Time to harness an unruly horse

Here are five areas in the Competition Act, 2002, that need intense review and intervention

The government has appointed a committee to review the working of the Competition Act, 2002, and to recommend changes. This is an important opportunity — there is much to be done. Provisions relating to market abuse were made effective in May 2009, while provisions governing combinations became effective in June 2011. Both these areas need intense review and intervention. This column will deal with five facets of what cries for attention.

First, the law presents a framework that can be quite ambiguous. The section on “appreciable adverse effect on competition” — a vital ingredient for either disapproving of a merger or for finding of market abuse — can be interpreted widely. Almost any fact pattern can be force-fitted into or out of the term — it all depends on what outcome has been decided. There are cases where the existence of parallel movements in price or production coupled with the existence of a trade association have been deemed adequate to arrive at the existence of a cartel. There are also cases where other facts and circumstances are meticulously gone in to demonstrate the requisite “plus factors” for a meaningful inference of the absence of a cartel. Court rulings over time have provided an indication of how to be equitable and proportionate in interpretation, but it is now time to codify these into the law.  

Second, the Competition Act has moved from the originally-envisaged framework of the Commission sitting in multiple benches to a framework of all available members, participating in the proceedings. It is time to think about multiple benches with a minimum size of each bench — say three members. Instead, it seems the policy intent is to prune the very size of the Commission to just three members. This would be a blunder. More minds — say, seven commissioners — would bring in diversity of thought but it may be provided that the Commission would conduct hearings in benches comprising at least three members. This would also ease the workload. In any case, practically, all members have never been able to hear every single case. This is a simple but important area of reform on which a simplistic approach must be shunned.

Illustration by Binay Sinha

Third, the imposition of penalty remains an unruly horse. The law rightly provides for penalty as a percentage of the revenues from violative conduct — the penalty must be imposed on the relevant violative revenues. However, penalties continue to be imposed either on the total revenues of entities alleged to be violative (including businesses generating non-violative revenues) or on the revenues of the relevant business but from territories outside the market in which the violation was committed (for example, using worldwide revenues as the basis of penalty although the violation relates to one Indian state). The result is a fantastic headline about a disproportionate penalty, but bad outcomes potentially following the appeal. The legislation must lay down the principle already made clear by courts, so that this problem does not recur.

Fourth, the law is not quite clearly demarcated to ensure discipline in how to vary the approach between alleged market abuse where the accused is already dominant, and potential abuse that may be averted by rejecting or modifying a proposed combination or merger. In determining whether someone who is a large player in a natural oligopoly (with very few competitors) is abusing the market, one would need to assess real facts to see if there is real abuse. On the other hand, when deciding whether to approve a merger, one may factor in the likelihood of future abuse to refuse to approve the merger. Applying the ratios and principles involved in combination cases, to cases involving findings of violation due to abuse of existing dominant position, can lead to unintended and unfair consequences. The factors adopted in assessing a proposed combination can be useful guides in cases involving investigation into alleged abuse; but they can never be an axiom that reasons for apprehending future abuse from a combination can be adequate and valid reason for punishing someone.

Finally, the Competition Act is the only statute made by Parliament in which (purely by blatant error and not by design) settled legal terminology used to differentiate between civil and criminal proceedings have been mixed up. Specifically, under any other law in India, the term “penalty” is used for civil monetary punishments. Penalties can be imposed by regulators that have been granted powers of a civil court. Likewise, under any other law in India, the term “fine” is used for criminal monetary punishments, which can only be imposed by criminal courts pursuant to a criminal trial. In criminal proceedings, the standard of proof required for establishing guilt is one of “beyond reasonable doubt” while in civil proceedings, the standard of proof is one of “preponderance of probabilities” — more a test of what a reasonable man would reasonably conclude about what transpired.

When a “fine” is imposed, because the standard of proof applied to criminal proceedings is higher, the legal stigma is much higher. Disqualifications under other laws too get fastened. These other laws (for example, the Company Law) use the term “fine” to refer to punishments that would attract a stigma. In the Competition Act, sections providing for punishments that may be imposed by the Competition Commission of India — which is not a criminal court but is explicitly a civil court — provide for imposition of a “fine”. This is a gross legal error waiting to be corrected — since it inflicts a skewed incongruence in the wider fabric of Indian law. The term “fine” has to be simply changed to “penalty” so that the Commission can validly apply the civil standard and impose civil penalty with appropriate civil consequences, instead of potentially inflicting criminal consequences without the checks and balances involved in determining whether a crime has occurred.

The author is an advocate and independent counsel. Tweets @SomasekharS