, Trade and Competition Policy http://icrier.org/pdf/wp146.pdf, (last visited on 5th Sept. 2008).

(Nov.

2004),

p.

4,

available

at

International Context and the Indian Copetition Policy An Analysis competition policies were discussed, among other issues. But there were several oppositions from the developed countries regarding the issues discussed in the Singapore Ministerial, which contributed to the collapse of the Cancun Round in 2003 and the formal dropping of the discussions of competition policies in the working plan of the Doha Round of negotiations, by the General Council, after its meeting in Geneva in 2004.

2.1

ISSUES RAISED IN THE WTO DEBATES

The Singapore Ministerial had set-up a working group for each of the issues discussed in the conference Relationship between trade and competition, relationship between trade and investment, trade facilitation and transparency in government procurement. The agenda for the Working Group on Trade and Competition Policies [WGTCP] was to study the issues raised by the Members relating to the interaction between trade and competition policy, including anticompetitive practices, in order to identify any other areas that may merit further consideration in the WTO framework.2 Each of the working groups was to draw upon each others resources for their work, apart from using the resource material of the UNCTAD. The General Council was in charge of reviewing the functioning of all the groups.3 The WGTCP submitted six reports which reported the stand and arguments of the various Members regarding the competition policy framework, with no breakthrough as to what policies can be adopted. The conclusion was clear that none of the Members wanted a Multilateral Agreement on Competition [MAC] under the aegis of the WTO. Subsequently a development-friendly tone was rendered to the discussions in the Doha Ministerial Declaration, where it was declared that full account shall be taken of the needs of the developing countries and least-developed country

Singapore Ministerial Declaration (1996) WT/ MIN (96) / DEC, Para. 20, available at http://www.wto.org/english/thewto_e/minist_e/min96_e/wtodec_e.htm (last visited on 29th July 2008) 3 Bhattacharjea, Supra note 2 at p. 6

International Context and the Indian Copetition Policy An Analysis participants and appropriate flexibility provided to address them.4 There were several discussions on the MAC and a lot of academic literature emerged out of this, but the adoption of the MAC and all discussions about the same was finally discarded after the breakdown of the Ministerial talks at Cancun in 2003. The development of the concept of MAC, the discussions on it and the reasons for failure of talks shall be dealt with in a detailed manner as follows.

2.2

THE

PILLARS

OF

MAC

AND

THEIR

DISINTEGRATION
The concept of MAC was developed on five different pillars, which disintegrated due to several reasons, during the course of discussions at WTO, according to Bhattacharjea. They are discussed as follows. 2.2.1. HARMONISATION OF COMPETITION LAWS OF NATIONS TO PROMOTE FOREIGN INVESTMENT The competition laws of nations normally have three main components. They prohibit anti-competitive agreements, including joint ventures, monopolisation or abuse of dominance, and anti-competitive mergers. In the category of anti-competitive agreements, jurisdictions normally prohibit cartels, which are agreements among competitors not to compete on terms of trade such as price or output, and agreements to divide markets. In some cases, the laws enable the competition authorities to identify or limit anti-competitive practices of state or local government. While all competition / antitrust laws have some prohibitions against cartels, the laws of different nations diverge on whether cartels are prohibited per se only when unreasonable, and to the extent of exceptions and exemptions. For most other acts, practices, contracts and transactions, laws may differ on the conception of what anticompetitive means, and whether and to what extent anti-competitive measures may be
4

Doha Ministerial Declaration (2001) WT/ MIN (01) / DEC / 1, Paras. 23-25, available at http://www.worldtradelaw.net/doha/mindec.pdf (last visited on 10th Sept. 2008)

International Context and the Indian Copetition Policy An Analysis justified by efficiencies or by non-market values, such as health and safety, ethics and industrial policy (e.g., Protecting jobs). The debate on what is anti-competitive reflects a significant divergence in various national antitrust policies.5Working assumptions are often involved; e.g., the assumptions that markets tend to work well and government antitrust intervention tends to be inefficient and impose costs, or the counter-assumptions that private power tends to impair the working of markets and government intervention is helpful in removing the impediments. Most but not all nations accept the mandate to protect efficient competition and disavow a goal to protect competitors; but even so nations disagree about how to reach this goal. The controversy is well illustrated in the jurisprudence of the US and the European Union [EU] on the law of monopolisation and abuse of dominance regarding exclusionary practices and duties to deal. US case law reflects the presumption that freedom to deal or not, aligns with the interests of the consumers.6 EU case law presumes that openness of and access to markets align with the interests of the consumers, and unlike US law, imposes duties of special responsibility on dominant firms not to exclude rivals unnecessarily.7 The US and the EU models are the two principal antitrust models in the world. Nations, especially newer antitrust jurisdictions, tend to gravitate towards one or the other. Also, its often asserted that developing countries have special needs and interests that may influence the shape of their antitrust laws. These special and differential needs are seldom articulated, except that the claim is made that if an international regime is adopted, developing countries should not be subjected to the same obligations as developed countries (e.g., to open their markets to incoming trade), and that the effective date of obligations should be delayed.8 In any case, MNCs have to follow different national laws relating to environment,
5

Eleanor M. Fox, World Competition Law Conflicts, Convergence, Cooperation , p.238, from Competition Law Today Concepts, Issues and the Law in Practice (2007), Edited by Vinod Dhall, (New Delhi: Oxford University Press). 6 Id. cited Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, 540 U.S. 398 (2004) 7 Id. 8 Id.

International Context and the Indian Copetition Policy An Analysis labour, taxation, product standards, etc., although the MNCs are more willing to invest in those nations with some competition law rather than no competition law, as the scope for political arbitrariness is much reduced in those nations. However, there isnt much of a solution for a cross-border merger where the merger is accepted by the law of one nation and prohibited by another. Some compromises have to be made by the concerned Competition Authorities of the two countries. For example, the mergers between the US firms Boeing and McDonnell Douglas and between General Electric and Honeywell was accepted by the US, but opposed by the EU. Similarly, the merger between Ciba-Geigy and Sandoz was approved by the EU, but opposed by the US.9 The UNCTAD, the OECD and the International Competition Network [ICN] (an association of national competition authorities) have been working on procedures to handle such cul-de-sacs in the future. However, this may not be included in the WGTCP as it was not included in the revised list of activities in the Doha Declaration.10 2.2.2. PROMOTING MARKET ACCESS FOR IMPORTS

The second pillar of the MAC was promoting market access in all countries. The EU had also advocated a similar policy and that was its primary agenda behind bringing competition policies to the WTO and making it an international code. It made this move from its own experience of abolishing private trade barriers, for restriction on movement of goods, among its member countries and which contributed to the abolition of official restrictions on trade between them.11 On a global although government-imposed trade restrictions have reduced under the aegis of the WTO, there is the apprehension that private RBPs would always restrict the access of foreign firms to new markets through the blocking of distribution channels, or import cartels, etc. In one of the earliest WGTCP meeting in 1998, India had complained of being precluded from participating in the Basel Jewellery and Watch Auction, and

Bhattacharjea, Supra note 1, p. 7 Id. p.8 11 Id.

10

International Context and the Indian Copetition Policy An Analysis Dutch flower festival.12 Japanese business groups have often been accused of import cartels and practicing other RBPs by the US Courts, as in the famous Kodak-Fuji case in 1998, where the US had taken the Japanese Government to a WTO Dispute Settlement Panel [DSP] on the ground that some of the market access concessions given by Japan was violative of the National Treatment principal. Although the DSP did not rule in favour of US, the panel did investigate the allegations of the US and ruled in favour of Japan.13 Similarly in the recent, 2004 Telmex case, where the US had initiated action against Mexico before the WTO for restricting access to US Telecom companies, by not containing an import cartel functioning in Mexico, in the telecom sector, which adversely affected the US Telecom companies. The panel ruled in favour of the US telecom companies and ordered Mexico to take action against the import cartel.14 Recently, the EU has changed its focus away from market access for the promotion of MAC. Whereas the US has started emphasizing more on the competition-related clauses in the bilateral trade agreements that it enters into with other countries, for market access. For example, the US uses the Structural Impediments Initiative with Japan to promote market access.15 The US is not apprehensive of restriction of access to the market of India, to US firms as the United States Trade Representatives report so succinctly puts that RBPs are rampantly practiced by private and public enterprises in India, with little governmental action against the same. These practices do not affect the access of American firms to India, adversely in any manner. The US is more concerned about the market access restrictions imposed by the Indian Competition Authority, rather than the restrictions that emerge as a result of RBPs.16 2.2.3. PREVENTING ABUSE OF ANTI-DUMPING PROCEDURES

12

Communication from India, WT/WGTCP/W/11 (Nov. 1998), available at http://commerce.nic.in/wto_sub/CP/sub_cp111.htm (last visited on 10th Sept. 2008). 13 The International Economics Study Centre (1998), available at http://internationalecon.com/wto/ch2.php (last visited on 10th Sept. 2008) 14 Bhattacharjea, Supra note 1, p. 9 15 Id. 16 Id.

International Context and the Indian Copetition Policy An Analysis The Uruguay Round on Anti-dumping has allowed Member countries to impose antidumping tariffs, if they can prove that goods are being dumped in their markets. Alternately, agreements can be signed by exporters that they shall not export products at prices much below the market value, which may affect the industries in another country. But such anti-dumping measures have often been misused by stating flimsy reasons for imposing the same. Countries have also tried to determine ways of containing predatory pricing practices of MNCs as well, which is supposed to be more rigorous than anti-dumping duties. In predatory pricing private enterprises sell their products at such low prices in the market, incurring a loss themselves, such that all competitors are killed, until there comes a time when they attain monopoly position in the market. So curbing predatory pricing is supposed to protect competition and not the competitors, unlike the antidumping laws. But in world market where there are a lot of competitors, it is unlikely for a particular enterprise to attain monopoly position. Even if predatory pricing is found to occur, the antitrust remedy for predatory pricing is an injunction and a fine, which doesnt have the anti-competitive consequences of price undertakings or antidumping duties. So replacing lax anti-dumping laws with laws curbing predatory pricing would technically help prevent abuse of anti-dumping laws. But practice has been very different. In 2000, the DSP adopted a resolution to adopt stringent laws curbing predatory pricing in place of anti-dumping laws17, but it met with stiff opposition from EU the US, who were then the most recent and active users of antidumping laws. Ironically even developing countries are opposed to the above resolution, even though they complain about the abuse of anti-dumping laws by the developed countries. India, being one of the most vociferous critics of developed countries for abusing anti-dumping laws has one of the highest records of abusing anti-dumping laws itself. A recent study, applies statistical filters used in the EU and the US, to determine the number of cases that could have justified as legitimate use of predatory pricing laws
17

Minutes of the Working Group meeting, July 1998, WT/WGTCP/M/5, Paras. 38, 48 & 49, available at http://www.wto.org/english/tratop_e/dispu_e/162ra1.doc (last visited on 10th Sept. 2008).

International Context and the Indian Copetition Policy An Analysis in India, and the study found that only five out of 92 cases passed the test. In the rest of the cases, anti-dumping laws were found to have been applied to protect Indian industries.18 So the anti-dumping regime has actually harmed competition and aggregate employment rather than protected competition. But with developed and developing countries playing the same game, reforming usage of anti-dumping laws seems to be off the agenda of WTO. 2.2.4. PREVENTING ABUSE OF INTELLECTUAL PROPERTY RIGHTS

Intellectual Property Rights [IPRs] is, many times, almost like giving monopolistic license to the IPR holder. There has been an increasing tendency for large corporations to cross-license their patented products to each other, with conditions of not sharing it with anyone else, effectively creating cartel- like arrangements, without an explicit cartel agreement. Other RBPs would include mandating the licensee to buy an input only from the patent-holder, not to deal with the products of rivals and making improvements to the patented product and selling it to the patent-holder alone and not others. Also, most of the patent-holders are concentrated in the developed countries, so developing countries are worried about the restriction in access to new medicines or seeds, the patent-rights for which are concentrated in a few MNCs of developed countries. The developing countries are also concerned about the protection of their traditional knowledge, like the use of different medicinal herbs for various purposes, and prevent their exploitation by MNCs of the developed countries. Several discussions have taken place in this regard, to dilute the IPR protection for different products in the WGTCP, but the discussion has not gone far, with the developed countries firm on their stand of maintaining the high IPR protection for patented products. Certain concessions were made with respect to granting licenses to manufacturers of developing countries to manufacture certain patented medicines,
18

Bhattacharjea, supra note 1, p. 10.

International Context and the Indian Copetition Policy An Analysis which they have the capacity to produce, just before the Cancun Ministerial in 2003.19 Developing countries are however, still vulnerable to IPR abuse with respect to other products. 2.2.5. CROSS-BORDER CARTELS

A fifth and much more widely accepted argument for MAC is the increasingly international nature of cartels, which affect several countries simultaneously. Many countries have utilised the Effects Doctrine to penalize or prevent mergers between different enterprises, if it can be proved that such a combination would adversely affect them. It becomes particularly problematic for developing countries, which do not have proper national competition laws, with equally weak enforcement mechanisms. Even if the developing countries did have adequate competition laws and enforcement mechanisms, they often require the cooperation of the competition authorities, and other authorities, of the foreign countries to help in the investigation process and precluding the combinations of different enterprises. In the 1990s, the US and the EU had prosecuted more than forty international cartels and fined them, for affecting the consumers of the US and EU, even though the cartels adversely affected several other countries as well.20 This was because of the good working rapport between the Competition Authorities of the US and EU, which had been built over time. Similarly, if Indian Competition laws have to be effectively enforced in foreign jurisdictions with respect to the mergers of foreign enterprises, it requires the cooperation and trust of the competition authorities of other countries, which would not happen overnight. Here, having a MAC would help, which would automatically mandate the cooperation of the Competition Authorities of different countries and help develop a universal competition policy.

2.3

SUBSEQUENT EVENTS AND ASSESSMENT OF THE WTO DEBATE

19 20

Id. Id.

10

International Context and the Indian Copetition Policy An Analysis

The WGTCP discussions during the first few years of its existence were diffused and non-converging. Faced with a lack of consensus on so many issues, the Doha Declaration of the 2001 Ministerial Conference of the WTO limited further discussion at the WGTCP to the issue of hard-core cartels; application of the fundamental WTO principles of nondiscrimination, transparency and procedural fairness in competition policy; capacity building in developing countries; and voluntary cooperation between Members.21 The EU modified its position to press for a MAC that would require Members to enact and enforce (possibly on a regional basis) a national competition law incorporating the fundamental principles. Such a law should at least prohibit hard core cartels, which were to be clearly defined, with any exemptions being well-defined and transparent. Countries would have to provide deterrent sanctions in their domestic competition regimes, and take on obligations that would be subject to the WTO dispute settlement mechanism, but these would be limited to the de jure consistency of their laws and regulations with the agreed framework. De facto implementation of these laws in practice, or the outcome of specific cases, would not be subject to review, according to the modified EU position. Transitional periods and technical assistance were offered for developing countries to enable them to comply with the proposed agreement.22 Underlying the position of the EU and most developed countries was the presumption that vigorous competition is undeniably a good thing, and that government policy should be geared towards promoting it.

21 22

Doha Ministerial Declaration, supra note 4, Paras. 23-28. Communications from the EU and its member States, (2002), WT/WGTCP/W/193 & WT/WGTCP/W/222, available at http://www.jmcti.org/2000round/com/doha/wg/wt_wgtcp_w_193.pdf & http://www.jmcti.org/2000round/com/doha/wg/wt_wgtcp_w_222.pdf, (last visited on 11th Sept. 2008).

11

International Context and the Indian Copetition Policy An Analysis While acknowledging the harm caused by international cartels, India and many other developing countries emphasized the need to respect their diversity in terms of stages of development, socio-economic circumstances, legal frameworks, and cultural norms. They opposed a one size fits all agreement, and drew attention to the dangers of transplanting a competition policy framework that has evolved over many years in industrial countries into economies lacking in experience, expertise, and institutional memory. Several developing countries claimed that development required giving greater priority to policy objectives other than promotion of competition, and questioned virtually every specific proposal advanced by the proponents, including the necessity of applying the fundamental WTO principles of non-discrimination, transparency and procedural fairness to competition policy. While they acknowledged the importance of transparency and procedural fairness, they raised concerns about the financial and administrative burdens they would have to incur in implementing an agreement which enshrined developed country standards. The developing countries were also worried about whether they would receive the kind of assistance that they require from the Competition Authorities of the developed countries to enforce their competition laws. Overall, the developing countries were reluctant to enter into the idea of competition policies and their implementation as they had so little experience in the same, and make them more vulnerable than what they are.23 Due to the irreconcilable differences between the developed and developing countries, a MAC was not very likely. The developing countries suggested a peer review mode of assessment, where all
23

Bhattacharjea, supra note 2, p. 16.

12

International Context and the Indian Copetition Policy An Analysis Member countries would review the functioning of competition Authorities of every other country and ensure that they all toed the line, with respect to competition policies. But other developing countries were apprehensive about this because there was no delineation on the aspect of who would undertake the review, in what bases and criteria would the review be undertaken and others. As late as February 2003, the EU was continuing to insist that according to the Doha declaration negotiations on all the four Singapore issues will commence after Cancun, and that they are a key element of the DDA [Doha Development Agenda] and part and parcel of the Single Undertaking. Only clarification of modalities of the negotiations remained to be worked out. However, some new signs of flexibility were apparent. The EU also held open the possibility that the discussion on modalities on a MAC could include exemptions from the core principle of nondiscrimination; differential levels of commitment and implementation periods for developing countries; and even how and in what timeframe (or even whether) WTO Members or certain categories of WTO Members would assume some or all of the obligations resulting from these agreements.24 According to Bhattacharya, the newly conciliatory position could well have been a ploy to induce wavering developing countries to agree to the commencement of negotiations, with the EU hardening its stance once they were under way. But ultimately, the developing countries opposition to any negotiations towards a MAC, along with disputes over agriculture and the other Singapore issues, came to a head in September 2003 at the Cancun Ministerial, which ended with no
24

Comments on the EC Communication WT/GC/W/491, WT/GC/W/501, (2003), available at http://ictsd.net/downloads/2008/08/wtgcw501.doc (last visited on 11th Sept. 2008).

13

International Context and the Indian Copetition Policy An Analysis consensus.25 On the eve of the Ministerial, several developing countries, led by India, formally protested that their views on the Singapore Issues had been bypassed in consultations and had not been reflected in the draft of the Ministerial declaration. 26 Their statement listed several points which they felt had not been adequately addressed and required further clarification in the Working Group. Most of these are discussed at various points in this monograph. At Cancun itself, the EU showed a willingness to unbundle the Singapore Issues and drop competition policy from the agenda, but subsequently it continued to raise the possibility of introducing it in some other form. In the Framework Agreement that was reached in July 2004, the WTO General Council formally dropped three of the four Singapore Issues, including competition policy, from the Doha work programme altogether,27 but the debate is likely to continue outside the WTO, and competition policy may well be reintroduced in the WTO after completion of the Doha round. Policymakers and the emerging competition community in India should therefore remain engaged with the issues. This process should also contribute to improving the effectiveness of the new Competition Act. The ultimate result of all these discussion has been that there would be no MAC in the foreseeable future. The developing countries have not been able to make a headway in those competition issues with which they were most concerned, like the curbing of hard-core cartels. Although the proponents of MAC have not been able to develop and introduce the same, fifty new developing countries have adopted new

25 26

Bhattacharjea, supra note 1, p. 17. Communication from Bangladesh on Behalf of the LDC Group (4th Sept. 2003), WT/MIN(03/W/4, available at http://www.wtocenter.org.tw/SmartKMS/fileviewer?id=5704 (last visited on 11th Sept. 2008). 27 Doha Development Agenda (1st Aug. 2004) WT/L/579, available at http://www.wto.org/english/tratop_e/dda_e/draft_text_gc_dg_31july04_e.htm (last visited on 11 th Sept. 2008).

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International Context and the Indian Copetition Policy An Analysis competition laws in their countries over the last decade, which is one step closer to the future of a global MAC.

3. A BRIEF OVERVIEW OF THE EVOLUTION OF COMPETITION POLICIES IN INDIA

The Indian economy was subject to controls and regulations for several decades, such as industrial licensing, monopolies and restrictive trade practices, foreign exchange restrictions, small scale industry protection, control on foreign investment and technologies, exit barriers under the Industrial Disputes Act and the Sick Industries Companies Act, quantitative restrictions on imports, administered prices, and control on capital issues. Major economic decisions were in the hands of the Govt. and there was little room in the system for competition policy. At the same time, the domestic industry was sheltered from competition arising out of imports.28 The economic consequences of this policy regime, though initially beneficial, were reflected in a poor rate of economic growth, low levels of productivity and efficiency, absence of international competitiveness, sub-optimal size of businesses, and outdated and inefficient technologies in various sectors. Some firms and business houses were particularly adept at exploiting the system of licenses and controls, and they built up and maintained monopolistic positions in the market to the detriment of public interest.29 In the late 1980s and 1990s, the realization began to dawn that this policy regime had outlived its utility and the system was crying for reform. Wide ranging policy and regulatory reforms were initiated, such as delicensing of industry, shrinking the monopoly of the public sector industries (other than those where strategic and security concerns dominated,) reducing the purchase preferences in Government procurement,
28

See Speech of Mr. Vinod Dhall, WTO/UNESCAP/ASCI Regional Seminar for Asia and Pacific Economies on Competition Policy and the Multilateral Trading System, (6th October2008), available at http://www.competitioncommissionindia.nic.in/speeches_articles_presentations/Speech%20Technical %20Hyderabad%2006%20Oct%2004.pdf (last visited on 29th July 2008). 29 Id.

15

International Context and the Indian Copetition Policy An Analysis removal of quantitative restrictions on imports, market determined exchange rate, liberalization of foreign direct investment, capital market reforms, liberalizing the financial markets, reduction in small scale industry reservations, and a much greater role for the private sector in infrastructure industries such as power, transport and communications. Sectoral regulators were set up in key infrastructure and utility industries which were hitherto dominated by the public sector and were now being opened up. The reform agenda is far from complete. Areas still needing attention are, for example, labour policy, exit policy under the Industrial Disputes Act, infrastructure sectors such as power, coal and roads, and opening of the remaining state monopolies to competition forces. The Monopolies and Restrictive Trade Practices Act, which came into being in1970, was designed for a different era to serve the socio-economic objectives of that time. However, it was soon realized that the Act needed extensive review. A high level committee was set up to suggest a modern competition law in line with international practice and to suit Indian conditions. The committee recommended a new competition law which was enacted and it came into force in January, 2003.

3.1

NEED FOR CHANGING THE MRTP ACT, 1969

Many countries like Australia, Canada, the UK, and the EU have competition law. The US covers competition in more than one statute. India had a very rudimentary competition law the MRTP Act, 1969. Unlike the competition laws of the countries mentioned above, which address engendering competition in the market and trade, and which address anti-competition practices, the Indian MRTPA was inadequate for addressing international competition issues that the competition legislations of other countries did.30
30

Report of the High Level Committee on Competition Policy and Law, from S. M. Dugar (2006) Commentary on MRTP Law, Competition Law & Consumer Protection Law, 4th ed., Vol. 2, App. 5,

16

International Context and the Indian Copetition Policy An Analysis

The MRTPA lacked provisions to deal with anti-competition practices that may accompany the operation and implementation of the WTO agreements. Many of the anticompetition practices have to be spelt out instead of having to rely on section 2(o) of the MRTPA, which merely spoke of the prevention, distortion or restriction on competition in a very broad, general sense.31 A perusal of the MRTPA would show that there is no definition or even mention of certain offending trade practices like the abuse of dominance, cartels, collusion, price fixing, bid rigging, boycotts, predatory pricing and refusals to deal.32 These were just a few of the reasons attributed to the MRTPA, by the High Level Committee for the enactment of a new competition legislation in India.

4. INDIAN COMPETITION ACT, 2002 AND ITS SALIENT FEATURES

The Act was part of Indias economic reform and globalisation process which necessitated aligning the economic laws of the country with the new economic scenario. the Monopolies and Restrictive Trade Practices Act, 1969 [MRTPA], has become obsolete in certain respects in the light of international economic developments, relating more particularly competition laws, and there is a need to shift our focus from curbing monopolies to promoting competition.33 The Preamble and section 18 read together would suggest that the Act seeks to achieve its objectives through the establishment of the Competition Commission of India [CCI], the enforcing authority, which in turn is
(New Delhi: Wadhwa & Co. Nagpur) 31 Id. 32 Id. 33 Vinod Dhall, The Indian Competition Act, 2002, pp. 499, 500, from Competition Law Today Concepts, Issues & The Law in Practice (2007), Edited by Vinod Dhall, (New Delhi: Oxford University Press)

17

International Context and the Indian Copetition Policy An Analysis given the mandate to spell out in section 18. section 18 states that it shall be the duty of the Commission to eliminate practices having adverse effect of competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure the freedom of trade carried on by other participants in markets, in India, and for matters connected therewith and incidental thereto.34 So the principle objective of a competition law is to maintain and protect the competitive process; this figures as the core objective of the Act and also as a principle duty of the CCI. The above objective appears in the competition laws of other jurisdictions as well. Economic theory asserts that competition itself maximizes consumer interest; nevertheless the protection of the interests of the consumers has been emphasized as a distinct objective of the Act. This view corresponds to the school of thought that regards competition law as being important to economic freedom as democracy is important to political freedom.35

4.1 ANALYSIS OF THE INDIAN COMPETITION ACT, 2002

The analysis of the Act has been divided and discussed under the following categories. Those portions of the Act considered relevant for the previous sections of the project have been discussed. 4.1.1. ANTI-COMPETITIVE AGREEMENTS

Section 3(i) prohibits any agreement with respect to production, supply, distribution, storage, acquisition, or control of goods or provision of services which causes or is likely to cause an appreciable
34

The Indian Competition Act, 2002, The Gazette of India, Extraordinary, available at http://www.competition-commission-india.nic.in/Act/competition_act2002.pdf (last visited on 13th July 2008). 35 Dhall, supra note 33, p. 500.

18

International Context and the Indian Copetition Policy An Analysis adverse effect on competition within India.36 The term agreement itself is defined in section 2 (b) of the Act; it includes any arrangement or understanding or action in concert whether or not formal or in writing or is intended to be enforceable by legal proceedings. Clearly, the definition which is inclusive, and not exhaustive, is a wide one. The agreement does not necessarily have to be in the form of commonly called a gentlemans agreement. In competition laws, generally the tern agreement is given a wide definition, because parties often choose to not formalize agreements, and sometimes they go to great lengths to hide it. In particular, cartels are shrouded in great secrecy. The World Bank/OECD glossary states that agreements may be implicit, and their boundaries are nevertheless understood and observed by convention among the different members and most agreements which give rise to anticompetitive prices tend to be covert arrangements that are not easily detected by competition authorities.37 In Registrar of Restrictive trade Agreements v. W. H. Smith and Sons,38 the court observed, people who combine together to keep up prices do not shout it from the house tops. They keep it quiet. They make their own arrangements in the cellar, where no one can see. They will not put anything into writing nor even into words. A nod or a wink will do. Parliament as well is aware of this. So it included not only an agreement properly so called but any arrangement, however informal. If any agreement creates even a shadow of doubt in the minds of competition authorities, as to its legality, then the parties trying to enforce the agreement through law could face serious difficulties. Section 19(3) states that while determining whether an agreement has an appreciable adverse effect
36 37

formal

document executed by the parties. It may include even what is

S. 3(1), Indian Competition Act, 2002, supra note 34. Dhall, supra note 33, p. 502. 38 (1968) 3 All ER 721.

19

International Context and the Indian Copetition Policy An Analysis on competition under section 3 the CCI shall consider the following factors: (i) creation of barriers to new entrants in the market; (ii) driving existing competitors out of the market; (iii) foreclosure of competition by hindering entry into market; (iv) accrual of benefits to consumers; (v) improvements in production of goods or provision of services; and (vi) promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services. This approach to determining adverse effects on competition is similar to the rule of reason adopted by the competition laws of most countries.39 Blacks Law Dictionary defines rule of reason in antitrust law as a judicial doctrine holding that a trade practice violates the Sherman Act only if the practice is an unreasonable restraint of trade, based on economic factors.40 In India, in Tata Engineering and Locomotive Co. Ltd.,41 the Supreme Court of India [SC] observed that to determine whether the restraint promoted or suppressed competition, it was necessary to consider three matters: (i) what facts are peculiar to the business to which the restraint is applied; (ii) what was the condition before ad after the restraint was imposed; (iii) what is the nature of the restraint and what is its actual and probable effect. In the case of horizontal agreements, listed in section 3(3), once it is established, it will be presumed that the agreement has an appreciable adverse effect on competition; the burden of proof would then shift to the defendant. This is called the Shall Presume rule, which most competition laws apply in cases of horizontal mergers, which are considered to be grave violations of competition laws. However, those horizontal mergers for research purposes, which have efficiency enhancing effects, shall be subject to the Rule of Reason as against the Shall Presume Rule.42
39 40

Dhall, supra note 33, p. 504. Blacks Law Dictionary, 7th ed. P. 1033 41 (1977) 2 SCC 55. 42 Dhall, supra note 33, p. 507.

20

International Context and the Indian Copetition Policy An Analysis

Vertical agreements are subject to the Rule of Reason and not the Shall Presume Rule, under section 3(4), which deals with vertical agreements. This softer treatment acknowledges that vertical agreements can have beneficial aspects as well, and these need to be weighed against the harmful effects to see if the agreement is on balance anti-competitive.43 Exclusive distribution agreements also cause concern because these could dilute intra-brand competition and partition the market. This would be particularly so if inter-brand competition is weak between the supplier and the competitors. In Tata Engineering and Locomotive Co. v. Registrar of Restrictive Trade Practices,44 a case under the MRTPA, the SC did not find the distribution of areas between the companys distributors as being restrictive. Section 3(5) of the Act deals with IPRs. This section allows patent-rights holders to impose those necessary and reasonable restrictions to protect their intellectual property, under the Patents Act, 1970 and the Copyright Act, 1957. For the effective implementation of competition laws and patent/copyright laws, the cooperation of the Competition Authorities of other countries is required.45 4.1.2. ABUSE OF DOMINANT POSITION

Section 4(1) prohibits any enterprise from abusing its dominant position. The European Commissions [EC] Glossary states that a firm is in a dominant position if it has the ability to behave independently of its competitors, customers, suppliers and ultimately the final

43 44

Id. (1977) 2 SCC 55 45 Dhall, supra note 33, p. 512.

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International Context and the Indian Copetition Policy An Analysis consumer.46 Dominant position defined in Explanation (a) relates to the relevant market and it is therefore necessary to determine the relevant market in which the dominant position is alleged. The markets are classified into geographical market, product market, etc. A geographical market is determined by factors such as regulatory trade barriers, local specification requirements,47 national procurement policies, adequate distribution facilities, transport costs, language, consumer preferences and need for regular or secure supplies or rapid after-sales services. This is given in the definition of geographical market in section 2(s) of the Act. Section 2(t) defines the relevant product market as comprising all those products or services which are regarded as interchangeable or substitutable by the consumer, by reason of characteristics of the products or services, their prices and their intended use.48 According the World Bank/OECD Glossary of Terms on competition policy, if markets are defined too narrowly in either product or geographic terms, meaningful competition may be excluded from the analysis. On the other hand, if product and geographic markets are defined too broadly, the degree of competition may be overstated.49 In Hoffmann-La Roche, the Court listed the following as relevant factors in determining the existence of a dominant position: the relationship between he market shares of the undertaking concerned and of its competitors, especially those of the next largest, technological lead of an undertaking over its competitors, the existence of a highly developed sales network, and the absence of potential competition. 50 The court also noted that an undertaking which has a very large
46

Glossary of Terms Used in EU Competition Policy Antitrust and Control of Concentration, Director General for competition (Brussels: July 2002), available at http://ec.europa.eu/comm/competition/publications/glossary_en.pdf (last visited on 11th Sept. 2008) 47 Dhall, supra note 33, p. 515. 48 See Indian Competition Act, 2002, supra note 30. 49 World Bank/ OECD: Glossary of Industrial Organisation Economics and Competition Law , available at http://www.oecd.org/dataoecd/8/61/2376087.pdf (last visited on 11th Sept. 2008).

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International Context and the Indian Copetition Policy An Analysis market share and holds it for some time, by means of the volume of production and scale of supply which it stands foris by virtue of that share in a position of strength which makes it an unavoidable trading partner and which, already because of this, secures for it, at the very least during relatively long periods, that freedom of action which is a special feature of a dominant position.51 Section 4(2) states that there shall be an abuse of dominant position if an enterprise indulges in any of the activities listed in the subsection, these being: unfair or discriminatory price including predatory pricing, limiting or restricting production or technical or scientific development, denying market access, imposing supplementary obligation having no connection with the subject of the contract, or using dominance in one market to enter into or protect another relevant market. The list of abuses is exhaustive. 52 The laws of many other jurisdictions are not very different from section 4 in respect of the practices that are treated as abuse of dominance. The term abuse of dominant position has been incorporated in competition laws such as those of EC, UK, Canada and Germany.53 In the US, the corresponding term for abuse of dominance is monopolization or attempt to monopolize, prohibited under section 2 of the Sherman Act. Monopolization has two elements: one, the possession of monopoly power, and two, the willful acquisition or maintenance of that power, as distinguished from growth or development as a result of a superior product, business acumen or historic accident.54

50

See Para. 48, Hoffman-La Roche AG v. Commission of European Communities [1979] 3 CMLR 211, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:61976J0085:EN:NOT (last visited on 11th Sept. 2008). 51 Id. Para 41. 52 Dhall, supra note 33, p. 517. 53 Id. 54 See Blacks Law Dictionary, Supra note 40, p. 1023.

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International Context and the Indian Copetition Policy An Analysis In order to demonstrate an attempted monopolization, a plaintiff must prove: (i) that the defendant has engaged in predatory or anticompetitive conduct with (ii) a specific intent to monopolize and (iii) a dangerous probability of achieving monopoly power.55 Abuse of dominant position is particularly harmful in the case of an essential facility, that is a facility, access to which is essential to compete effectively. The term is said to have originated in a US case Terminal Railroad Association of St. Louis.56 In some legal systems, there is a presumption that certain practices by dominant firms are inherently unfair and the approach has the merit of facilitating the design and enforcement of new competition laws. But in the Indian Competition Act, 2002, there is no such presumption, so technically, if a firm fulfills the conditions in section 19(4) which determines if a firm enjoys a dominant position presumed that there is an abuse of dominant position. 4.1.3. REGULATIONS OF COMBINATIONS, EXTRA-TERRITORIALITY AND SECTORS REGULATED BY THE COMPETITION LAW The Act contains provisions fro regulations of combinations, in section 5. a combination has been defined in section 5, and it includes an acquisition, acquiring of control, and any merger or amalgamation. The section sets certain size-related thresholds and only an acquisition, acquiring of control or a merger or amalgamation above these thresholds is covered under the definition. Section 20(3) provides that these thresholds are subject to periodic revision by the Central Government, so as to account for, inter alia, inflation and exchange
55 56

or not and if it

indulges in any of the activities listed in section 4(2), then it shall be

Dhall, supra note 33, p. 519. 224 US 383 (1912) referred to in Dhall, supra note 33, p. 520.

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International Context and the Indian Copetition Policy An Analysis rate fluctuations.57 Section 5(c) also explains how the value of the assets is to be computed, which shall include intangible assets like the value of goodwill, copyright, patent and trademark. Merger control is an essential ingredient of the competition laws of most countries. In the US, the Sherman Act does not contain specific provisions relating to merger control and this lead to numerous difficulties dealing with mergers; consequently the Clayton Act was enacted in 1914, which incorporated, inter alia, specific provisions for merger control. In the EC, merger control was introduced through a Council Regulation in 1989, which was later replaced by the Council Regulation of 2004.58 While the definition of combination is given in section 5, the regulation of the same is given in section 6. Section 6(1) states that no such combination shall be recognised as valid, which adversely affects the competition in the relevant market. Such a combination shall be considered to be void. Section 6(2) provides for a notice to be given to the CCI, disclosing the details of the combination, within seven days of approval of the board of directors of the enterprise concerned.59 Once the relevant market has been determined, it would be necessary to determine whether the combination causes any adverse effects to competition in that market. Section 20(4) both positive and negative factors and the last factor specifically states whether the benefits of the combination outweigh the adverse effect of the combination, if any. In the UK, mergers are to be analysed according to the substantial lessening of competition test. The EC law requires determination of the relevant market, and the factors considered
57 58

Id. p. 526. Id. p. 527. 59 See Indian Competition Act, 2002, supra note 34.

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International Context and the Indian Copetition Policy An Analysis include the market structure, actual or potential competition, economic and financial power, barriers to entry, technical and economic progress, countervailing power, efficiency and failing firm defence.60 The procedure for inquiry into a combination is laid down in section 29 and 31 of the Act. The investigation can commence either on the basis of a notification given to either of the parties to the CCI or it can be undertaken suo motu by the CCI up to one year after the combination has taken place [section 20(3)]. If the CCI does not give its approval within 90 working days since the publication of details regarding the combination, the CCI is deemed to have given its approval. The effects doctrine has been incorporated in the legislation,

empowering the CCI to look into combinations or abuse of dominant position or anything else, if it adversely affects the competition in any relevant market in India [section 32]. The jurisdiction of competition law extends to all sectors in the economy. Section 21 of the Act allows the CCI to coordinate with the Sector Regulator of a particular sector concerned, to increase the efficiency in implementation of the competition law. For efficient enforcement of the competition law, the competition authority in India requires the cooperation of other bodies as well. 4.1.4. POWERS OF THE CCI AND ENTITIES AGAINST WHOM

ACTION SHALL LIE The CCI is empowered to regulate its own procedure and is not bound by the procedure laid down by the Code of Civil Procedure, 1908, which describes the general procedure for civil courts. However, the CCI shall
60

Dhall, supra note 33, p. 529.

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International Context and the Indian Copetition Policy An Analysis follow principles of natural justice, as enshrined in section 36 of this legislation, whereby any party sought to be prosecuted shall be heard and be given an opportunity to present their case. The CCI has the power to summon witnesses, require production of documents, etc.61 The same powers are available with the Director General while carrying out investigations, undertaking search of premises, etc. Prohibition against abuse of dominant position lies only against an enterprise, while the prohibition against anti-competitive agreements, anti-competitive combinations, etc. lie against enterprises and association of persons [section 6(1)].

4.2

SALIENT

FEATURES

OF

THE

NEW

INDIAN

COMPETITION LEGISLATION
The Competition Act improves upon its predecessor in many ways. It defines crucial terms that were left undefined in the MRTPA, for example cartel, consumer, predatory pricing and turnover. Several criteria have been listed for defining the relevant market and the relevant product in determining effects of business conduct on competition. The Competition Act provides for regional benches of the proposed Competition Commission, as well as specialized merger benches, unlike the MRTP Commission, which sat only in Delhi. Unlike the MRTPA, the new Act provides for outside advisers and consultants, and for hearing expert testimony. Firms violating the new law can be fined ten per cent of their turnover, whereas the MRTP Commission could only issue cease and desist orders, with modest fines for not complying
61

with

them.

Apart

from

regulatory

and

adjudicatory

Section 36, Indian Competiton Act, 2002.

27

International Context and the Indian Copetition Policy An Analysis functions, the Competition Commission, unlike its predecessor, is also entrusted with competition advocacy. The Competition Act also includes clauses specifically related to cross-border competition issues.62 Another range of improvements relates to what the Act does not attempt to cover. It wisely avoids unfair trade practices [UTPs]. The vast majority of cases before the MRTP Commission in recent years came under the chapter on UTPs and the section on compensation. These involved mainly complaints relating to misleading advertising, deficiency in quality of goods or delayed delivery, usually of flats or cars booked with dealers. Matters such as these should have been taken up by the consumer forums under the Consumer Protection Act [COPRA], because adjudicating consumer cases requires principles that are quite different from those required for a modern competition law. Consequently, the limited resources of the MRTP Commission were unnecessarily diverted away from the monopolistic and restrictive trade practices that were its original responsibility. The Competition Act rightly transfers pending UTP cases to the National Commission constituted under COPRA, to be disposed of under its provisions, which have recently been streamlined.63 In recent years the Commission has also entertained several

complaints under clause 2(o)(ii) of the subsection defining Restrictive Trade Practices [RTPs], which refers to manipulation of prices so as to impose on the consumers unjustified costs or restrictions. This issue is related to the second way in which the Competition Act represents an important improvement, again because of what it does not include. The MRTPA was pervaded by the notion that the public
62 63

Bhattacharjea, supra note 1, p. 27. Id.

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International Context and the Indian Copetition Policy An Analysis interest was to be decisive in adjudicating cases. This criterion has been removed from the Competition Commissions mandate in the new Act.64 MRTP Commissions interpretations usually had nothing to do with maintaining competition, but were based instead on idiosyncratic notions of social justice, such as protecting employment in industries threatened by low-priced imports, or (in conjunction with the price manipulation aspect of alleged [RTPs] protecting consumers from prices which the Commission believed to be excessive. Evidence of collusion, market dominance or effects on competition, which should be central to establishing an anti-competitive act, was not required. The MRTP Commission thus displayed a tendency to issue orders against prices that it regarded as unfair, whether too high or too low.65

5. FINAL OBSERVATIONS AND CONCLUSIONS

The Indian market today is totally different from what it was a few years back; there is greater availability of goods and there is wider choice for the consumers. Prices of many goods and services have fallen in real terms and, generally speaking, business is growing at a healthy pace. The benefits of competition are particularly visible in sectors such as automobiles, telecommunication, airlines, banking and insurance.66 It would be a major challenge to build up the Competition Commission as a highly professional organization and attract well qualified professionals to work in the Commission. Given the Governmental salaries provided for the Commission, it may be difficult to attract and retain professionals and prevent a rapid turn-over of staff, especially economists and lawyers. It is also important to undertake capacity building of the Commission and its staff so that they have a deep understanding of the concepts, both economic and legal, which underlie the Act and also the latest developments in this area
64 65

Id. p. 28. Id. 66 See Speech by Mr. Dhall, Supra note 28.

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International Context and the Indian Copetition Policy An Analysis across the globe. This challenge extends also to the investigating staff as they would be required to investigate complaints keeping in mind the complicated economic and legal issues that are bound to arise.67 It is also important to build up a larger body of professionals, outside of the Commission, having adequate knowledge and experience of competition policy and law such as economists, lawyers, professionals and business managers. Our experience is that, being a new subject, the number of knowledgeable people in the country is very small, confined mainly to the leading lawyers or law firms and a few economists. The law provides that, in addition to advocates, chartered accountants, company secretaries and cost accountants can also appear before the Commission. It is a challenge before them to build up their knowledge and skills to effectively appear before the Commission.68 India is still getting used to the idea of having its own indigenous competition legislation. With time the efficiency of the CCI is bound to improve. As the CCI establishes itself as a fair body, the Competition Authorities from other countries would also start trusting the CCI with their investigation work for their cases and cooperation between the Indian CCI and the other authorities can slowly develop. The progress may be slow, the Indian Competition Act, 2002 is the first step towards a more globally comfortable India.

67 68

Id. Id.

30