penalty amounts to unfair and restrictive trade practice. On appeal, the Supreme Court refused to grant leave to hear the matter. Nonetheless, in my view, it would be difficult for CCI to bring the practice of pre-payment penalty within the four corners of the prohibited actions as laid out in Sections 3 and/or 4 of the Competition Act.Typically, a pre-payment penalty is a clause in a mortgage/loan contract that says if the mortgage/loan is prepaid within a certain time period, a penalty will be assessed. The penalty is usually based on percentage of the remaining mortgage balance or a certain number of months worth of interest. In India, banks usually charge this penalty at the rate of 2% to 3% of the remaining principal amount.
To begin our analysis, let us assume that pre-payment penalty amounts to anti-competitive practice so far as it restricts a consumer to avail banking services of another firm which is ready to offer the loan at lower interest rates. Yet, it would be difficult for CCI to pin down the practice as result of some sort of collusion among banks or abuse of dominance. The CCI would have two options to target the banks:
i. Firstly, it may try to establish that the defending banks entered into an agreement among themselves to fix the rate of pre-payment penalty and had limited or controlled the supply of banking services (home loans and such other loans being the relevant product market) within India (relevant geographic market), [Section 3(3) Claim] or;
ii. CCI may claim that the defending banks possess “collective dominance” in the relevant product market and thus have abused this dominance by limiting or restricting the provision of services or market therefor. It is important to note that CCI may not be able to claim that any one of the defending banks individually enjoys a “dominant position” in the relevant product market. The reason being, Indian retail banking sector, over the time, has seen fierce competition with gradual introduction of new entrants. According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: September 2009', nationalised banks, as a group, accounted for 50.5 per cent of the aggregate deposits, while State Bank of India (SBI) and its associates accounted for 23.8 per cent. The share of other scheduled commercial banks, foreign banks and regional rural banks in aggregate deposits were 17.8 per cent, 5.6 per cent and 3.0 per cent, respectively. Given the market shares of different commercial banks, the only way in which CCI may put forward its claim is through the application of "collective dominance".
Having identified the two viable options available to CCI, it would be interesting to examine whether there may be a successful claim against the defending banks. Coming to the first option, it would be certainly an uphill task for CCI to prove the elements of Section 3(3) claim. CCI would have no evidence to suggest that the defending banks entered into any agreement, arrangement or understanding, whether formal or informal, to implement pre-payment penalty clauses in their loan contracts. The practice of pre-payment penalty by banks is matter of commercial policy and prudence practiced all throughout the world. Therefore, existence of an agreement is a matter of remote possibility or rather impossible. This brings us to the question of fixation of rate of pre-payment penalty. The impediments of proving agreement apply here too. Added to the hurdle is the question as to whether rate of pre-payment penalty may be categorized as “purchase or sale price” under clause (a) of Section 3(3). The banks may safely argue that “pre-payment penalty” does not form part of the interest rate (which is the real source of revenue in any loan contract) applied to loan while selling their services. The penalty clause is mere insurance against the untimely loss of a customer, being entirely independent of the interest rate. Hence, an overall analysis of the practice of prepayment penalty clearly suggests that the CCI is unlikely to rely on the first option to prove its claim.
This leaves us with the claim of “collective dominance” and abuse thereof i.e. Option 2 [Section 4 Claim]. CCI’s task would have been much easier has there been only one bank with large market share. But, the adoption of pre-payment penalty clauses by almost all known commercial banks together brings the issue of “collective dominance” − a concept alien to the Indian Competition Act. Unlike European Commission, where it was much easier for Commission and Courts to read the concept of ‘collective dominance” under Article 82 of EC Treaty, the CCI would not enjoy the same privilege. This is because the difference in while couching the opening words of Article 82 of EC Treaty and Section 4 of the Competition Act. Article 82 begins with the phrase “any abuse by one or more undertakings of a dominant position” and it was this phrase “one or more undertakings” which was used by Court of First Instance in Italian Flat Glass case to hold that “there is nothing in principle to prevent two or more independent economic entities from being, on a specific market, united by such economic links that, by virtue of that fact, together they hold a dominant position vis-à-vis the other operators on the same market.” This marked the birth of the concept of “collective dominance” in Europe.
However, Section 4 of the Competition Act aims at “an enterprise” or “group”. Section 4(1) reads: “No enterprise or group shall abuse its dominant position”. There is nothing in the definition of enterprise under Section 2(h) or in the provisions of Section 4 to suggest that two or more independent entities can be clubbed together to constitute collective dominance. Again the term ‘group’ borrows its definition from Explanation to Section 5 which applies to related entities.
Even assuming that the concept of “collective dominance” may be forcibly read into Section 4 by applying provisions from General Clauses Act (Section 13), yet it would bring little respite to CCI. The concept was evolved to tackle the abuse of dominance by two or more undertakings in an oligopolistic market. Most cases in EC where the doctrine of collective dominance has been applied invloved two to three entities having significant market share in the relevant market. Given the present market structure in banking sector (supra), it would be difficult to prove that the relevant product market is oligopolistic one. Hence, in my view, should the CCI find the banks guilty, it has a bleak chance to prove its case before the Appellate Tribunal. This note has not addressed on the issue of pro and anti-competitive effects of penalty clause. I would bring my perspectives on the same soon!
