CUTS Institute for Regulation & Competition, World Trade Centre, Mumbai & Institute of Company Secretaries of India – Centre for Corporate Training & Research Presents Competition Policy and Law in a Liberalising Economy by Prof. H D. Pithawalla, Advocate & Solicitor Thursday, 7 th December 2006

2 Competition Law A myth or a reality in India ?

3 Contents Background of the Competition Act Background of the Competition Act Unfair Trade Practices Unfair Trade Practices Restrictive Trade Practices Restrictive Trade Practices Protection of Intellectual Property Rights Protection of Intellectual Property Rights Abuse of Dominance and Combinations Abuse of Dominance and Combinations Case Studies Case Studies

4 Background “Competition” (L – “compete”) is an age- old phenomenon “Competition” (L – “compete”) is an age- old phenomenon In olden days, competition In olden days, competition existed amongst cave-men is also reflected in the Mahabharat In modern times, competition has become a global phenomenon starts right from Kindergarten & Nursery classes

5 Benefits of Competition…. Companies : Efficiency, cost-saving operations, better utilization of resources, etc. The Consumer : Wider choice of goods at competitive prices The Government : Generates revenue BUT…………………………

6 ….Benefits of Competition ………all these benefits are lost if Competition is UNFAIR or NON- EXISTANT Choice of CARS in the olden days MTNL Monopoly : The position today Airlines : INDIAN AIRLINES : JET : SAHARA Mobiles : Price Wars Indian Railways : The monopoly continues….

7 Perfect Competition – A Myth “PERFECT COMPETITION” is an ideal situation which exists only on paper. It implies: A large number of Sellers A large number of Buyers Free entry Free exit Manufacturers are “price-takers” and not “price-makers” No single manufacturer can influence the market

8 Evaluation of Country’s Competition Regime Competition Policy & Philosophy of the Government Trade Agreements & Practices which are RESTRICTIVE Trade Agreements & Practices which are UNFAIR Abuse of dominance Combines : Mergers, amalgamations and take- overs Protection (or lack of it) of Intellectual Property Rights Competition at the international level : Trade Blocs Consumer activism : NGOs and Consumer Associations

9 Evolution of Competition Law Before MRTP Act came into force (1970), limited provisions existed under : The Indian Contract Act The Law of Torts Directive Principles of State Policy (Non- enforceable) The MRTP Act brought in a four-pronged thrust : Concentration of economic power ( - Repealed in ) Restrictive Trade Practices Monopolistic Trade Practices ( - Almost a dead letter - ) Unfair Trade Practices ( - Added in )

10 Competition Act - “Still in Incubator” Raghwan Committee Raghwan Committee Two Writ Petitions – as soon as Act was notified Two Writ Petitions – as soon as Act was notified Observations of the Hon'ble Supreme Court Observations of the Hon'ble Supreme Court The position on date The position on date

11 Unfair Trade Practices Many competition regimes do NOT consider this as part of Competition Law Many competition regimes do NOT consider this as part of Competition Law BUT, it does affect competition – directly or indirectly BUT, it does affect competition – directly or indirectly Consumer protection provisions made for the first time in India by 1984 Amendments in the MRTP Act Consumer protection provisions made for the first time in India by 1984 Amendments in the MRTP Act The Consumer Protection Act came only 2 years later The Consumer Protection Act came only 2 years later How Consumer Courts were hurriedly constituted How Consumer Courts were hurriedly constituted After 1986, MRTP Commission and Consumer Courts had parallel jurisdiction After 1986, MRTP Commission and Consumer Courts had parallel jurisdiction Consumer Courts v MRTP Commission : Pros & Cons Consumer Courts v MRTP Commission : Pros & Cons

12 Unfair Trade Practices HOW UTPs affect competition : HOW UTPs affect competition : Warranties not based on lab tests Warranties not based on lab tests After sales guarantees not honoured After sales guarantees not honoured Contests & Competitions Contests & Competitions View of the MRTP Commission View of the MRTP Commission View of the Supreme Court View of the Supreme Court Disparagement of competing products Disparagement of competing products Godrej v Kelvinator Godrej v Kelvinator Colgate v Pepsodent Colgate v Pepsodent Rulings in RIDAKE (India) & XENICAL (USA) Rulings in RIDAKE (India) & XENICAL (USA) Misleading sales ads Misleading sales ads “ UPTO 60% OFF” “ UPTO 60% OFF” Guptaji’s Sales Guptaji’s Sales Ads of CURRYS (U.K.’s biggest electrical chain) Ads of CURRYS (U.K.’s biggest electrical chain)

13 UTPs vis-à-vis Competition Act Under the Competition Act : No provision for Unfair Trade Practices No provision for Unfair Trade Practices Only Consumer Courts will have jurisdiction Only Consumer Courts will have jurisdiction Pending cases will be continued by MRTPC for 2 years Pending cases will be continued by MRTPC for 2 years After 2 years : After 2 years : All cases (except Disparagement Cases) will be transferred to National Commission under CPA All cases (except Disparagement Cases) will be transferred to National Commission under CPA All Disparagement Cases will be transferred to Competition Commission All Disparagement Cases will be transferred to Competition Commission Q. : After 2 years, WHERE can a Company file Disparagement Cases ? Q. : After 2 years, WHERE can a Company file Disparagement Cases ?

14 Restrictive Trade Practices MRTP Act MRTP Act Today, the Act contains a two-pronged approach to RTPs Today, the Act contains a two-pronged approach to RTPs RTPs (except one) are NOT declared void. Only registration formalities are to be complied with RTPs (except one) are NOT declared void. Only registration formalities are to be complied with MRTP Commission can issue Notice of Enquiry – followed by Cease-&-Desist Order if RTP proved to be against public interest : No jail, no fine MRTP Commission can issue Notice of Enquiry – followed by Cease-&-Desist Order if RTP proved to be against public interest : No jail, no fine “Gateways” are available “Gateways” are available

15 Restrictive Trade Practices Competition Act Competition Act 9 “Anti-competitive Agreements” are declared void 9 “Anti-competitive Agreements” are declared void “Per Se Rule” applied to 4 Horizontal Agreements “Per Se Rule” applied to 4 Horizontal Agreements “Rule of Reason” applied to 5 Vertical Agreements “Rule of Reason” applied to 5 Vertical Agreements

16 Anti-competitive Agreements Horizontal Agreements Horizontal Agreements Persons engaged in identical or similar goods or services enter into an agreement : Persons engaged in identical or similar goods or services enter into an agreement : to determine purchase or sales prices to determine purchase or sales prices to limit / control production, supply, technological developments, etc. to limit / control production, supply, technological developments, etc. to share the market, allocate geographical markets or number of customers to share the market, allocate geographical markets or number of customers for bid rigging or collusive tendering for bid rigging or collusive tendering All the above 4 Agreements “shall be presumed to have an appreciable adverse effect on competition”

17 Anti-competitive Agreements Vertical Agreements Vertical Agreements “Tie-in” Arrangements “Tie-in” Arrangements Exclusive Supply Agreements Exclusive Supply Agreements Exclusive Distribution Agreements Exclusive Distribution Agreements Refusal to deal Refusal to deal Resale price maintenance Resale price maintenance Such an Agreement will be contravention of the Act IF the Agreement causes – or is likely to cause – an appreciable adverse effect on competition

18 Powers of Competition Commission as Regards Agreements After the inquiry into the Agreement, Competition Commission can: After the inquiry into the Agreement, Competition Commission can: direct parties to discontinue the agreement direct parties to discontinue the agreement prohibit parties from re-entering such agreement prohibit parties from re-entering such agreement direct modification of the agreement direct modification of the agreement impose penalty upto 10% of average turnover of the enterprise impose penalty upto 10% of average turnover of the enterprise

19 PROTECTION OF INTELLECTUAL PROPERTY RIGHTS MRTP Act MRTP Act Firstly, the MRTP Commission cannot pass Orders which restrict Firstly, the MRTP Commission cannot pass Orders which restrict the right of any person to restrain the infringement of a patent granted in India, or the right of any person to restrain the infringement of a patent granted in India, or any person as to the condition he attaches to a licence to do anything, the doing of which, but for the licence, would be an infringement of a patent granted in India any person as to the condition he attaches to a licence to do anything, the doing of which, but for the licence, would be an infringement of a patent granted in India Secondly, Section 39, which declares resale price maintenance to be void, does not affect the validity of a licence granted by the proprietor of a patent or trade-mark, so far as it regulates the price at which articles produced by the licensee may be sold by him. Secondly, Section 39, which declares resale price maintenance to be void, does not affect the validity of a licence granted by the proprietor of a patent or trade-mark, so far as it regulates the price at which articles produced by the licensee may be sold by him.

20 PROTECTION OF INTELLECTUAL PROPERTY RIGHTS Competition Act Competition Act The prohibition on horizontal and vertical agreements do not restrict the right of any person to impose reasonable restrictions to protect any of his rights under the Copyright Act, the Patents Act, the Trade and Merchandise Marks Act, Designs Act The prohibition on horizontal and vertical agreements do not restrict the right of any person to impose reasonable restrictions to protect any of his rights under the Copyright Act, the Patents Act, the Trade and Merchandise Marks Act, Designs Act

21 Abuse of Dominance Mandate of the Act : “No enterprise shall abuse its dominant position.” Mandate of the Act : “No enterprise shall abuse its dominant position.” 5 categories of “abuse” are listed in the Act, as for instance, - 5 categories of “abuse” are listed in the Act, as for instance, - Imposing discriminatory conditions in purchase or sale of goods Imposing discriminatory conditions in purchase or sale of goods Predatory pricing Predatory pricing Limiting production or scientific or technical development Limiting production or scientific or technical development Using dominant position in one market to enter another market, etc. Using dominant position in one market to enter another market, etc.

22 Abuse of Dominance “Dominant position” is defined as a position of strength which enables the enterprise “Dominant position” is defined as a position of strength which enables the enterprise to operate independently of competitive forces in the market, or to operate independently of competitive forces in the market, or to affect its competitors or consumers in its favour. to affect its competitors or consumers in its favour. No mathematical or statistical formula is adopted to “measure” dominance – as under the repealed provisions of the MRTP Act ( - 25% of market share - ) No mathematical or statistical formula is adopted to “measure” dominance – as under the repealed provisions of the MRTP Act ( - 25% of market share - )

23 Abuse of Dominance Power of the Competition Commission Power of the Competition Commission After inquiry into abuse of dominant position, the Competition Commission can order: After inquiry into abuse of dominant position, the Competition Commission can order: discontinuance of abuse of dominant position discontinuance of abuse of dominant position impose a penalty upto 10% of the average turnover of the enterprise impose a penalty upto 10% of the average turnover of the enterprise

24 Combinations MRTP Act MRTP Act Provisions of the MRTP Act regarding registration of undertakings, establishment of new undertakings, take-overs, mergers and amalgamation were criticized on the ground that they were based on an impractical and untenable proposition that “BIG is BAD” Provisions of the MRTP Act regarding registration of undertakings, establishment of new undertakings, take-overs, mergers and amalgamation were criticized on the ground that they were based on an impractical and untenable proposition that “BIG is BAD” Ultimately, these provisions were repealed in 1991 Ultimately, these provisions were repealed in 1991

25 Combinations Competition Act Competition Act NOW, the Competition Act seeks to regulate any “acquisition”, “acquiring of control”, “mergers or amalgamations” if it results in assets or turnover exceeding specified monetary limits NOW, the Competition Act seeks to regulate any “acquisition”, “acquiring of control”, “mergers or amalgamations” if it results in assets or turnover exceeding specified monetary limits Concept of voluntary notice is introduced. On receipt of such notice, Competition Commission can inquire – and Concept of voluntary notice is introduced. On receipt of such notice, Competition Commission can inquire – and approve the combination, or approve the combination, or direct that the combination shall not take effect, or direct that the combination shall not take effect, or propose modifications propose modifications If no such Order is passed within a time- bound frame, the combination is DEEMED TO HAVE BEEN APPROVED. If no such Order is passed within a time- bound frame, the combination is DEEMED TO HAVE BEEN APPROVED.

26 Combinations Powers of Competition Commission Powers of Competition Commission It can : It can : issue a Show Cause Notice to the parties issue a Show Cause Notice to the parties direct the parties to publish details of the combination direct the parties to publish details of the combination invite members of the public to file written objections invite members of the public to file written objections pass appropriate Orders pass appropriate Orders Two questions are worth considering : Two questions are worth considering : Is this just a back-door entry of earlier provisions of the MRTP Act ? Is this just a back-door entry of earlier provisions of the MRTP Act ? Will monetary limits fixed five years ago remain relevant five years hence ? Will monetary limits fixed five years ago remain relevant five years hence ?

27 Case Studies Columbia Columbia AVIANCA, Columbia’s largest airline planned a merger with the country’s second largest airline, ACE. AVIANCA, Columbia’s largest airline planned a merger with the country’s second largest airline, ACE. Justifications given for the merger were : Justifications given for the merger were : AVIANCA had huge accumulated losses, and the merger would be a potential answer to its financial problems AVIANCA had huge accumulated losses, and the merger would be a potential answer to its financial problems The merged airline could effectively compete with foreign carriers in the international market The merged airline could effectively compete with foreign carriers in the international market HELD : Merger would be anti-competitive : The merged airline would be FOUR times the size of its nearest domestic rival. HELD : Merger would be anti-competitive : The merged airline would be FOUR times the size of its nearest domestic rival.

28 Case Studies India India The JET take-over of SAHARA : A damp squib ? The JET take-over of SAHARA : A damp squib ? Australia Australia Co X with 75% of domestic biscuit market proposed a merger with Co Y, which had 15% market share of Australia’s biscuit market. Co X with 75% of domestic biscuit market proposed a merger with Co Y, which had 15% market share of Australia’s biscuit market. Justification given for the merger : “Snacks” and NOT “Biscuits” is the relevant market. In the snacks market, Co X had a 10% share of the market and Co Y, a mere 1%. Justification given for the merger : “Snacks” and NOT “Biscuits” is the relevant market. In the snacks market, Co X had a 10% share of the market and Co Y, a mere 1%. HELD : The relevant market was “Biscuits” and not “Snacks”. Merger NOT ALLOWED. HELD : The relevant market was “Biscuits” and not “Snacks”. Merger NOT ALLOWED.

29 Thank You!