Competition laws are premised upon the principle of consumer welfare. The consumer welfare standard states that the competition regulators should consider overall consumer welfare and economic efficiency when assessing an alleged anti-competitive behaviour. Consequently, the market should be regulated in a manner in which firms conduct businesses so that a level playing field is created in the market. Thus, the underlying intention is competition on merits and not with the aid of an anti-competitive agreement or behaviour.
In India, the precursor to the Competition Act, 2002 was the Monopolies and Restrictive trade Practices (“MRTP”) Act which aimed at curbing monopolies. However, the current competition law focuses on promoting competition instead of curbing monopolies. This article traces the enactment of the MRTP Act, 1969, the conditions which led to its replacement with the current Competition Act, 2002 and the basic mechanism under the present Act which regulates competition in the Indian market.
It is imperative to note that although the Act was enacted in the year 2002, the implementation of the substantive provisions of the Act came into effect on 20th May, 2009.
Enactment of the MRTP Act, 1969
The MRTP Act, 1969 prohibited three types of trade practices i.e. restrictive practice, unfair practice and monopolistic trade practice.
Restrictive trade practice
The restrictive trade practice (RTP) has the effect of distorting competition in the market by preventing it or restricting it. Some of the RTPs include refusal to deal, tie-up sales, exclusive dealing, price discrimination, resale price maintenance, etc. All these RTPs were deemed to be prejudicial to public interest.
- Refusal to deal - It included any agreement which restricted or was likely to restrict by any method the persons or classes of persons to whom goods are sold or from whom the goods are brought.
- Tie-Up sales - It referred to a situation in which the sale of one good is conditioned on the purchase of another good. Tying forecloses opportunities for other firms who sell related products. The MRTP Commission had examined various such agreements and observed that a ‘rule of reason’ had to be adopted in curbing such practice as it might also enhance competition under certain circumstances. In line with the same, under the present competition law, tied-in selling is dealt under vertical agreements i.e. they are not prohibited per se but only when they lead to an appreciable adverse effect on competition. These practices have been explained below:
- Exclusive dealing - Exclusive dealing or exclusive purchasing arrangement refers to an agreement to purchase, sell or deal in products which are approved by the manufacturer. It may also be combined with territorial restrictions wherein the distributor or dealer is not permitted to sell the product outside a specified territory.
- Price discrimination - It refers to the sale of similar goods and services to different buyers at different prices. The variation may manifest in the form of either price or in discounts accompanying a uniform price.
- Resale price maintenance (RPM) - The concept of resale price maintenance was borrowed from the U.K. Restrictive Trade Practices Act, 1956. Under the MRTP Act, the intention and purpose of introducing RPM was to prevent manufacturers and suppliers who sell goods to dealers for resale, from fixing minimum prices at which the goods have to be resold and to prevent withholding of supplies from those dealers who would sell below the minimum price fixed.
Unfair trade practice
The unfair trade practice (UTP) included misleading advertisements, false representations, bargain sales, hoarding or destruction of goods, etc. These practices had the enormous capacity to harm the public and consumer interest. Thus, they were jointly regulated by the MRTP Act and the Consumer Protection Act, 1986. These practices have been explained below:
- Misleading advertisements - Under the MRTP Act, misleading advertisements referred to any unfair or deceptive practice such as falsely representing that the goods are of a particular standard, quality, quantity, etc or the seller as the approval or affiliation which he did not have, etc.
- False representations - Under the MRTP Act, it referred to the practice of making any oral or written representation which falsely suggested that goods are of a particular standard or quality, or gave a false guarantee of the performance or efficiency of the good, etc.
- Bargain sales - It refers to the price stated in the advertisements suggesting a price lower than the ordinary price of that particular goods or services.
- Hoarding or Destruction of Goods - Hoarding or destruction is an unfair trade practice which leads to rise or an intended rise in the cost of related goods and services. It is similar to refusal to sell a product.
Monopolistic trade practice
The Monopolistic trade practice (MTP) included a trade practice which had the effect of maintaining the prices of goods or services at an unreasonable level, unreasonably preventing or lessening competition in the production, supply or distribution or limiting technical development, etc. Under the Act, dominance was determined by considering whether the undertaking has a share of one-fourth or more in the production, supply, distribution or control of goods or services.
The LPG Model in India
Globalisation refers to an increase in international trade, finance and information and creation of an integrated global market. It has been responsible for the opening up of economies since the 1950s and an increased deregulation and decreased interference of government. In line with the broader global narrative India’s new economic policy was announced on July 24, 1991 in the form of the Liberalisation, Globalisation and Privatization model, where liberalisation refers to making the policies less constraining, globalisation refers to expansion of economic activities across territorial boundaries and privatization is the transfer of government owned property to a privately owned entity.
The LPG Model or the New Economic Policy was introduced because of a decline in India’s export earnings, national income and industrial output. It aimed to regulate monopolies and improve efficiency and productivity. Further information is in a CUTS paper and the Annex below.
Due to the introduction of this model, amendments were introduced in 1991 to the MRTP Act. It was restructured and pre-entry restrictions with regards to mergers and acquisitions were removed. However, the Act still contained provisions on RTPs and MTPs to take action against anti-competitive mergers. Thus, despite bringing the amendments, the law was unable to align itself with the economic transformation.
Owing to the tremendous transformation in the economic and trade milieu since the drafting of the MRTP Act in 1969, it was decided that a new law should be enacted instead of bringing innumerable changes to the existing act.
The Raghavan Committee on Competition Policy and Law, 1999
For the purpose of drafting a modern competition law in line with the international developments, the Government of India appointed Mr. S.V.S. Raghavan, a retired senior official of the Central Government to chair the high level committee.
The Committee considered 80 different countries' competition laws to study the relevant features for the prevailing economic conditions in India. It was identified by the Committee that the new competition law should promote competition in the market instead of curbing monopolies.
The Committee prepared and presented a draft in November, 2000 to the Government. After holding consultations with various stakeholders, a bill on the new competition law was introduced in the Parliament. The Parliament remitted the competition bill to the Standing Committee which presented its recommendations. In 2002, after considering the refinements introduced by the Standing Committee, the bill was passed and the new law in the form of Competition Act, 2002 was introduced.
An Overview of Competition Act, 2002
The Act seeks to check anti-competitive practices, prohibit abuse of dominance and regulation of combinations. It also provides for the establishment of the Competition Commission of India (“CCI”), a quasi-judicial body, which prevents practices which have an adverse effect on competition and promotes consumer welfare.
Some of the important concepts under the Indian competition law has been explained below:
The Act envisages an appreciable adverse effect on competition in the relevant market. According to Section 2(r) of the Competition Act, relevant market means the market which may be determined by the CCI with respect to relevant product market or relevant geographic market or both.
According to Section 2(s), relevant geographic market means the market comprising the area in which the conditions of competition for supply of goods or provision of services or demand of goods or services are distinctly homogeneous and can be distinguished from the conditions prevailing in the neighbouring areas.
According to Section 2(t), relevant product market means all those goods and services which are regarded as substitutable or interchangeable by the consumer, by reason of characteristics of the product or services, their prices and intended use.
The term agreement is defined under section 2(b) of the Act as any arrangement or understanding or action in concert. It may or may not be in writing. The term “agreement” has been purposely awarded a wide connotation so that agreements in the form of cartels which are usually entered into without a formal written agreement can be included within the definition of anti-competitive agreements.
Section 3 of the Act 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 adverse effect on competition.
Under Section 3(2) of the Act, any agreement in contravention this provision shall be void.
The Act recognises two types of anti-competitive agreements i.e. horizontal agreement and vertical agreement.
Horizontal agreement: It refers to an agreement entered into between two or more firms operating at the same level of the production or distribution chain.
The Act prohibits the following types of horizontal agreements i.e.:
- Agreements regarding fixing of purchase or selling prices of a product either directly or indirectly.
- Agreements with regard to limit, control production, supply, investment, provision of services of particular products and for a particular quantity.
- Agreement regarding sharing of market
- Bid rigging agreements which is an agreement between parties engaged in identical business, which has the effect of eliminating or reducing the competition for bids or adversely affecting or manipulating the process for bidding.
- Agreements in the form of cartels.
Vertical agreement: Under Section 3(4) of the Act, the Competition Act seeks to prohibit only such vertical restraints that cause, or are likely to cause, an appreciable adverse effect on competition in India.
The types of vertical restraints identified in the Act include:
- Tie-in arrangement: In this arrangement, a purchaser of goods is required to purchase any other goods as a condition of purchase;
- Exclusive supply agreements: it restricts, in any manner, the purchaser from acquiring or otherwise dealing with the goods of the seller or any other person;
- Exclusive Distribution Agreements: it limits, restricts or withholds the supply of goods or allocates any area or market for the disposal or sale of goods.
- Refusal to deal: It restricts or is likely to restrict, by any method, the person or persons from or to whom goods are bought and sold; and
- Resale Price Maintenance: It refers to any agreement wherein goods are sold on the condition that the resale price shall be the price stipulated by the seller, unless clearly stated that prices lower than those prices may be charged.
Abuse of Dominant Position
Dominant position has been defined under the Act as a position enjoyed by an enterprise whereby enables it to:
- Operate independently of competitive forces prevailing in the relevant market;
- Affect its competitors or consumers or the relevant market in its favour.
Section 4 of the Competition Act provides for acts which amount to an abuse of dominant position i.e.
- Direct or indirect imposition of unfair or discriminatory condition in purchase or sale of goods or services or prices in purchase or sale of goods and services.
- Limiting or restricting the production of goods or services or putting restrictions on technical or scientific development relating to goods or services to the prejudice of consumers.
- Indulging in practices which result in denial of market access
- Using a dominant position in one relevant market to protect or to enter into another relevant market.
Combination Regulations (Merger Control)
Under Section 5 of the Act, there are three types of combinations which are regulated under the Act:
- Acquisition of shares, voting rights or assets of another entity by a person or an enterprise.
- Acquiring control by a person over enterprise.
- Merger or amalgamation between or amongst enterprise.
Section 6(1) of the Act prohibits combinations which causes or is likely to cause an appreciable adverse effect on competition. Further, under section 6(2) of the Act, any person or enterprise who or which proposes to enter into a combination shall give notice to the Commission, in the form as may be specified, and the fee may be determined by regulations disclosing the details of the proposed combination within 30 days of the execution of any document of acquisition or approval of the proposal of amalgamation or merger by the Board of directors. The time period prescribed under the act for the combination to take effect is 210 days after giving notice to the commission or the date on which any order has been passed by the commission with regard to that notice, whichever is earlier.
The role and function of the CCI
The role of the Competition Commission for India is to sustain competition in the market, protect freedom of trade and interests of consumers in the market. In order to do so, it has powers to make an inquiry, suo moto or on request of any person, consumer or trade association, impose penalties and advise the central government.
The CCI also has power to inquire into acts outside India that causes adverse effect on competition in India.
While discharging its functions in matters pertaining to producing evidence, issuing summons, etc, it has power equivalent to a civil court and it also has power to regulate its own procedure. In discharge of its functions it is guided by the principles of natural justice and other rules made by the Central Government.
Composition of the CCI
The CCI consists of a chairperson and 6 members appointed by the central government. It may also call upon such experts, from the fields of economics, commerce, accountancy, international trade or from any other discipline as it deems necessary to assist it in the conduct of any inquiry.
If the CCI is satisfied that there is an abuse of dominant position or presence of anti-competitive agreement, it can give the following orders i.e.
- Cease and desist;
- Imposition of penalty of up to 10% of the average turnover of the enterprise for the preceding three financial years;
- In case of cartel, it may impose a penalty of up to 3 times its profit or 10% of the turnover whichever is higher, for each year during which the agreement is in force;
- Order a modification to the agreement or practice;
- Issue any directions in addition to above to end the contravention
In case of a combination, the CCI has the capacity to introduce suitable modifications or direct that such a combination shall not take place.
Further, if a person fails to comply with the orders or directions of the CCI or fails to pay the fine imposed by it, then the Act prescribes for a jail term of up to 3 years.
Any order passed by the CCI is appealable before the appellate authority i.e. the National Company Law Appellate Tribunal (“NCLAT”). The NCLAT replaced the erstwhile Competition Appellate Tribunal (“COMPAT”) as the appellate authority. An appeal from the NCLAT lies in the Supreme Court of India.
The preceding sections serve to provide a brief insight into the competition law in India and the circumstances under which it was brought into being. Various amendments have been brought in the Act since its enactment in 2002, considering the economic changes from time to time.
ANNEX - Liberalisation, Privatisation and Globalisation Model
The economy of India had undergone significant policy shifts in the beginning of the 1990s. This new model of economic reforms is commonly known as the LPG or Liberalisation, Privatisation and Globalisation model. The primary objective of this model was to make the economy of India the fastest developing economy in the globe with capabilities that help it match up with the biggest economies of the world.
The chain of reforms that took place with regards to business, manufacturing, and financial services industries targeted at lifting the economy of the country to a more proficient level. These economic reforms had influenced the overall economic growth of the country in a significant manner.
Liberalisation refers to the slackening of government regulations. The economic liberalisation in India denotes the continuing financial reforms which began since July 24, 1991.
Privatisation and Globalisation
Privatisation refers to the participation of private entities in businesses and services and transfer of ownership from the public sector (or government) to the private sector as well. Globalisation stands for the consolidation of the various economies of the world.
LPG and the Economic Reform Policy of India
Following its freedom on August 15, 1947, the Republic of India stuck to socialistic economic strategies. In the 1980s, Rajiv Gandhi, the then Prime Minister of India, started a number of economic restructuring measures. In 1991, the country experienced a balance of payments dilemma following the Gulf War and the downfall of the erstwhile Soviet Union. The country had to make a deposit of 47 tons of gold to the Bank of England and 20 tons to the Union Bank of Switzerland. This was necessary under a recovery pact with the IMF or International Monetary Fund. Furthermore, the International Monetary Fund necessitated India to assume a sequence of systematic economic reorganisations. Consequently, the then Prime Minister of the country, P V Narasimha Rao initiated groundbreaking economic reforms. However, the Committee formed by Narasimha Rao did not put into operation a number of reforms which the International Monetary Fund looked for.Dr Manmohan Singh, the present Prime Minister of India, was then the Finance Minister of the Government of India. He assisted. Narasimha Rao and played a key role in implementing these reform policies.
Narasimha Rao Committee's Recommendations
The recommendations of the Narasimha Rao Committee were as follows:
- Bringing in the Security Regulations (Modified) and the SEBI Act of 1992 which rendered the legitimate power to the Securities Exchange Board of India to record and control all the mediators in the capital market.
- Doing away with the Controller of Capital matters in 1992 that determined the rates and number of stocks that companies were supposed to issue in the market.
- Launching of the National Stock Exchange in 1994 in the form of a computerised share buying and selling system which acted as a tool to influence the restructuring of the other stock exchanges in the country. By the year 1996, the National Stock Exchange surfaced as the biggest stock exchange in India.
- In 1992, the equity markets of the country were made available for investment through overseas corporate investors. The companies were allowed to raise funds from overseas markets through issuance of GDRs or Global Depository Receipts.
- Promoting FDI (Foreign Direct Investment) by means of raising the highest cap on the contribution of international capital in business ventures or partnerships to 51 per cent from 40 per cent. In high priority industries, 100 per cent international equity was allowed.
- Cutting down duties from a mean level of 85 per cent to 25 per cent, and withdrawing quantitative regulations. The rupee or the official Indian currency was turned into an exchangeable currency on trading account.
- Reorganisation of the methods for sanction of FDI in 35 sectors. The boundaries for international investment and involvement were demarcated.
The outcome of these reorganisations can be estimated by the fact that the overall amount of overseas investment (comprising portfolio investment, FDI, and investment collected from overseas equity capital markets ) rose to $5.3 billion in 1995-1996 in the country) from a microscopic US $132 million in 1991-1992. Narasimha Rao started industrial guideline changes with the production zones. He did away with the License Raj, leaving just 18 sectors which required licensing. Control on industries was moderated.
Highlights of the LPG Policy
Given below are the salient highlights of the Liberalisation, Privatisation and Globalisation Policy in India:
- Foreign Technology Agreements
- Foreign Investment
- MRTP Act, 1969 (Amended)
- Industrial Licensing
- Beginning of privatisation
- Opportunities for overseas trade
- Steps to regulate inflation
- Tax reforms
- Abolition of License -Permit Raj