Collective Dominance, Commercial Viability and Policy Decision under Competition Act 2002

The Competition Commission of India in a recent ruling (Royal Energy Ltd v IOCL and others, MRTP Case No. 1/28, decided on May 9, 2012) has held that the decision by the Oil Marketing Companies (OMC) viz. Indian Oil Corporation Ltd, Bharat Petroleum Limited and Hindustran Petroleum Limited, to purchase bio-disel at prices determined by themselves at prices less than the manufacturing cost was not in contravention of Section 3 (anti-competitive agreements) or Section 4 (Abuse of dominant position). Despite being a short order, this case has conceptually observed on certain aspects that will be explained below in this post. 

First a little background on this case. With a view to using alternative sources of energy, the Ministry of Petroluem and Natural Gas came out with the Bio-Diesel Purchase Policy. Under this policy, the Bio-Diesel suppliers could supply bio-disel to the OMCs. The OMCs could blend the bio-diesel with the High Speed Diesel which was to be ultimately used as fuels for the vehicles. Under this policy, the OMCs were to purchase the bio-diesel that met the BIS specifications at a uniform price determined by the OMCs. As the price of High Speed Diesel was fixed & regulated, the OMCs determined the purchase price of bio-diesel by backward integration. This price was considered less than adequate and below the manufacturing cost by the suppliers of bio-diesel. This was alleged to be an anti-competitive agreement by the OMCs. The CCI ultimately held that the OMCs could not be mandated to purchase the Bio-diesel at a price higher than the price of the end product and make it commercially unviable for the OMCs to operate.

This brings to the fore the issue of whether a commercial viability test can be introduced as a defence in an investigation pertaining to Section 3 violation. For e.g. if three non-dominant enterprises wish to compete against a dominant enterprise by agreeing to act in one of the ways determined under Section 3 (3) (a) (say for instance by indirectly facilitating collusive bidding by joining forces to get the contract to the disadvantage of the dominant enterprise) resulting in better competition and for commercial viability of the enterprises then will such a conduct still be viewed to be having an appreciable adverse effect on competition for the purposes of Section 3 (1). Such an action need not necessarily result in any of the benefits identified under Section 19 (3) or may not have the effect of driving the dominant enteprise, and may be merely directed at meeting the competition posed by the dominant enterprise. Unlike the proviso to Section 4 (2) (a), Section 3 does not statutorily have the explicit 'meeting competition defence'. The action may merely result in promoting competition in the market in which the enterprises are operating - an action promoting the object of the Competition Act, 2002 and one of the duties of the CCI under Section 18. At least as held in the Royal Energy Case, there seems to be a possibility for using the commercial viability test because the subject investigation pertained to fixation of prices by direct competitors under Section 3 (3) (a).

Another issue is can commercial viability / protecction of commercial interests be used as a defence in a Section 4 contravention (apart from Section 4 (2) (a) cases). In the past in Europe it has been held that even dominant undertakings can take counter action to protect their commercial interests, however, such counter action should be proportionate to the threat taking into account the economic strength of the parties. (Case 27/76, United Brands v Commission, judgment delivered by European Court of Justice Para 189-190)

The next important observation of the CCI was that “even if an anti-competitive conduct flows from any policy of the Government, the Commission will still have jurisdiction to examine the conduct and in case of any violation suitable orders can be passed”. The Activity of policy determination by the Government may be viewed as sovereign in nature (being inalienable function of the government) and therefore, in light of Section 2 (h) of the Competition Act, 2002 and such activities may be considered outside the purview of the CCI. Even if the policy decisions are not viewed as sovereign, it will be interesting to see if the CCI would like to intervene into policy decisions of the Government. As normally a policy of deference would be adopted in matters relating to law and policy making as it is expected that it is best left to the Parliamentarians and the Government. However, in the light of the dicta in the Royal Energy case, it appears that even actions undertaken directly pursuant to a mandate under the policy of the Government would result in indirectly reviewing the policy decision.

This may lead to the CCI scrutinizing the actions of several PSUs that function under the operative directions of a particular Ministry and pursuant to policy decisions. In addition, actions taken pursuant to policy decisions of other sectoral regulators may also fall within the purview of the CCI. This only heightens the existing tension and debate whether the CCI should intervene in cases where other sectoral regulators operate. With the proposal to oust the jurisdiction of CCI in matters pertaining to acquisition and mergers of banks gaining strength[1], other sectors are also not too far behind in seeking for an exemption from the rigours competition law.[2] It will also be pertinent to note that power to exempt any enterprise from the purview of the Act under Section 54 of the Competition Act 2002 is available with the Central Government only if it is necessary in public interest or in the security of the state or to comply with any of India’s obligations under an international treaty or for enterprises performing activities that are relatable to the sovereign functions of the state. Any exemption granted pursuant to the Competition Act would have to pass any of the aforementioned tests to be clearly outside the purview of the Competition Act.

Furthermore, at a jurisprudential level, the CCI has also held in the case under discussion that the concept of collective dominance is not envisaged under Section 4 of the Competition. Collective Dominance as accepted in Europe is a case where a group of unrelated entities that are united by economic links collectively hold a dominant position in a market.[3] Although the decision does not provide any reasons for the same, the reason may be because presently Section 4 provides that no ‘enterprise or group’ should abuse its dominant position. Initially the un-amended section 4 only provided that no enterprise shall abuse its dominant position and post the 2007 amendment the term ‘group’ was specifically introduced. The definition of group is restricted to entities under the same management or control. Therefore, it may seem that collection of enterprises that do not form part of group was not considered by legislature to come within the purview of Section 4. Also, whether a concept that has its genesis outside the frontiers of India should cross the judicial borders to enter into India is a question that will have to be decided. On the other hand ordinarily it is a statutory rule that a singular word would also include a plural.[4] Therefore, by that logic enterprise would also include enterprises and a group of enterprises can abuse their dominant position. However, these issues have not been effectively raised or decided by the CCI in the said case and therefore it will still remain to be seen whether the collective dominance concept is envisaged under Section 4.

Furthermore, this decision (and the principles enshrined therein) is still to be tested by the higher judicial echelons. It will be interesting to see, if and when, this decision (or the issues) reaches the Competition Appellate Tribunal or the Supreme Court, which way would the tide of competition sway.

---

[1] Please see in this regard a news report in The Economic Times report on June 11, 2012 available at: http://articles.economictimes.indiatimes.com/2012-06-11/news/32175083_1_practices-and-abuse-cci-competition-act

[2] Please see in this regard a news report in the Hindu Business line reported on May 29, 2012, available at:

[3] Case T-68, 77 and 78/89, Societa Italiana Vetra SpA v Commission [1992] 5 CMLR 302, Para 358

[4] Section 13 of the General Clauses Act, 1897

Prepayment Penalty: Does CCI has a Case?

If the speculation in print media is to be believed, it seems the Competition Commission of India (CCI) has made its mind to penalise banks that impose “pre-payment penalty” clauses on their borrowers while lending loans. One of the defending banks, State Bank of India, has already suffered the brunt of National Consumer Disputes Redressal Commission (NCDRC) in Usha Vaid v Sate Bank of India [RP No.2466/2007]. In Usha Vaid case, the NCDRC categorically held that the levy of pre-payment 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!