CCI's Order in Banks' Prepayment Penalty Case: Of Mistakes and Mis-interpretations!

The Competition Commission of India ("CCI") has issued its first order in a contentious case, Neeraj Malhotra v Deustche Post Bank Home Finance Ltd. & Ors, involving issues of anti-competitive agreements and abuse of dominance by banks while charging prepayment penalty on home loans. (CCI has earlier issued orders in several cases but those were not investigated by Director General (DG) and were disposed by CCI as they did not have merit. This is the first case where CCI has issued its final order after DG has investigated the matter). The majority order of CCI exempts banks from any liability under the Competition Act. However, Mr Parashar and Mr Prasad in their separate dissenting order have found banks violation provisions of Section 3 of the Act. The dissenting orders may be found here and here.

Earlier, I had written on this blog as to why it would be difficult for CCI to make case based on the information I had from media reports. The piece on this blog may be found here. I had pointed that: (i) CCI may not be able to fix the banks under Section 3 as there would be little or no evidence to suggest an agreement given high competitiveness among banks in today's economy; and (ii) proving abuse of dominance would be difficult given the highly fragmented market share of banks. These conclusions were based on the facts available in public domain at that time. However, the investigation of DG reveals that Indian Bank Association ("IBA") had convened a meeting of its members on 28.08.2003 to discuss the issues in relation to charging prepayment penalty ("PPP") and had issued circulars on having a common approach towards PPP. In the light of these facts, it would now be important to analyse the orders (both majority and dissenting) of CCI.

The facts of the case are very simple. The Opposite Parties charge a penalty in the range of 1% to 4% of the entire loan amount or outstanding loan to its customers/borrowers in case the customers choose to prepay their loan ahead of the scheduled time originally agreed. The customers may do so either by switching to another lender (who obviously is offering loan at lower interest rate) or by their own savings. Most the banks charge prepayment penalty ("PPP") in either case while some charge PPP only in the former case. The Informant filed information against four banks/house finance companies ("HFCs"). However, the DG impleaded 12 more banks/HFCs while investigating the matter.

1. Arguments raised by the Informant

The major allegations of the informant may be summed as follows: (i) that by charging PPP on entire loan amount, the opposite parties have agreed to determine sale prices for their services; (ii) that the imposition of PPP also limits the supply/provision of services as the customers are unable to opt for another source of loans; (iii) that the opposite parties have also abused their dominant position in the relevant market by imposing unfair and discriminatory conditions in purchase or provision of services (i.e. loans); and (iii) that the practice of PPP prevents borrowers from switching over to competitors offering lower rate of interest thereby causing existing competitors to drive out from the market.

2. Findings of the DG

The DG in its report to CCI concludes that:
(i) The allegations regarding violation of section 3(1), 3(2) read with Section 4(1), (2)(a)(i) are untrue and that PPP is charged on the outstanding principal and not on the entire loan amount.
(ii) The allegation with regard to violation of section 3(3)(b) is found to be true.
(iii) The levy of PPP makes the exit for a borrower expensive and thus acts as a deterrent for a borrower in availing the best prevailing interest rate of other bank/financial institution.
(iv) levy of PPP violates provisions of Section 19(3) (a), (c) and (d).

3. Analysing the order

At the outset it may be noted that the Chairman of CCI has recused himself from this case, perhaps because he himself is the borrower of home loan from one of the opposite parties. The majority framed five points of determination before (I am not repeating them here; see pg 138-139 of the majority order). The analysis begins with macroeconomic analysis of interest rates over an economy and how it impacts investment and growth. The majority order, on issue of existence and nature of PPP, holds that no uniform can be said have been adopted by banks/HFCs in regard to levy of PPP.

3.1 Limiting the concept of "agreement":

The major upset in the majority order would be seen in its analysis of agreement under section 3 of the Act. While referring to words used in section 3(1) of the Act i.e. production, supply, distribution, storage, acquisition, or control of goods, or provision of services, the majority holds that these terms/activities relate to the supply side of the market. Thus, the majority holds that these terms clearly excluded agreements between a producer and the end consumer because no consumer can be said to be involved in activities such as production, distribution or control of any goods or services. This undoubtedly raises several questions than it answers:
(i) who is an end consumer?
(ii) whether section 3(1) does not apply to section 3(4)?
(iii) If section 3(1) is the genus and section 3(4) a species of the genus, then what happens to tie-in agreement or exclusive supply agreements? Referring specifically to SAIL-JINDAL dispute, whether or not Indian Railway is the end consumer of steel? If Indian Railway is the end consumer, can there be any sustainable case against SAIL-Indian Railway exclusive supply agreement?

3.2 Raising the threshold to prove agreement more than intended by the Act itself:

The majority states that an agreement is a conscious and congruous act that has to be associated to a point in time. With this reasoning, it holds that there is nothing to prove that the opposite parties have formed any internal and discrete association for charging PPP. The majority stressed on the point that there is no concerted action among banks as not all of them started charging PPP at one point of time. While it may be true that HDFC and LIC started charging PPP much before the said meeting of IBA members in 2003, however the majority does not provide any reasoning why other members, who started charging PPP only after the said meeting, could not have been charged of having entered into an agreement towards a common approach for levy of PPP. It would be pertinent, here, to quote the extract of the minutes of the meeting of IBA members on 28.08.2203:

"...[W]hile discussing the issue members had expressed divergent views on the subject. While one view was that commitment charges on non-availment of committed line of credit would improve the fee-based income of banks. Suggestions were made that we should also think of uniform norms for pre-payment charges when a borrower chooses to pre-pay the loan availed. With the interest spread narrowing under intense market competition, it was felt that banks should look for other avenues for earnings. It was therefore suggested that IBA could suggest to reintroduce commitment charges on unutilized portion of working capital limits and decide on levy of pre-payment charges with the decision as to the extent of charges to be levied being left to the banks..."

Further, IBA issued a circular to its members after the said meeting on 10.09.2003 stating in part as follows:

"On the whole, members were of the view that levy of commitment charges and pre-payment charges would help not only in terms of asset liability management, but also in augmenting fee based income of the banks. The latter was seen as significant consideration in today’s competitive market with pressures on interest spread. While members felt that charges in the range of .5%-1% would be reasonable, the view was that a decision in this regard should be left to the banks to decide …"

Yet, the majority held that there was no congruence of action which is an integral part of any agreement. The majority seems to be guided by the fact that different banks/HFCs charge different rates of PPP. It further notes that mere fact that the IBA issued a circular dated 10.09.2003 mentioning concern of some of member banks could not in itself be said to form a basis for or evidence of an agreement between banks.

In contrast to the above, Mr Parashar, in his minority order, has presented a richer analysis of facts and legal position on agreements. Mr Parashar has very meticulously analysed the action of each of the opposite parties pursuant to the meeting of IBA members and to show that how the common approach deliberated in the meetings of IBA was actually effected by most of the opposite parties. The internal circulars of the some of the opposite parties (for example, Punjab National Bank and Vijaya Bank) clearly show that the asset liability management ("ALM") was no reason for adopting PPP. The circulars of these banks prove that the main purpose to introduce PPP was to dissuade the borrowers from shifting to other banks. Further, internal circulars of some other banks also clearly suggested that their action was in pursuant to the meeting of IBA dated 28.08.2003.

Given this factual background, the majority order has clearly undermined the statutory intent of giving 'agreement' a very wide meaning. The position in Europe and UK is clear, as has been rightly referred by Mr Parashar in his minority order, that "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 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". The minority order is also laudable, in another aspect, for clearly stating that temporal coincidence is not necessary for proving an agreement. Mr Parashar has rightly noted that a 'decision' to be covered within the provisions of section 3(3) of the Act need not necessarily be simultaneous or taken at the same point of time by all parties (at para 73 of his order). The majority order, it seems, has ignored the dynamics of steadily changing competition law jurisprudence in other jurisdictions. CCI has in effect imposed a higher threshold for itself and also for informants for all future cases of alleged cartels which in themselves are toughest of the cases to crack.

3.3. On cartels and burden of proof: Is there a per se rule?

The majority order is completely silent on how the burden of proof works under section 3(3) of the Act. It is here again that the minority order of Mr Parashar is partially of worth. I say partially as Mr Parashar has confused the legal practitioners on the "per se-rule of reason dichotomy". Mr Parashar provides a detailed analysis of evolution of per se rule under the US antitrust law and concludes that agreements under section 3(3) of the Act is covered within the per se rule. He begins stating that ". . . cartels and similar horizontal agreements are placed in a special category and are subject to the adverse presumption of being anti-competitive. This is also known as per se." There is inherent contradiction in these two statements. If something is subject to adverse presumption, how can it be "per se" as evolved under US antitrust law. Under US antitrust law, there are certain agreements which because of their pernicious effects on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and, therefore are considered to be illegal without any further elaborate enquiry [Northern Pacific Rilaway Co. v United States; 356 US 1 (1958)]. Interestingly, Mr Parashar refers to this decision and yet finds the agreements under section 3(3) to be covered under per se rule. While interpreting the term "shall presume" appearing under section 3(3), Mr Parashar refers to decisions of Supreme Court where it has held that the phrase lays down a rebuttable presumption in respect of matters with reference to which they are used . . . and not laying down a rule of conclusive proof. In spite of this Mr Parashar, again at paragraph 100, holds that the agreement reached among opposite parties is covered within the per se rule contained in section 3(3) of the Act. This, in my opinion, is not correct as there is no per se rule under the Indian competition law as it has been known and evolved in US antitrust jurisprudence.

However, Mr Parashar's attempt to clearly bring out the onus of proof in cases of allegations under section 3(3) is laudable. Where the majority is conspicuously silent on the burden of proff, Mr Parashar has convincingly conveyed that once the existence of agreement among opposite parties is proved, the onus to prove that it does not have appreciable adverse effect on competition lies on the opposite parties. The majority is of the view that housing finance market has seen immense growth during 2004-2009 and thus levy of PPP has in no way undermined competition in home loan market. However, Mr Parashar has taken more rule-based or technical approach holding that banks have not been able to conclusively show that how PPP helps in maintaining asset-liability balance. He emphasizes that neither the asset is defined and quantified at relevant stages nor the liability is worked out and specified on the basis of cost transactions. Thus, he rejects the entire plea of ALM on grounds of lack of facts and evidence. Here again, Mr Parashar has successfully implemented the intent of legislature by casting stringer test for successfully pleading pro-competitive effects under section 19(3).

3.4. On abuse of dominance

Both majority and minority orders do not find any violation of section 4 given the highly fragmented market share of banks/HFCs in home loan market. But, here again, it may be argued that CCI has escaped the responsibility of a deeper and technical analysis of geographic markets. Given the huge disparity in economic growth among parts of country, there are areas (geographic markets) in this country which have not experienced the mushrooming of banks/HFCs unlike more developed tier-I cities. In such less developed markets, it may be certainly possible that a bank or two to three banks command the entire market for home loans. Could it be said that levy of PPP by such dominant banks in segregated smaller geographic markets results in abusive practice? That is separate question which, I believe, requires complex number crunching, deeper and technical analysis.

4. Final remarks

It is disheartening that the informant Mr Neeraj Malhotra did not provide his comments on the DG report. However, this does not mean that the order of CCI cannot be appealed before the Appellate Tribunal. Section 53B of the Act vests the right to appeal in any person aggrieved by the order of CCI. It would be desirable that the order of CCI is appealed before the Tribunal for a better interpretation of law.

Note: My earlier piece on prepayment penalty was based on the limited facts avaiable in public domain. With IBA meeting and its circular, the issue as to the existence of an agreement among opposite parrties (except HDFC and LIC)is contentious.

Director-General (CCI) finds NSE abusing dominant position

According to a report published in the Economic Times, Monday, 29 Nov., 2010, the Director-General, CCI (DG), the investigating wing of CCI, has found National Stock Exchange (NSE) abusing its dominant position in the currency derivative segement of exchange market. The report suggests that DG has prepared a 245-page dossier detailing how NSE has over several years abused its dominant position and financial muscle to kill competition in the countrys stock exchange space.It seems from the reports that DG has found that NSE violated Section 4(2)( a)( ii),and Section 4(2)( e) read with 4(1) of the Competition Act,2002.

CCI had ordered a probe into the practices of NSE after it received information from MCX Stock Exchange (MCX-SX) alleging that NSE was indulging in abusive practices by waiving the transaction fee on currency derivatives.

The case is interesting in many aspects. First, CCI spread its wings into competition in capital markets within a year of Section 3 and 4 getting enforced; showing the overarching jurisdiction of CCI. Second, it seems that DG has recommended several remedial measures which could lead to the division of NSE into more than one entity so that there is competition in the country's stock exchange business.

As and when more information comes in public domain, this blog would closely follow all issues surrounding this case.

Readers may also access a report published in Financial Express here

Disclaimer: This piece on this blog is based on information published in media. The actual facts may be different.

Press Release on Functioning of CCI

Recently, Mr Salman Khurshid, Minister for Corporate Affairs, informed that a total of 130 cases are before CCI (80 under Section 19 of the Competition Act + 50 transferred from MRTPC). The Minister also claimed that out of these 130 cases, 37 cases have been disposed off. However, there are only 25 final orders which may obtained from CCI website.

The press release by Press Information Bureau may be accessed here.

CCI shows teeth; imposes Rs 1 crore fine on Kingfisher for not furnishing information

As per the media reports, CCI has imposed a fine of Rs 1 crore on Kingfisher Airlines for not furnishing information it sought during the investigation into the carrier's proposed strategic agreement with another private player Jet Airways.

The newspaper reports suggest that Kingfisher Airlines had not furnished certain information that the Director General had asked for. Therefore, CCI, while exercising its powers under Section 43 of the Competition Act, 2002, has imposed fine to the tune of INR one crore (approximately USD 222,220) on Kingfisher Airlines. However, the media reports suggest that the fine was imposed under Section 44, which obviously cannot be true as Section 44 applies to combinations and the provisions relating to combinations have not been enforced by the Central Government yet. This is for the first time that India's new competition regulator (CCI) has imposed penalty on any company.

It would be interesting to see how Kingfisher Airlines responds to the recent move of CCI. Under Section 43 of the Act, CCI has power to impose fine which may extend to Rs 1 lac for each day during which non-compliance continues subject to a maximum of Rs 1 crore. Kingfisher may choose to appeal against this order. The Appellate Tribunal has express powers under Section 53A of the Act to hear appeals against order passed by CCI pursuant to Section 43.

However, the Appellate Court or any Writ Court has very limited power to meddle with the decision of a lower authority on issues of penalty. The Appellate Court would, rather review the issue, than examine it on detailed merits. It would interfere with the quantum only if it finds that the decision is illogical or suffers from procedural impropriety or is shocking to the conscience of the court, in the sense that it is in defiance of logic or moral standards.

The law in India on this issue is settled. In B.C. Chaturvedi V. Union of India and others, (1995) 6 SCC 749, the Supreme Court after referring to a number of its earlier decisions observed as under:-

"A review of the above legal position would establish that the disciplinary authority, and on appeal the appellate authority, being fact-finding authorities have exclusive power to consider the evidence with a view to maintain discipline. They are invested with the discretion to impose appropriate punishment keeping in view the magnitude or gravity of the misconduct. The High Court/Tribunal, while exercising the power of judicial review, cannot normally substitute its own conclusion on penalty and impose some other penalty. If the punishment imposed by the disciplinary authority or the appellate authority shocks the conscience of the High Court/Tribunal, it would appropriately mould the relief, either directing the disciplinary/appellate authority to reconsider the penalty imposed, or to shorten the litigation, it may itself, in exceptional and rare cases, impose appropriate punishment with cogent reasons in support thereof." (emphasis supplied)

Similarly, in Apparel Export Promotion Council Vs. A.K. Chopra, AIR 1999 SC 625, the Supreme Court again observed :-

". . . Even insofar as imposition of penalty or punishment is concerned, unless the punishment or penalty imposed by the Disciplinary or the Departmental Appellate Authority, is either impermissible or such that it shocks the conscience of the High Court, it should not normally substitute its own opinion and impose some other punishment or penalty."

Thus, the Appellate Court would interfere only if it finds that the quantum of penalty is wholly inconceivable, given the facts of the case. In absence of correct facts and data in public domain, it is not known what information was not provided by Kingfisher Airlines. It is also not known whether CCI issued any further notice calling for information before imposing the penalty.

It would be interesting to see what happens next. Indeed, these are exciting times for both academia and lawyers concerned with the developments in competition law.

CCI v SAIL: Supreme Court Gets it Right!

In a telling judgement, the Supreme Court of India, on Sep. 9, 2010, has effectively and judiciously circumscribed the boundaries of exercise of power by both the Competition Commission of India (CCI/Commission) and the Competition Appellate Tribunal (“the Tribunal”) while delivering its verdict in the much awaited case Competition Commission of India v. Steel Authority of India Ltd. This Note captures the highlights of the decision for readers of this Blog!

Background:

The Court was hearing an appeal by the CCI against the order dated Feb. 15, 2010 of the Tribunal in Steel Authority of India Ltd. v. Jindal Steel & Power Ltd. Jindal Steel had filed a complaint before CCI alleging anti-competitive practices and abusive behaviour by SAIL while it entered into an exclusive supply agreement with Indian Railways. Upon receipt of the complaint/information, CCI issued notice to SAIL to furnish certain information for within two weeks from the date of receipt of such notice. SAIL requested for an extension of time upto six weeks to file the required information. CCI in its meting deliberated on the request and decided not to grant any further extension. In the said meeting CCI also formed a prima facie opinion on the existence of the case and directed the Director General (DG) to inquire into the matter pursuant to its powers under Section 26(1) of the Competition Act, 2002 (“the Act”). SAIL challenged this direction before the Tribunal claiming that CCI could not have formed a prima facie opinion without hearing it first. SAIL also contended that CCI has not recorded any reasons while forming the prima facie opinion and that the time provided by CCI to file information was grossly inadequate. While filing the appeal before Tribunal, SAIL did not implead CCI as a party. CCI thus filed an application before Tribunal for impleading itself as a necessary and proper party and also assailed the very maintainability of appeal.

The Tribunal, in its detailed order, holding that even the direction to inquire was appealable under Section 53A(1) of the Act noted that CCI could not have directed the DG to inquire into the complaint without having heard SAIL. It further noted that CCI was neither a necessary nor a proper party in appeals filed by an aggrieved party before the Tribunal. The Tribunal also noted that CCI did not record any reasons while declining to grant extension of time and hence it in violation of principles of natural justice.

Appeal before the Supreme Court:

Aggrieved by the order of the Tribunal, CCI approached the Supreme Court which framed six broad issues noting some of the allied issues raised by the parties:

(i) Whether the direction passed by the Commission u/s. 26(1) of the Act while forming prima facie opinion would be appealable u/s/ 53A(1) of the Act?
(ii) What is the scope of the power vested with Commision u/s. 26(10 of the Act and whether parties including the informant and other affected parties are entitled to notice at the stage of formation of prima facie opinion?
(iii) Whether the Commission would be necessary or at least a proper part in proceedings before the Tribunal?
(iv) At what stage and in what manner the Commission can exercise its powers u/s. 33 of the Act while passing interim orders?
(v) Whether it is obligatory for the Commission to record reasons while forming prima facie opinion?
(vi) What directions, if any, need to be issued by the Court for ensuring proper compliance of the procedural requirements while keeping in mind the scheme and object of the Act?

The Verdict:

Issue 1: The Court made an exhaustive study of the scheme and the provisions of the Act and rules of statutory interpretation, noted the distinction between “and” and “or”, referred to Indian, UK and European decisions to unearth settled principles of law and finally concluded that Section 53A(1) of the Act expressly provides for what decisions or orders or directions may be appealed before Tribunal. The Court noted that right to appeal is a substantive right which derives its legitimacy from the operation of law or statute. If the Statute does not provide for an appeal, the Court cannot presume such right. The direction to cause an investigation into a matter is passed under Section 26(1) of the Act does not determine any right or obligation of the parties to the lis. It does not find mention in Section 53A(1) of the Act and hence, the Court found that such orders would not be appealable under the Act.

Issue 2 and 5: The Court noted that the exclusion of principles of natural justice (PNJ) is a well known concept and the legislature has the competence to enact such laws. Whether the exclusion of application of PNJ would vitiate the entire proceedings would depend upon the nature and facts of every case in the light of the Act or Rules and Regulation applicable to the case. The Court, then, read into various provisions of the Act and the Competition Commission of India (General) Regulations, 2009 in order to determine the nature of functions of the Commission under various provisions. The Court found that at the face of it, the exercise of power u/s. 26(1) of the Act while forming prima facie opinion is inquisitorial and regulatory. It held that while forming prima facie opinion, the Commission does not condemn anyone. This function is not adjudicatory in nature but merely administrative. This function is in the nature of preparatory measures in contrast to the decision making process and hence right of notice of hearing is not contemplated u/s. 26(1) of the Act.
On the issue of reasons to be recorded at the stage of forming prima facie opinion, the Court held that the Commission must express its mind in no uncertain terms that it is of the view that prima facie case exists. Such opinion should be formed on the basis of the records, including the information furnished and reference made to the Commission. The reasons may not be in detail but there must be minimum reasons substantiating the view of the Commission.

Issue 3: The Court reiterated the settled position of law relating necessary party and proper party. A necessary party is one without whom no order can be made effectively whereas a proper party is one in whose absence an effective order can be made but whose presence is necessary for a complete and final decision on the question involved in the proceeding. Applying the principle of dominus litus, the Court then noted that in cases where the Commission initiates a proceedings suo moto it shall be the proper party. In all other proceedings, it shall be a necessary party.

Issue 4: On powers of the Commission u/s. 33, the Court noted in following terms: “During an inquiry and where the Commission is satisfied that the act is in contravention of the provisions stated in Section 33 of the Act, it may issue an order temporarily restraining the party from carrying on such act, until the conclusion of such inquiry or until further orders without giving notice to such party, where it deems it necessary. This power has to be exercised by the Commission sparingly and under compelling and exceptional circumstances. The Commission, while recording a reasoned order inter alia should : (a) record its satisfaction (which has to be of much higher degree than formation of a prima facie view under Section 26(1) of the Act) in clear terms that an act in contravention of the stated provisions has been committed and continues to be committed or is about to be committed; (b) It is necessary to issue order of restraint and (c) from the record before the Commission, it is apparent that there is every likelihood of the party to the lis, suffering irreparable and irretrievable damage or there is definite apprehension that it would have adverse effect on competition in the market.”

Issue 6: One of the major outcomes of the case relates to the Court’s recognition and affirmation of the expeditious disposal of complaints filed before the Commission. The Court found this to be a fit case to issue certain guidelines in the larger interest of the justice administration. These directions weigh special worth in the light of the fact the Commission, even after more than one year of the enforcement of the operative provisions of the Act, has not issued its order in a single contentious case. The Court passed following guidelines:
(a) Even though the time period for forming prima facie opinion by the Commission is provided in the Regulations (i.e. 60 days from the date of filing information) it is expected of the Commission to hold its meetings and record its opinion about existence or otherwise of a prima facie case within a period much shorter than the stated period.
(b) All proceedings including investigation and inquiry by the Commission/DG must be completed expeditiously while securing the objectives of the Act.
(c) Wherever during the course of inquiry the Commission exercises its jurisdiction to pass interim orders, it should pass a final order in that behalf as expeditiously as possible and in any case not later than 60 days.
(d) The reports by the Director General u/s. 26(2) should be submitted within the time as directed by the Commission but in all cases not later than 45 days from the date of passing of directions in terms of Section 26(1) of the Act.
(e) The Commission/DG shall maintain complete confidentiality as envisaged u/s. 57 of the Act and Regulation 35 of the Regulations. Wherever the ‘confidentiality’ is breached, the aggrieved party certainly has the right to approach the Commission for issuance of appropriate directions in terms of the provisions of the Act and the Regulations in force.


Reading between the Lines:

The verdict of the Apex Court bears immense significance given the timing of and issues involved in the judgement. It may be noted that both “competition law and policy” and the Commission are at a very nascent stage within the broad regulatory matrix of Indian economy. The judgement of the Supreme Court has rightly echoed the sentiments of proponents of free and fair market economy and it shall go in long way to effective sketch the competition law landscape in the country. At this point, I would like draw some conclusions which may not seem apparent at the face of it. They are as follows:

(i) The Court, in its opening paragraphs, notes the importance of competition law and policy for any free market economy referring to three types of efficiencies: i.e. allocative, productive and dynamic. The Court observes that the main objective of competition law is to promote economic efficiency using competition as one of the means of assisting the creation of market responsive to consumer preferences. While it may be too early to conclude, but this certainly indicates that Indian Courts are going to lean towards Chicago School of Thought in the Chicago-Harvard dichotomy. It is the Chicago School of Economists which has brought the efficiency test as a dominant factor in last three decades in US Courts.

(ii) While highlighting the aims of competition law, the Court makes a mention of the relevant laws of other jurisdictions including that of USA, UK and Australia. It would not be far-fetched to argue that the Court has indirectly hinted that in future, it shall definitely take into account the competition law jurisprudence developed in these jurisdictions while deciding contentious issues. That the Supreme Court is going to rely on EU and US Court decisions while explaining the substantive concepts involved in competition law is further strengthened by the fact that the Court referred to two decisions EU courts i.e. CFI and ECJ in its very first judgement related to the new Act even when there was no substantive concept of competition law as such involved.

Remarks:

(i) The Court has very effectively defined the ambit and scope of the powers of the Commission and the Tribunal at the stage of forming of prima facie opinion. No jurisdiction generally allows challenging the direction passed by the competition authorities to initiate investigation. However, there may be cases where the amount of information to be filed would be voluminous and the Commission in such cases must provide adequate time. It is doubtful whether a person would be able to challenge the denial of extension of time by the Commission in such cases.

(ii) In larger interest of justice administration, the Court passed certain directions till the Commission formulates its own regulations in that regard. Though such a step by the Court is quite welcome, but the timelines provided by the Court are quite unreasonable and strict. For example, the Court has directed that the DG must submit its report within 45 days u/s. 26(2) of the Act. This seems quite onerous to be implemented in practice. The collection of evidence and ascertainment of facts would require the DG to issue notices to relevant parties. Such parties would have to prepare their responses which they intend to file before DG. All this may not be done within 45 days of time period.

(iii)Though I fully agree with the Court’s reasoning as to why Commission needs to give notice to parties at the time of forming prima facie opinion; the analysis seems to be incomplete as the judgement has not even referred to provisions of Section 36 of the Act. The Court should have analyzed the provisions of Section 36 while discussing the issue of compliance or non-compliance of PNJ.

(iv)Finally, the Court also states that “as far as American law is concerned, it is said that the Sherman Act, 1890, is the first codification of recognized common law principles of competition law.” I do not want to sound picky, but to my limited knowledge, Canada was the first country to enact its Competition Act which was one year prior to the Sherman Act i.e. in 1889.

Anti-dumping Measure: Effect on Competition in Exporting Economy

Dumping is a classic example of international price discrimination where a producer firm sells its products at different prices in the domestic and export market. When the producer firm exports its goods at price less than at which it sells the same goods in domestic market, it is said to cause dumping of goods in the export market. The anti-competitive effects of dumping in the export market are more than obvious. The literature on industrial economics in general and international trade in particular in particular is replete with findings showing adverse effects of dumping in the export market. To put it shortly, the dumping of goods primarily leads to gradual eradication of firms operating in export market as the consumers increasingly tend to buy dumped goods. In the short run consumers, though, may benefit with goods at lower prices as the consumer surplus increases; the same does not hold true in the long run. In the long run, the firms in the export market gradually leave the industry due to losses and the exporter captures the entire demand in the export market. Eventually, the export would raise its prices at monopolist level when there are no competitors left in the market.

Thus, in order to curb these anti-competitive effects of dumping, economies across the globe take resort to anti-dumping measures though appropriate legislations. Much has been written about the effects of dumping in the export market. However, trade lawyers and economists have thrown little light on the effects of an anti-dumping measure on the domestic market of the exporter. In this brief note, I would argue that anti-dumping measure not only creates a level playing field for the domestic producers in the economy where goods are dumped but it also promotes efficiency in the economy which is the source of dumping

Let us assume that there is a firm “A” operating in an open economy “X” producing a product G (say, a beauty cream which brings about a unique glow in women’s skin). g is also produced by some firms in an economy “Y”. Firm A also exports the goods to its customers in economy Y. However, these exports are made at dumped prices i.e. the export price of G is less than the normal value of G. Normal value of G is the price at which it is sold in economy X. For the sake of simplicity, let us assume that the firm A in economy X does not face any import competition. The Government of X has banned imports of goods G in its country from other economies as all other economies exploit children while producing G. This has led to a situation where A has become a monopolist in economy X. Since, A does not face any competition; it prices G in its home market at P^M which is much above the competitive price P^C. Had the market for G in economy X been perfectly competitive, the price of the product would have been P^C. However, in the export market i.e. economy Y, Firm A faces competition from all other firms and hence the demand is perfectly elastic as shown in the Fig. by D^F. Therefore, ‘A’ prices its exports to Y at the competitive price P^C or else it would lose all its customers in economy Y. The producers of G in economy Y petition the government for imposition of anti-dumping duty on imports of G from economy X. The investigating agency in economy Y finds that indeed the goods are being sold at dumped prices as P^M is higher than P^C. The investigating agency, on facts and evidence, also determines that dumped imports of G have caused material injury to domestic producers of G in Y. Therefore, the government of economy Y imposes anti-dumping duty amounting to ‘t’ on imports of G from ‘A’. If firm A continues to price its products at P^C, the customers in economy Y would not buy its products as the same has now become costlier for customers by an amount ‘t’. The customers would move to either import from other countries or to the domestic producers in Y. Therefore, in order to sell its products to customers in economy Y, firm A would be left with only two options:

(i) It may further lower its price from P^C to P*, where P* <>C, to circumvent the effect of anti-dumping duty. However, this would lead to further intensive dumping of goods and the domestic manufacturers may petition the government to review the amount of duty or to change the format of anti-dumping duty to reference price form. In a reference price form, the government would calculate a non-injurious price and set it as the benchmark price for imports. Any imports less than the benchmark price would attract anti-dumping duty amounting to difference between the benchmark price and the lesser import price. In such a case, firm A would not be able to circumvent the duty by lowering its price.

(ii) The second option left to firm A is to lower its price in its domestic market and bring it to the competitive level P^C. Once the normal value is equal to export price, there would be no dumping and hence Firm A would be able to sell its products to its customers in economy Y. Thus, the imposition of anti-dumping duty would result in lowering of prices in economy X and subsequent increase in the consumer surplus. The consumers in economy X would now get more of goods G i.e G^C at a lower price P^C.

Therefore, the imposition of anti-dumping duty by government of economy Y may bring competitive pricing in the relevant market in economy X which otherwise was faced with monopolistic pricing.

Regulating Mergers before the Merger Regulation

More than two years have elapsed since the first draft guidelines on combinations were issued and for quite some time now the Government has promised that the revised regulations would be made public. Finally, now it appears that a fast track pre-merger consultation process will be put in place by the Competition Commission of India for companies to seek the views of the regulator. In the meanwhile, contrastingly, the Ministry of Corporate Affairs vide notification dated 15^th of May 2009 has empowered the Competition Commission of India to inquire into Sections 3 and 4 violations (while sections 5 and 6 have been ignored). It, therefore, leaves the CCI incapable of regulating combinations, at least for now. This brings to fore a very interesting issue - the question of regulating mergers before the merger regulation - although it may not be of immense practical importance, but vital from a policy perspective on the role that will be played by the Regulator.

The language employed in the Competition Act, 2002 has significantly derived its inspiration from Europe - most notably sections 3 (anticompetitive agreement) and 4 (Abuse of dominance) closely resemble Articles 81 and 82 of the Treaty Establishing the European Community (or now Articles 101 and 102 of the Treaty respectively of the Functioning of the European Union) – but what is all the more interesting and which has not been examined is how history has struck a chord between Europe and India even with respect to combinations.

For a long time the Competition Commission in Europe did not have the jurisdiction to regulate combinations. Politics and industrial policy in the member countries ensured that control over the industrial structure remained with the individual member states. In the absence of a unanimous Council Regulation, the Commission did not have the power to regulate mergers. This brought forward the question before Courts whether mergers could be scrutinized under Articles 81 and 82 of the Treaty. In the case of Europemballage Corp and Continental Can Co Inc v. Commission [1973] ECR 215, the European Court of Justice (ECJ) while scrutinizing the effect on competition as a result of the acquisition of 80% of the shares of Thomassen and Drijver-Verbliva by Continental Can Co. held that mergers per se could be scrutinized under the abuse of dominance provision. The ECJ held that since the aim of the treaty was to protect competition, mergers that have a detrimental effect on the effective competitive structure in the relevant market should be prohibited. Further it observed that an abuse may occur when an undertaking in a dominant position strengthens its dominance in the market to substantially fetter competition. This was in effect laying down a test based on structure rather than conduct or effect.

The ECJ was also quick to add that an anticompetitive effect in such a case (i.e. one involving a merger) would be rare and shall only be found where practically all competition is eliminated. On the facts of the case the ECJ held that since sufficient competition from substitutable products was not scrutinized, a case for abuse of dominance in the relevant market was not made out.

The ECJ has also held that agreements relating to acquisition of shares would have to stand the scrutiny of Article 81 (anticompetitive agreements). In British American Tobacco and R J Reynolds Industries Inc case [1987] ECR 4487, the ECJ observed that an acquisition (even of a minority shareholding as it was in that case) may serve as an instrument for influencing the commercial conduct of companies to restrict or distort competition on the market in which they carry on business, especially when the agreement provides for commercial cooperation between the companies or creates a structure likely to be used for such co-operation.

This interpretation accorded in Europe assumes special significance in India as only the provisions relating to abuse of dominance and anticompetitive agreements have been brought into force while Sections 5 and 6 of the Competition Act, 2002 relating to mergers are yet to be notified (and nor have the merger / combinations regulations been notified). From a regulatory perspective, it is better if mergers are scrutinized under the proposed Combinations regulation. Most acquisitions / mergers do not create anticompetitive effects, as the data from Europe suggests that out of 3368 notified mergers between September 1990 and March 2007 only 19 were prohibited. The structure based principle in Europe too is now giving way to an economic and effects based test. In addition, the presence of a specific provision under the competition Act, 2002 to regulate combinations (unlike in Europe where the Commission did not have the power to regulate mergers) should ensure that the CCI does not apply Sections 3 and 4 for combinations. It is only a matter of time before mergers are brought within the purview of combination regulations. Anyways, enterprises post May 20, 2009 (the date when sections 3 and 4 came into force) will still have to ensure that they do not violate Sections 3 and 4 of the Competition Act, 2002. Therefore, the reason for the CCI to adopt Sections 3 and 4 for acquisitions / combinations would be unnecesary.

In this connection, we need to see if the pre-merger consultation process will help dispel doubts in the minds of investors (please see this article in the ET on the doubts created by the first draft regulations) and make the regulatory regime more investor friendly. The CCI seem to be heading in the right direction in so far as they are not emulating their European Counterparts by applying sections 3 and 4 for combinations and in assisting the potential enterprises that fall within the combination thresholds to get acquainted with the regulatory scheme through the medium of pre-merger consultations.

ACCC institutes proceedings against Korean Air Lines Co. Ltd

It is yet another instance where Australian Competition & Consumer Commission (ACCC) has instituted proceedings against an airline company. ACCC has alleged that Korean Air Lines Co. Ltd. has enaged in price-fixing in air cargo industry.

The details may be read here: http://www.accc.gov.au/content/index.phtml/itemId/917336/fromItemId/142

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!

Competition Law in India

Welcome readers, this is a blog that has been created to discuss and analyze the nuances of competition law in India. The substantive provisions of the Competition Act, 2002 ("Competition Act") relating to anti competitive agreements and abuse of dominance have been notified whereas provisions with respect to combinations (mergers, acqusitions et al) have not yet been notified. Thus, in this blog, we shall look at various concepts of competition law which are prevelant in US and EU antitrust laws which can be used as a tool to interpret the Competition Act.