India’s newest regulator, the Competition Commission of India, has taken its place on the field. Alfred Romann investigates the commission’s early actions and asks whether its empowerment will prove a sticky wicket for domestic and international corporations
In a country obsessed with Bollywood it is only fitting that the first investigation taken up by the recently empowered “good guys” of competition should focus on the film distribution industry.
On 20 May two sections of the Competition Act, 2002, dealing with anti-competitive agreements and abuse of dominance, were notified. This means the Competition Commission of India (CCI) could finally get on with implementing legislation that for seven years lay dormant on the country’s statute books.
The CCI – an independent body – can choose what it investigates, but is duty-bound to follow up on complaints. Among the first people to come knocking on its doors were the distributors of Bollywood films.
For several years a fight had been brewing between film producers and distributors. Multiplexes – which dominate the market and are operated by a few big chains – sought an ever-greater slice of the proceeds, leaving small production houses feeling particularly hard done by.
“The [legislation] is such that there is no particular law that can protect them,” says Debshikha Dutta, a consultant at FoxMandal Little who has followed the dispute since it began. “Only the big names are making money,” she adds.
In retaliation, some distributors and film producers started releasing films only through independent film houses. The effect was more of cutting off their nose to spite their face, as both the film houses and the filmmakers lost money.
As the revenue-sharing feud worsened, the Multiplex Association of India filed a complaint against a phalanx of organizations: the United Producers and Distributors Forum; the Association of Motion Pictures and TV Program Producers, and the Film and TV Producers Guild of India.
Eventually the filmmakers and distributors settled their differences before the CCI started its work, but the cat had been let out of the bag.
Recently the CCI has begun a second investigation, this one targeting providers of direct-to-home television. A well-placed source at the CCI, who spoke on the condition of anonymity, said there were complaints that a lack of connectivity between television boxes makes it difficult for customers to switch from one provider to another. This could be taking choice out of the customer’s hands and competition out of the market.
The CCI has requested information from the various parties, but so far nobody is entirely sure what information to provide or how to proceed. As there is no outer limit to the time an investigation can take, this uncertainty on how to proceed could be exploited by those being investigated. They could stall or delay their cooperation. However, the CCI can fight delays with a Rs100,000 (US$2,000) fine per day and so compel companies to provide information.
The CCI has also sent notices to Jet Airways and Kingfisher Airlines, requesting information about their prospective alliance. According to various reports, the tie-up is aimed at lowering costs and optimizing revenue through the sharing of manpower resources and code-sharing agreements. The CCI is believed to have raised concerns about implications of the merger for competitors and is looking into allegations which suggest the parties’ intend to raise fuel surcharges and fares. However, the impact of its investigation on India’s two leading carriers, which is still at a nascent stage, remains to be seen.
Changing rules for a changing environment
India has had competition legislation of one type or another for more than four decades. The Monopolies and Restrictive Trade Practices Act, a command-and-control type law enacted in 1969, served an India that was very different to what it is today. Economic liberalization that began in 1991 changed the economic landscape and created the need for more comprehensive legislation.
The 2002 Competition Act paved the way for the establishment of the CCI, a specialized agency with exclusive jurisdiction over competition matters. But in common with many other legal developments in India, things have moved slowly for the CCI. Legal wrangling slowed down its key appointments, and in its first seven years the CCI, without any real regulatory power, has acted as an advocacy body.
The CCI’s enforcement role began only on 20 May, three days after the results of the country’s general election were released. The timing was not significant. “It was more a coincidence than anything else,” says Jonas Koponen, a competition and antitrust partner at Linklaters.
However, the CCI’s current role is restricted to regulating sections 3 and 4 of the competition act, which deal with cartels and anti-competitive agreements, and abuse of dominant position respectively. Other parts of the act, including sections 5 and 6, which regulate combinations, mergers and acquisitions, are yet to be notified.
“Given that the new merger control rules create a mandatory merger notification regime and as such, may lead to a high volume of work for the CCI, the CCI may prefer to be fully staffed and well trained before notifying [the remaining sections of the act],” says Jaishree Vyavaharkar, an associate at Baker & McKenzie.
Section 66 of the act, which will finally repeal the outdated Monopolies and Restrictive Trade Practices Act, was to be notified on 1 September. That step would mark the beginning of the end of an interesting situation created by the fact that both pieces of legislation remain in force. This meant that, as the CCI began operations, the Monopolies and Restrictive Trade Practices Commission (MRTPC) remained active and taking on new cases.
The latest reports suggest, however, that the MRTPC was to stop taking on fresh cases from 1 September, with the aim of allowing the CCI to take the reins on competition matters. Speaking at a conference organized by the PHD Chamber of Commerce and Industry on 29 August, Salman Khurshid, the Minister of State for Corporate Affairs, said the government would issue a notification in this regard shortly.
The rules so far
At present the CCI can investigate companies involved in anti-competitive agreements, or those abusing their dominance in a particular market. But the law is not without loopholes. Section 3 does not do anything to protect intellectual property rights and export agreements. Furthermore, some joint venture agreements that are aimed at increasing efficiency in production, storage or supply are not included in the anti-competitive agreements.
“From the position of public companies, the rules on anti-competitive agreements and abuse of dominance are different from the pending merger control regime because they do not require any obvious, public changes from companies, given that they tend to address covert activities,” says Vyavaharkar.
The CCI’s rulings are on par with those of a high court. It has the power to impose substantive and significant penalties if it finds evidence of abuse, though such rulings can be challenged at the Supreme Court. At up to three times profits or 10% of turnover, penalties for cartel-related offences can be considerable. Although the commission retains discretion to impose lower penalties it can also, in extreme cases of abuse, order a company to cease its business.
Among the most controversial areas of the new competition regime are the filing fees (a cost for parties notifying the CCI) and the mandatory pre-merger notification requirement for all domestic and international mergers, acquisitions and amalgamations that fall within prescribed “local nexus” thresholds.
Another area of concern is the speed of decisions coming out of the CCI. When dealing with mergers and acquisitions it will have up to 210 days to decide on applications. This is widely seen as too long, especially as some prospective deals could become less beneficial in the seven months that the CCI may take to consider them. The regulations were amended to allow for fast-track approvals of 30 days so although the CCI still has several months to process applications, in most cases it is expected to issue decisions within a month.
So far the CCI remains a largely untested institution. While it expects a steady stream of complaints, observers say it is likely to keep a careful watch on sectors like cement, airlines, telecoms and explosives.
Challenging the status quo
The empowerment of the CCI is likely to have an immediate impact on India’s competition environment, although it will mean different things to different companies. “A corporation that has been operating in India for a while could find that some of its activities are anti-competitive,” says Koponen.
Indeed, companies working in formal or informal cartels could soon find their established arrangements questioned. “If you are buying into a company that is operating in this market, make sure that the company has a clean bill of health,” cautions Koponen.
Perhaps more worrisome for potential targets of investigation is that the commission can investigate any activity outside of India that has an impact on the domestic market. However, Kiran Desai, a partner at Mayer Brown, says in a research note he believes it is unlikely that the CCI will fine foreign corporations that have already been hit by authorities in Europe or the US.
It remains to be seen whether the commission will seek to identify abuses, or simply react to complaints. So far it has been relatively reactive and a particularly tough stance is unlikely. Draft regulations on lesser penalties, published in 2008, include a relatively generous regime for leniency and whistleblowing, including reductions of fines for whistleblowers – not just the first one to step forward in a case of anti-competitive behaviour, but subsequent ones as well.
“It will be interesting to see whether companies are encouraged by the generous leniency regime to come forward given that whistleblowing is not traditionally a part of India’s corporate culture,” Vyavaharkar says.
The CCI will have a staff of 240, but some commentators believe it will need twice that many people to fulfil its mission. Finding them could be among the commission’s biggest hurdles.
“It is the problem with the government that they don’t get good, efficient people right away,” says Dhanpat Agarwal, director of the Kolkata-based Institute of International Trade. “In India, there is no depth of talent.”
However, the appointment of Dhanendra Kumar as the first CCI chairman appears to be a good choice. A well respected career bureaucrat, he has a solid résumé that includes time at the World Bank, where he was an executive director in charge of India, Sri Lanka, Bangladesh and Bhutan.
Hitting the right note he has repeatedly said that the CCI will rise up to the considerable challenges it faces.
“We will assume the role of a dynamic regulator keen to promote and sustain competition and prevent practices having adverse [effect] on competition,” Kumar said during an interview with The Economic Times earlier this year. “A soft or lax regulator we won’t be.”
According to Kumar the CCI will aim to be a “neutral umpire” with three objectives: “economic development, protecting the interest of consumers and freedom of trade”.
Speaking a couple of months later, Kumar noted that the CCI will not be a stumbling block for industrial growth, but rather a facilitator that strives to promote fair and healthy competition.
Lofty ambitions, but given the history of the last seven years observers like Agarwal are cautious. “Let’s hope it will create a good competition environment,” he says.