THE MRTP AND THE COMPETITION ACTS
In this chapter, we study the MRTP Act and the Competition Act, enacted by the Government of India to regulate Indian industry to serve the overall interests of the country’s economy. We will learn the genesis, objectives, salient features and scope of both these acts and the consequences of the post-liberalization developments. We compare the two acts to highlight the differences between the two. A clear grasp of these two Acts is important to understand and appreciate the need for government regulation in the industry.
A monopoly is said to exist where at least one person or a company controls one-third of a local or national market. In many countries, the attitude of the public towards complete and partial monopolies has for many years been one of acute and distinct opposition. This has been mainly due to the abuses of monopoly which include: (i) high prices and restricted output; (ii) wrong allocation of resources; (iii) abuse of investors by monopolists painting alluring pictures of high profits and perpetual exploitation of the market; (iv) preventing inventions since a monopolist’s profits do not depend upon continuous progress in production; (v) increasing the instability of the economic system; (vi) unfair trade practices such as price discrimination, secret rebates, etc.; (vii) undue economic clout being used to curry political favours; (viii) corruption and bribery and (ix) concentration of economic power in the hands of a few. It is for these reasons that monopoly has been regarded as a social evil and various measures have been designed in free-enterprise economies to control and regulate it or in some cases to eliminate it altogether. Moreover, it is an obvious fact that monopoly with its attendant evils such as practices of dominant firms, high prices for poor quality products, which cheat the consumer, unfair trade practices that go against rivals in business, corruption and bribery militate against the very principles of corporate governance. This is the reason why societies that value corporate democracies and better governance practices have enacted anti-monopoly laws that attempt to (a) prevent monopoly firms from coming into existence, (b) dissolve or split existing monopoly firms and (c) prevent monopoly firms from indulging in unfair trade practices such as price discrimination and cutthroat competition.
Basically, the difference between a competitive firm and monopoly firm arises from the fact that, in the former, supply of a commodity comes from thousands of sellers, each selling a small quantity with a limited capacity to charge high or different prices, while in the latter, there is only one firm controlling the entire supply of the product with a capacity to charge high or different prices. A competitive firm in a free-market economy is preferred to a monopoly for a variety of reasons:
- The consumer stands to gain from the reduced prices that are result of intense competition.
- Firms avoid wastage and duplication in a bid to be competitive.
- Competition means survival of the fittest; hence, firms have no choice but to be efficient.
- Optimal use of resources by firms, vis-à-vis consumer preferences, maximizes the gains for the society as a whole.
Competition is, thus, considered to be the best market practice that will benefit consumers. In this chapter, we examine two pieces of legislation that were designed and implemented keeping in mind the larger goals of the state—the MRTP Act and the Competition Act.
THE MRTP ACT, 1969
It was the avowed policy of Government of India in the early period of its pursuing the path of rapid industrialization to curb monopolies and monopolistic practices. Earlier, even when the government introduced the licensing policy as part of the Industrial Policy Resolution and Industrial (Development & Regulation) Act, large industrial houses frustrated its attempts through all kinds of corrupt means and grew bigger and bigger with every passing year. The anti-monopoly policy was reinstated in the Janata Government’s Industrial Policy Statement announced in the Parliament in December 1977. Among other things, the policy stated unequivocally the following: The growth of large (business) houses has been disproportionate to the size of their internally generated resources and has been largely based on borrowed funds from public sector financial institutions and banks. This process must be reversed. The policy stressed that there should not be any situation where a business group in the private sector be allowed to acquire a dominant or monopolistic position in the market. Any large industrial house would have to rely on its own internally generated resources for financing new projects or expansion of the existing ones. The funds of the public sector financial institutions which were hitherto made easily available to dominant private sector business houses would be henceforth available mainly to the small-scale businesses. Even in the case of capital-intensive industrial sector hitherto dominated by the large industrial houses, preference would be given to medium entrepreneurs and the public sector companies so that further concentration of economic power could be restricted. Under the new policy, government not only imposed restrictions on the entry of large industrial houses into a number of strategic industries, but also set up public sector units in those industries and also encouraged small and medium industrial units. But the most important step towards the curbing of monopolies was the passing of the Monopolies and Restrictive Trade Practices Act, popularly known MRTP Act in 1969, and setting up of the MRTP Commission in 1970, as a logical follow-up. The preamble to the Act described the purpose of the Act in the following words: “An Act to provide that the operation of the economic system does not result in the concentration of economic power to the common detriment, for the control of monopolies, for the prohibition of monopolistic and restrictive trade practices and matters connected therewith or incidental thereto.”1
The following were the declared objectives of the MRTP Act, 1969—applicable to the whole of India excepting for the state of Jammu and Kashmir:
- To ensure prohibition of monopolies and unfair trade practices
- To ensure that there is no concentration of economic power to the common detriment, and control of monopolies
The following sections discuss the salient features of the MRTP Act.
Inter-connected and Dominant Undertakings
The Monopolies and Restrictive Trade Practices Act mentioned two types of business undertakings—national monopolies covered under Section 20 (a) of the MRTP Act which were either “single large undertakings” or “groups of interconnected undertakings” (i.e., large houses) with assets of at least INR 1 billion as of 1985; and product monopolies covered under Section 20 (b) and called “dominant undertakings” were those that controlled 25 per cent of production or market of a product with assets of at least INR 30 million. “By the end of March 1990, 1854 undertakings were registered under the MRTP Act. Of these, 1787 belonged to large industrial houses and the remaining 67 were dominant undertakings. The Industrial Policy of 1991, has now scrapped the assets limit for MRTP companies”.2
The MRTP Act contained a number of flaws especially in defining what constituted “interconnected undertakings”. This lacuna in the definition and the subsequent problems faced by people in identifying companies that fit the bill helped many large industrial houses to escape the clutches of the Act. There were interesting examples of how companies were able to wriggle out of the loops of the Act. For instance, TELCO claimed that it was not interconnected with any Tata company and Century Rayon argued successfully that it was not interconnected with any Birla company, though it was common knowledge that both were closely interconnected to their respective parent companies! It is appropriate in this context to quote N. K. Chandra: “Under Indian conditions it is quite possible that two companies are not ‘legally’ interconnected, but are in fact controlled by one business family. The widespread practice of benami shareholders whereby the de facto owner for a variety of reasons has the shares recorded in the name of a relative or a protégé, helps to underscore this above lacuna”.3
Monopolistic, Restrictive and Unfair Trade Practices
A restrictive trade practice (RTP) in the context of the MRTP Act means a trade practice that has, or “may have the effect of preventing, distorting or restricting competition in any manner and in particular (i) tends to obstruct the flow of capital or resources into the stream or production; (ii) tends to bring about manipulation of prices or conditions of delivery or to affect the flow or supplies in the market relating to goods or services in such manner as to impose on the consumers unjustified costs or restrictions.”4
Other forms of restrictive trade practices include (i) Collusion among firms or formation of cartels; (ii) price discrimination between different groups of buyers; (iii) predatory pricing with a view to eliminate competition; (iv) tie-up sales of goods in high and low demand; (v) forcing full line purchase and (vi) area restriction.
On the other hand, “A monopolistic trade practice (MTP) is a trade practice which has, or is likely to have, the effect of (i) maintaining prices at an unreasonable level, or (ii) unreasonably preventing or lessening competition, or (iii) limiting technical development or capital investment to the common determent, or (iv) allowing the quality to deteriorate. As per 1984 amendment, unreasonably increasing (i) the cost of production or charges for services; (ii) the prices of goods or services, or the profits derived by production, supply or distribution; or (iii) lessening or preventing competition in production, supply or distribution also results in a monopolistic trade practice.”5
Prior to 1984, “the MRTP Act was restricted to monopolistic and restrictive trade practices only. The 1984 amendment extended it to unfair trade practices also. Trade practices which amount to unfair trade practices include (a) the publication of a statement, made orally or in writing or by visible representation; (b) the publication of any advertisement for sale at bargain price; (c) enticement by gift or contest; (d) sale (or supply) of sub-standard goods; and (e) hoarding or destruction of goods, or refusal to sell goods or to provide service.”6
The MRTP Act specified a large number of different kinds of industrial agreements that required its scrutiny. Each one of these agreements along with the names of practices to the agreement was required to be registered with the Registrar of Restrictive Trade Practices, who exercised the following control on their industrial activities:
- Under Section 21 of the Act, any registered undertaking which proposed to expand substantially its activities should notify the central government and obtain its approval
- Under Section 22 of the Act, had there been a proposal to establish a new undertaking, prior permission of the central government was needed to be obtained
- Under Section 23 of the Act, prior sanction of the central government was needed to be obtained if it was proposed to acquire or merge or amalgamate with another undertaking
The MRTP Act envisaged that it was incumbent on the government to ensure that there was no concentration of economic power in any group of companies that would be detrimental to national interest. However, it was for the companies concerned to get the clearance from the government before undertaking an industrial project. Prior to 1991, an MRTP company, if it wanted to establish a new unit or expand substantially an existing unit, merge or take over another undertaking, should apply to the Department of Company Affairs (DCA). It was up to the DCA to refer the case to the MRTP Commission, if it thought it was worthwhile to do so. It was, in any case, only a fraction of such cases that were referred to the Commission by the DCA. Even this minimum number of references seemed to have stopped after 1984. It should be stressed here that the MRTP Commission was only a recommendatory body and the ultimate decision to let a company undertake any industrial activity was that of the Government at the Centre.
On the basis of several complaints of malpractices and inefficiencies in the administration of the Act and of the Commission, the government appointed the Sachar Committee in 1977 to review the working of the MRTP Act and make recommendations to review its working. The government amended the Act in 1980 and 1984 on the basis of the recommendations of the Committee. However, the policy of successive governments seemed to reverse the rigours envisaged in the MRTP Act. The government announced that large industrial houses would be exempted from the provisions of the Act if they establish industries in 90 “Zero industry” districts in the country. Government also provided infrastructural facilities to these districts on top priority basis. One of the most important decisions in this direction was that of V. P. Singh, the then Union Finance Minister, who in his 1985-86 budget raised the threshold limit of assets for companies covered under MRTP Act from INR 200 million to INR 1 billion. This budgetary provision immediately de-linked almost 49 out of 101 large industrial houses from the MRTP Act and gave a boost to their growth.
Since 1982, the government has been diluting considerably the provisions of the MRTP Act. The Government, either covertly or overtly, allowed large industrial houses to enter into areas which were hitherto open only to the public sector. Telephones, infrastructure projects, ports, etc. were some of these domains that were open to the private sector dominated by large industrial houses. The MRTP Commission itself did not function effectively; most of the time it did not have a chairman; members did not agree with one another; there was a tremendous degree of political interference and corruption; the Commission's orders were not implemented as they lacked the power and above all, before 1991, the MRTP Commission could not initiate proceedings against any company suo moto.
The following are some of the relaxations made by the government after several major concessions extended to large industrial houses with the launching of the New Economic Policy of 1991.
- The Industrial Policy Statement of 1973 allowed a large number of industries to be taken up by large monopoly houses. These relaxations covered some of the core industries, industries that had direct linkages to them and the export-oriented industries. Originally, there were only 19 such industries, but subsequently it included 35 industries.
- The government added to the MRTP Act Section 22 A mainly with a view of providing an impetus to production in industries of high priority both for domestic consumption and for exports. This enabled the government to notify industries or services to which Sections 21 and 22 of the Act would not apply. Following this, all cent per cent export-oriented industries set up in the Free Trade Zone were exempted from Sections 21 and 22 of the Act in October 1982. Further, the government notified in May 1983, that all MRTP companies were eligible to establish new capacities in industries of high national priority or industries with potential for planning import substitution without prior approval of the government. This was subject to the condition, of course, that such companies were qualified to avail the concessions.
- Certain industries that were identified by the government as being important with export potential were permitted 5 per cent growth automatically per annum “up to a limit of 25 per cent in a plan period over and above the normal permissible limit for 25 per cent excess production over the authorized capacity.” However, large industrial houses required no approval under the MRTP Act for such automatic growth.
- The Industrial Licensing Policy of 1985 announced by the government on 24 December of that year gave a major concession to MRTP companies. This Industrial Policy allowed the unrestricted entry of large industrial houses and those governed by the Foreign Exchange Regulation Act (FERA) into the manufacture of 21 high technology products, which widened the scope of MRTP and FERA companies to freely take up 83 items.
- Earlier, the government, through a notification, allowed the administrative ministries under whose jurisdiction industrial activity such as machine tool industry, electrical equipment industry, steel forging industry, steel ingot industry, etc. was included, to endorse applications from companies without MRTP clearance.
- In another path-breaking development, the government removed under the provisions of the Sick Industrial Companies (Special Provisions) Bill 1985, “Sick” industrial companies for reasons of modernization, expansion, amalgamation or merger.
- In March 1986, with the idea of developing backward areas in the country, the government enlarged the scheme of delicensing to MRTP/FERA companies in respect of 20 industries located in centrally declared backward areas. This policy was further liberalized and later on included industries with export obligations.
- In an amendment to the MRTP Act in 1985, the asset holding limit for the purpose of determining the dominant status of a firm was raised from INR 200 million to INR 1 billion.
- The government announced a major concession in the form of a new scheme under the MRTP Act effective from 1 April, 1988. Under this scheme, the industrial license/registrations with technical authorities were to be automatically re-endorsed at the highest level of production actually achieved by all industrial undertakings including MRTP/FERA companies in any of the financial years between 1 April, 1988 and 31 March, 1990.
- In another measure of liberalization, government freed dominant undertakings from industrial licensing policy restrictions applicable under the MRTP Act effective from 30 June, 1988. This decision enabled dominant undertakings take advantage of relaxation in industrial licensing policy meant for non-MRTP and non-FERA companies, except in cases of products in which they were classified dominant.
The 1991 Industrial Policy Takes the Sting Out of the MRTP Act
The New Industrial Policy announced on 24 July, 1991 scrapped the assets limit for MRTP companies altogether. The 1991 amendment made drastic changes in the MRTP Act. Briefly, the major amendments were the following:
- The provision with respect to the concentration of economic power was repealed, unless it was detrimental to national interest. This implied that henceforth the emphasis of the Act shifted from monopolies to restrictive and trade practices.
- As per the new policy, a company need not seek the permission of the MRTP Commission any more for making investment in new undertakings, for capacity expansion or for diversification.
As per the new policy “The MRTP Commission is empowered to inquire into monopolistic, restrictive and unfair trade practices of the companies on (a) reference made by the Centre and the State governments, (b) on the application from the Director-General of Investigation; and (c) on complaints from a trade or consumer association with a membership of 25 or more.”7
The New Economic Policy confers the right of a civil court on the MRTP Commission. It is now empowered to summon a company or a business house, enquire into its business practices and activities, direct it to submit its business accounts and to produce evidence contrary to the complaint against it. It is also empowered to dismiss a case against the company and initiate action in accordance with the provisions of the Act. The MRTP Commission is also authorized to initiate investigation suo moto or on complaints received from individual consumers or classes of consumers in regard to monopolistic, restrictive and unfair trade practices.
The MRTP Act was passed by the government with the objectives of controlling and regulating the concentration of economic power, controlling monopolies and restrictive trade practices, and prohibiting trade practices unless they were in public interest. The MRTP Commission was established to oversee whether these objectives were borne in mind while implementing industrial policies. However, over the period of time, political compulsions and considerations of economic growth have made the government relax almost all provisions of the MRTP Act so much so that the new provisions enunciated in 1991 have made it a toothless tiger and the MRTP Commission just a paper tiger. The government presently seem to believe that the responsibility of a public authority is to create a conducive environment for Indian companies to become large enough to compete in the global market, and to not to concern itself merely on their sizes.
Economists assert that given the resources and technology, an economy is efficient when it is able to provide its consumers with the most desired range of products at minimum cost and this is possible under the mechanism of a competitive market, leading to the determination of equilibrium price. In a particular product segment, marginal cost and marginal utility of a product are exactly balanced at the equilibrium price. Once the efficiency is achieved, it is not possible to reorganize production to make someone better off without making someone else worse off in that particular situation. In the practical world, however, business decisions are affected more by actual rather than potential competition. The following are some of the benefits expected from competitive markets:
- Growth of entrepreneurial culture leading to increase in the number of producers and sellers in the market
- Increase in investment and capital formation leading to increase in supply capabilities
- A strong incentive for developing cost-cutting technologies through sustained research and development efforts
- Reduction in wastage and improvement in efficiency and productivity
- Greater customer focus and orientation
- Increased possibility for entering and tapping foreign markets
- Conducive environment for growth of international trade and investment
- Better utilization of resource and capacity
- Wider range of availability of goods and services and wider choice for consumers
on account of these perceived benefits, governments in free-enterprise countries take steps to generate and promote competition. This, however, requires a suitable economic system and the constitutional framework as well as an appropriate macroeconomic policy setup. The transformation of a centrally controlled, planned or socialist economy to a free-enterprise system is not easy as was demonstrated in the attempt of erstwhile Soviet-type economies to market-driven economies. It requires major shift in the institutional philosophy of the structure, production system, socio-economic policies and the fundamental philosophy of the government itself. For this, the transition period could be long, painful and problematic. A number of economies in Eastern Europe are facing serious transition problems in the gradual process of liberalization towards market-oriented system. The movement towards market-based system is generally slow and has to be based on adaptive processes.
THE REGULATION OF COMPETITION
While it is important and necessary to promote competition among firms to enable consumers gain maximum advantage from a free-market economy, an unregulated competition is bad and may even lead to unmitigated disaster and destruction of the nation's wealth. Competition particularly between firms of highly unequal strength can be self-destructive. In unregulated markets, there can be widespread negative spillover effects. The negative effects could be in the form of information asymmetries, unethical collusions, hostile takeovers, malicious interlocking directorates in companies, transfer pricing, strategic market alliances, unjustified market segmentation and differential pricing, and a number of other monopolistic and unfair trade practices. These factors result in anticompetitive outcomes, which underscore the need for regulation of competition.
The regulation and protection of competition usually requires a competition policy backed by an appropriate legislation. There are three basic areas of such competition policy:
- Control of dominance firms by regulation
- Control of mergers to prevent the possibility of emergence of monopolies
- Control of anti-competitive acts like full line forcing and predatory pricing
In India we had a long tenure of Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 replaced recently by Competition Act 2002 which was passed in December 2002. In the United Kingdom, Competition Act, 1980 empowers the Office of Fair Trading (OFT) to investigate anti-competition practices. In the USA, the Anti-Trust Legislation seeks to control monopoly and restrictive practices in favour of competition. It specifically deals with price discriminations, exclusive dealings, and interlocking directorates and shareholdings among competing companies.
CORPORATE CONTROL IN COMPETITION
The influence of competition on the practice of corporate governance can be gauged properly if we look at the risks associated with markets where competition is restricted. While there is an increasing liberalization of markets for goods and services in recent times, in several erstwhile socialist countries and mixed economies like India, the need for corporate control is generally overlooked. Regulatory barriers and firm-level practices have tended to limit the scope of competition in takeovers, disinvestments and privatization, both in industrial and developing countries. In more advanced markets, it was found that as regulatory barriers were imposed on corporate control transactions, managerial efforts and board supervision became weak. Firms try to postpone addressing business problems. Corporate performance generally declines with adverse consequences for shareholders.
According to a research study on the US corporate sector in late 1980s, when sharply intensified anti-takeover regulations brought control transactions to a halt, a very large number of the leading firms failed to produce any economic value added for their capital and R&D expenditures. It was true that many firms produced satisfactory results despite the deteriorating business environment, but the average return on investment capital was surprisingly low.
Constraints in Developing Countries
Among developing countries, restricted competition in the market for goods and services is a more prevalent situation. There are diverse constraints, ranging from anti-competitive practices by firms to government policy restrictions on ownership and entry. Frequently, entry barriers are disguised as regulation purportedly designed to serve the “public interest”. In fact, these policies usually give the preferred producers and service providers profits in excess of competitive returns. Such profits, however, come from distorted prices, which is truly a hidden tax on consumers.
With easy, if not ensured, profits and preferential treatment, such firms have little or no incentive to use resources efficiently. At any given time, firms insulated from competition generally incur costs, which are higher than what is possible under the best technical and managerial practices leading to inefficiency in operations. Over time, these losses are compounded by the misallocation of resources as the distorted price and profit signals lead firms to make poor investment decisions. Notwithstanding such inefficient practices, these firms may still produce satisfactory operating and financial results. High prices mask high costs. And the resulting burden is borne by the society as a whole. India's is a classic example wherein the government adopted a highly restricted policy between 1951 and 1991 in the name of import substitution and protection of home industry, which resulted in gross inefficiency, high prices, shoddy goods and an overheated economy. In such a system, corruption and black money abounded and corporate governance was unheard of.
The Role of Banks
Banks, which play a predominant role in financial intermediation in developing countries, maintain cosy relationships with established and often well-connected businesses, a natural outcome in a protected and profitable business environment in which both the borrowers and the lenders operate. In some countries, commercial firms also own and control major domestic banks, creating business conglomerates with “in-house” sources of easy financing for themselves, as was the case in India before 20 of these banks were nationalized in the 1960s and thereafter. Moreover, bank lending is often determined by political directives, which generally favour large incumbent firms. Some of these practices contributed to the high leverage of leading firms in East Asia, as well as the widespread corporate distress and banking failures in the financial turmoil that occurred in these so-called Tiger Economies in early 1990s. More generally, preferred access to bank credit significantly reduces the need of incumbent firms to rely on securities markets where external financiers often demand transparency and accountability of corporate insiders.
Lack of competition accentuates ownership concentration. Owners of incumbent firms have an incentive to retain control of profitable domestic operations. They may choose to remain a private firm or may go public, but without giving up control either by retaining a controlling stake or by issuing non-voting shares. Research findings show that a higher share of the leading firms remains private in less competitive markets. Even within the group of publicly traded companies, a higher proportion of closely held firms are observed in less competitive economies such as India.
While concentrated ownership in individual firms may not cause much concern, there is nonetheless a greater risk of abuse committed by corporate insiders. Unless this risk is mitigated, it is difficult to attract minority and foreign shareholders. Taken to the extreme, ownership concentration and the reliance on internal resources can undermine the development of securities and capital markets, without which corporate governance practices may be very difficult to put in place.
THE BENEFITS OF COMPETITION
Competition improves the conduct of managers, as they understand that in such markets only the fittest can survive. This, in turn, improves quality of products and reduces prices for consumers, and maintains or increases market share, and return on shareholders’ investment. Consumers in economies having hitherto restricted competition as in India are reaping these benefits. In a much freer market they enjoy a wide variety of products and services to choose from, competitive prices, technically updated products and other consumer friendly policies such as easy and instalment credit, longer warranties, etc.
These benefits of competition can be analysed from two aspects: (i) competition in the product market and (ii) competition in the capital market.
Competition in the Product Market
Competition is a positive sum game and not a zero sum game. Increased competition can increase shareholder and consumer welfare. Competition provides strong incentives for performance. It aids in defending and expanding market share. It also helps in the provision of accurate information to measure performance, that is, it increases transparency in all operations. Competition to win market share drives greater efficiency and innovation. It passes on lower prices to consumers and eliminates monopoly rents. All these benefit the ultimate consumers.
Impact on management is such that there is a need to actively manage costs down. Benchmark performance measures are available through reference to competitors unlike in monopoly. It encourages a customer-driven market rather than product-driven market. In a competitive market, the consumer is truly the king as it is he who determines the quality and quantity of the products, as reflected in the price mechanism. Competition in product markets is generally associated with allocative and productive efficiency. Competition encourages the supply of goods and services at lowest costs and at prices.
Competition in the Capital Market
While the benefits of competition to consumers in the product market can be directly linked and may reflect corporate governance practices, it may not be so direct in the case of capital market. In a competitive environment, firms generally cannot expect to earn excess profits. An industry that generates above-average profits tends to attract new competitors, which bring forward additional supply and drive down profitability. Where natural barriers to entry are high, excess profits may persist and interim regulation may be needed to protect consumers. Over time, however, technological advances and entrepreneurial innovations tend to chip away the natural barriers, unless they are prevented by regulations.
To withstand competition, firms need to rely on operational efficiency. Unless their production and administrative costs are kept below prevailing market prices, which may be determined by efficient competitors at home or abroad, they cannot service their debt and meet shareholders' expectations. Under effective competition, preferential treatment can be quickly detected and brought to light by those who suffer the adverse consequences.
However, often, competition may undermine the development of long-term relation between companies and financial institutions. For example, the willingness of banks to provide rescue finance to firms in financial distress, returns hinge on the expectation that these investments will yield long-term returns. Where there is competition in financial markets and firms are in financial distress, then the provision of rescue funding by banks may be discouraged. On the other hand, limitations on competition in financial markets may result in monopoly exploitation of borrowing firms. The desire to retain corporate control, i.e. for the ownership of companies drives performance. The threat of takeover acts as discipline on management. The inefficient use of assets and poor strategy or lack of leadership is not rewarded in a competitive environment. Thus, a firm that remains competitive will be able to get the required funds through the capital market.
Encouraging Good Governance
Competition in product markets and market for corporate control encourage good governance. For good corporate governance, there are ethics, self-regulation and “fair play” on one hand and on the other, there are sharp practices and “cowboy” behaviour. Where competition is intense and global in scope, more firms realize that good corporate governance makes good business sense. Investors seek out firms that run the business efficiently, treat shareholders equitably and comply with high standards of disclosure, even when they are not mandatory.
By applying good governance, a firm can earn a good reputation and efficient access to finance, which in turn enhances their ability to compete. In effect, good governance becomes an instrument of competitive strategies.
The reputation effects of external auditors can be very important in enforcing good governance, particularly where there are complexities and other issues that make the monitoring of shareholders difficult. Takeover codes should not be “captured”, but should maintain a consumer and shareholder focus.
Competition is not always readily available. There are certain areas where there is no competition in the Indian scenario. These include the non-market areas (e.g., defence), and also natural monopolies, scale effects and network effects.
Competition is Only Part of the Solution
Competition is not the only solution to the myriad of problems that exist in such economies. There is a need to regulate certain fiduciary relationships. Steps should be taken to prevent exploitation and/or abuse of information. There should be situations of asymmetric information between buyer and seller.
Enforcement of Good Governance
There can be private enforcement through the market mechanism or through voluntary or self-regulation through trade associations if the losers are sufficiently well-informed, concentrated and expert. Public enforcement is called for if private efforts do not work or if matter is felonious. The positive effects of competition can also reduce the burden of enforcement.
Public enforcement is resorted to where self-regulation and private enforcement will not work in competition policy because consumers or buyers are not sufficiently informed or concentrated to bring suit. Those who are most likely to bring suit may not be those affected allowing pass-through without blowing the whistle.
Regardless of competition, it is important to have sound rules and regulation. Enforcement is vital, complementary to competitive mechanisms, and often may be required to put the corporate governance practices in place.
CHALLENGES TO GOOD ENFORCEMENT
The credible threat of detection, whether from private or public investigation/monitoring, requires resources. Meaningful sanctions applied in a timely period with correct burden of proof depend on legal system and legislative and judicial approaches to white-collar crime. This is a big challenge in the area of international cooperation as globalization continues.
Ultimately, the key role of competition is to enhance economic freedom. It provides opportunities for new entrepreneurs and firms to compete on economic merits, and not on the ability to garner political favours. More business ideas get to face the market test. Over time, firms with good governance are more likely to succeed, while those without it will be shunned and weeded out.
A competition policy seeks to prevent anti-competitive practices and business developments or policy reforms which may facilitate these practices. It aims to stop unfair business tactics and abuse of market power or political office to gain excess profits. With a clear set of competition rules, the government is in a better position to resist the lobbying of interest groups for preferential treatment. Experience also shows that it is useful to maintain economic efficiency as the principal policy objective. Encumbering competition policy with other goals, such as employment, regional development and social pluralism, as has been practiced in India, tends to compromise the beneficial result.
To be effective, the enforcement agencies should have adequate independence, resources and the necessary powers to review, investigate and initiate prosecution of anti-competitive practices. Effectiveness is also enhanced in most countries, except perhaps those with very large domestic markets, if the enforcement agencies focus on firm behaviour concerning anti-competitive pricing and business practices. Often structural issues such as market share and industry concentration can be addressed through removal of restrictions on foreign trade and investment, as well as domestic barriers to entry.
In addition to enforcement, an important role of competition agencies is to review and spell out the implications of public policies and regulatory practices on competition and efficiency. “This function increases public awareness of the costs and benefits of alternative policies and helps ensure that government policy initiatives do not work at cross-purposes”. Another important role of competition agencies is to collaborate with their counterparts abroad in the sharing of information and experience, as well as in the investigation of cross-country anti-competitive practices, including international cartels, the scale and impact of which is only recently being recognized. In this respect, it will be useful to understand the factors that constitute a good competition policy.
WHAT IS A GOOD COMPETITION POLICY?
A good and effective competition policy with the objective of restraining the emergence of monopolies and bringing in a competitive market that would ensure benefits to the consumers and overall economic efficiency, and at the same time take cognizance of the specific needs of a developing country like India, should have the following characteristics:
- It should be capable of controlling the misuse of the market power of dominant firms. It should have a clear perception of dominance and should develop unambiguous criteria for determining the abuse of dominance.
- It should be able to identify the anti-competitive effects of mergers and acquisitions and provide a prescription to deal with such effects.
- It should check barriers to entry, subject to the provisions of industrial policy.
- It should be able to identify and monitor collusion, cooperation or alliances between independent firms in various institutional forms such as cartels and trade associations to restrict, suppress or modify competition. Collusion may take a number of tacit or explicit forms and may involve output restriction, price fixation, distribution controls or market sharing. In many cases, collusions are designed to prevent the entry of potential firms.
- It should be capable of monitoring and preventing anticompetitive agreements between business organizations.
- It should be able to identify restrictive and unfair trade practices and provide a continuous mechanism to prevent them.
- It must ensure that competition leads to better productivity and efficiency and wider choice to the consumer.
- The policy should apply to all the major segments of the economy including agriculture, agribusiness, manufacturing, infrastructure, utilities and services.
- It must provide suitable defences and protection measures to the marginal/vulnerable or weaker enterprises in the small-scale sector, which have national importance.
- The policy must accommodate international factors and influences in the national interest.
- The policy should be able to create a level playing field for various categories of enterprises and must target an optimum degree of competition; which is in the best interest of the economy from the view point of growth, equity and social justice.
THE COMPETITION ACT, 2002
“In pursuit of globalization, India has responded by opening of its economy, removing controls and resorting to globalization. The natural corollary of this is that the Indian market should be geared to face competition from within the country and from outside. The Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 had become obsolete and was choking the economy.”8 Therefore, it became imperative to enact a Competition Act to replace the outdated MRTP Act.
The Competition Act is important for businesses in three main areas:
- Commercial agreements and trading practices
- Conduct towards competitors, suppliers and customers, especially in the case of firms with a strong market position
- Mergers and acquisitions
Since the adoption of the economic reforms programme in 1991, corporates have been pressing for the scrapping of the MRTP Act. The argument was that the MRTP Act had lost its relevance in the new liberalized era and global competitive markets. It was pointed out that only large companies can survive in the new competitive markets and therefore “size” should not be made a constraint. Accordingly, the government appointed an expert committee headed by S. V. S. Raghavan to examine the whole issue. The Raghavan Committee submitted its Report to the Government on May 2000. The Committee proposed the adoption of a new competition law and doing away with the MRTP Act. The Competition Bill, 2001, was introduced in the Lok Sabha in August 2001 and was referred to the Parliamentary Standing Committee on Home Affairs, chaired by Pranab Mukherjee. The Committee tabled its report in the Parliament in November 2002. The report contains two different views. While some members favoured the passage of the Bill, some others contended that by enacting the Bill at this stage, India would lose its bargaining power at the WTO negotiations. They have, therefore, suggested that the Bill should not be enacted till 1 January, 2005 by which time some decisions on issues such as competition policy trade and investment and related matters would have been taken. However, the Bill received the assent of the President of India on 13 January, 2003.
The basic objectives of the Competition Bill that is designed to eventually replace the MRTP Act are:
- Encourage competition
- Prevent abuse of dominant position
- Protect the consumer
- Ensure a level playing field to participate in the Indian economy
The spirit behind the Competition Bill is that big is no more bad, but hurting competition and consumer interest is. S. Chakravarty a member of the Raghavan Committee pointed out that “Size is no longer the issue. It could become only when consumer interest is compromised.”
The Preamble to the Act states that it is an Act to provide taking cognizance of the economic development of the country: (i) for the establishment of a commission to prevent practices that adversely impact competition; (ii) for promoting and sustaining competition in markets; (iii) for protecting consumers’ interests and (iv) for ensuring freedom of trade for other players in markets in India, and for matters connected therewith or incidental thereto.
Consequent to the passing of the Competition Act, the following acts have lost their significance.
- The Industries (Development and Regulation) Act, 1951 may no longer be necessary except for location (avoidance of urban-centric location), for environmental protection and for monuments and national heritage protection considerations, etc.
- The Industrial Disputes Act, 1947 and the connected statutes need to be amended to provide for an easy exit to the non-viable, ill-managed and inefficient units subject to their legal obligations in respect of their liabilities.
- The Board for Industrial Finance and Restructuring (BIFR) 1987 formulated under the provisions of Sick Industrial Companies (Special Provisions) Act 1985 need to be abolished.9
The Competition Commission of India
Section 7 of the Competition Act, 2002 envisages the establishment of the Competition Commission of India to further the cause of competition as described in the Preamble to the Act.
The Bill advocated a regulating body called the Competition Commission of India (CCI). The CCI is to be set up as a quasi-judicial body and would have a chairperson and a team comprising 2–10 members. The CCI would have separate prosecutorial and investigating wings. It would be entrusted with various powers such as the power to grant interim relief, enquire into certain combinations, impose fines on the guilty, order divisions of an undertaking, pass “cease and desist”, order a demerger and direct payment to be made to aggrieved parties for loss or damage suffered by them. The administration and the enforcement under the Act to be done by the CCI are proactive rather than reactive.
The Commission, taking a global cue, set certain benchmarks in terms of deal size and company turnover for these competition norms to apply. To start with, Mergers and Acquisition (M&A) deals involving companies with a minimum turnover of INR 40 billion or groups with a minimum turnover of INR 1,120 billion would require a clearance from the Commission. Apart from these norms, the Commission also has suo moto powers to intervene in any deal, which may directly or indirectly affect competition in any particular industry or segment.
The Focus Areas of the Competition Act
The focus of the Competition Act was on three identified areas where anti-competitive practices could prevail.
- Agreement amongst enterprises: The Act deals only with those agreements between enterprises, which have an appreciable adverse effect on competition. This means that all restrictive agreements are not held to be anti-competitive. The rule of reason is to determine whether an agreement is anticompetitive. The objective of the rule of reasons is to determine whether on merits the activity promotes or restrains competition. To determine this, the CCI will consider the structure of the market as well as the action in question. The CCI is vested with the power to enquire into cartels of foreign origin directly as well.
As per this provision, no person or enterprise or group shall enter into an agreement that causes adverse effects on competition within India in respect of production, supply, distribution, storage, acquisition or control of goods or rendering of services.
- Abuse of dominance: The Act regulates all agreements, which could result in abuse of dominance. The enterprise should be “dominant” and the agreement should have resulted in “abuse” of the dominance. Dominance has been defined as “the position of strength in the relevant market enjoyed by an undertaking which enables it to operate independent of competitive pressures in the relevant market and also to appreciably affect the relevant market, competition and consumers by its actions.
“Abuse” would include agreements charging or paying unfair prices, restriction of quantities, markets and technical development. It includes discriminatory behaviour, predatory pricing (i.e., sale of goods or provision of services at a price lower than the cost of production) and any exercise of market power leading to the presentation, restriction or distortion of competition.
- Mergers of combination among enterprises: The Act regulates all mergers, which create a position of dominance post-merger. It is understood that the government would make pre-merger notification, if required, voluntary. It also provides for a deemed approval of a merger in the absence of a response from the CCI within a period of 90 days. However, it would be mandatory for financial institutions, foreign institutional investors and venture capitalists to file the details of acquisition with the CCI within a week of entering into an agreement.
As per this provision, no enterprise or group of enterprises shall form a combination that causes or is likely to impact adversely competition in the relevant Indian market. If such a combination was effected, it will be held illegal.
The CCI, however, will have the power to make an investigation into a merger even after a year of the pre-merger notification either suo moto or on a complaint. The Act rules out any post-merger review for individual company mergers, which have a combined turnover of less than INR 30 billion or a combined asset size of up to INR 10 billion in India. This provision will not apply to share subscription or funding or any acquisition by a public financial institution, foreign institutional investor, bank or venture capital fund as a result of an agreement.
Salient Features of the Competition Commission
The Government of India enacted the Competition Act 2002 and subsequently set up the Competition Commission to execute the Act. In the following sections we study details of the powers and responsibilities of the Commission and of the officers associated with it.
Qualification of the Chairperson
As per the Act, the chairperson of the CCI should have the following qualifications: (i) he/she shall be a former Judge of a High Court or (ii) be qualified to be appointed as a High Court Judge; or (iii) either well-versed or has experience of 15 years in the areas of international trade, economics, law, finance, management, administration or any other field of human endeavour, which in the opinion of Central Government, should provide the necessary expertise to be able to discharge his duties to the Commission competently.
After passing of the Bill and the President gave his assent to the Competition Act, 2002, the CCI came into existence with the notification issued by the Government of India in October 2003. The Commission has 10 members and a chairman. The government named the then Commerce Secretary as the incumbent chairman of CCI. However, this move of the government was stalled by a petitioner who challenged the decision in the Supreme Court on the plea that only a judge and not a bureaucrat should be appointed as the chairman of CCI. Subsequently, Vinod Dhall has been appointed as acting chairman. The chairman or members shall hold office for a term of 5 years and shall be eligible for reappointment. The Act laid down that neither the chairperson nor the members shall accept any employment or connected in any other manner with the management of any enterprise which has been a party to the proceedings before the Commission, for a period of 1 year once they cease to hold office.
The Competition (Amendment) Bill, 2006 seeks to make the CCI fully functional on a sustainable basis. It has started the scrutiny of the liquor and passenger transport policies of State Governments to find out whether they followed practices that militated against free-market competition. The Commission also has started in its mission to identify, if there is any, anti-competition practices such as cartelization and misuse of market dominance in pharmaceuticals, telecom, transport in Western India, retail food and food grains sectors.
Duties, Powers and Functions of the CCI
The Competition Commission of India is charged with the following duties:
- With regard to eliminate anti-competition practices, the Commission will have to consider the factors such as whether
- There are barriers to new entrants in the market
- Existing competitors are being driven out
- Any foreclosure of competition is attempted by hindering entry into the market
- Benefits to consumers are accruing
- Improvements in production and distribution of goods or provisions of services
- Promotion of technical, scientific and economic growth by means of production of goods or rendering of services is taking place
- With regard to determining whether an enterprise is a “dominant” one, the Commission has to consider the enterprise's
- Market share
- Size and resources
- Size and importance of competitors
- Economic strength including its commercial advantage over its competitors
- Its vertical integration as well its sale or service network
- Hold on consumers in terms of their dependence on it
- Its dominant or monopoly position, whether acquired by virtue of its being statutory, or public sector or government company or otherwise
- Entry barriers
- Countervailing buying power
- Size and structure of market
- Social cost and social obligations
- Relative advantage in the economy by virtue of its contribution to its growth and as such commanding a dominant position so as to have an adverse impact on competition
- The CCI’s power to order an enquiry: The Competition Commission may order an enquiry under the following circumstances:
- On receipt of a complaint
- On a reference by Central/State government or a statutory authority
- On its own on the bases of its knowledge and information. In such cases, if the CCI is satisfied that there is a prima facie case, it should initiate an investigation. To deal exclusively with such cases, the CCI may constitute one or more “Mergers Benches”.
- The CCI’s powers in the follow-up of an inquiry: The Competition Commission, under Section 27 of the Act, has the following powers in the aftermath of an inquiry to order to the concerned enterprise
- To put an end to the impugned agreement or else to stop the abuse forthwith
- To impose a fine which in its opinion will meet the ends of justice, which in any case should not exceed 10 per cent of the average turnover for the previous 3 years
- Order in case of cartelization a penalty equivalent to three times of the amount of profits made out of such agreements in case of the cartel or 10 per cent of the average turnover of cartel for the last preceding 3 financial years, whichever is higher
- To award compensation to the abused parties.
The Commission may pass all or any of the above orders on the enterprises that stood and acted against competition.
- The CCI’s powers to order division of an enterprise: The CCI has the power to direct the division of a dominant enterprise to see to it that it does not abuse its dominant position any more.
- The CCI’s tacit approval for a combination: Section 31 gives powers to the CCI to issue orders in certain types of combinations. If it is satisfied that a combination is not likely to cause any adverse effect on competition, it can approve such a combination.
In the event that the CCI does not issue any orders within 90 days of the commencement of an enquiry, the combination that was inquired into shall be deemed to have been approved by it.
- The CCI’s power over agreements entered into outside India: The CCI has the necessary powers to enquire into any agreement that was entered into outside India, if such agreement has or is likely to affect competition in the relevant market within India.
- Execution of orders of the CCI: As per the Act, every order passed by the Commission shall be enforced as if it were a decree or order of a principal Civil Court or High Court in a suit heard by them.
Section 40 also provides for the right of appeal to the aggrieved party against any order of the Commission. Such an appeal is to be filed in the Supreme Court within 60 days from the date of communication of the decision of the Commission.
- Contravention of orders of the Commission: If any party contravenes any order of the Commission without any reasonable ground, the concerned party shall be liable to be detained in a civil prison for a period up to 1 year and shall also liable to pay a fine not exceeding of INR 1 million.
The Commission has also the power to impose a penalty of INR 1,100,000 for each day in case of failure to comply with the order of the Commission until such time it is complied with.
- Penalty for making false statement before the CCI: If anybody who is a party to a combination makes a false statement, he/she shall be punishable with a fine between INR 5 million to 10 million.
- Relationship between the CCI and Central Government: The Central Government, while formulating a policy on competition, may make a reference to the Commission for its opinion which has to be rendered by the latter within 60 days of the reference. However, the Central Government is free to accept or reject the opinion.
Besides, the Central Government may, by notification and for reasons specified therein, super-cede the Commission for such period, not exceeding 6 months.
- Director General and the CCI: Section 41of the CCI Act lays down as follows:
- The Director General shall, when so directed by the Commission, assist the Commission in investigating into any contravention of the provisions of this Act or any rules or regulations made there under
- The Director General shall have all the powers as are conferred upon him by the Commission
- If any person fails to comply with a direction given by the Director General in his official capacity, the Commission shall impose on such a person a penalty of INR 100,000 for each day during which such failure continues.
MRTP ACT AND THE COMPETITION ACT
In this section, we make a comparative study of the Competition Act and the MRTP Act.
- Unlike the MRTP Act, the Competition Act recognizes the need for monopoly in certain industries: The intent of the legislation in India is to promote competition and the existence of a monopoly across the board. There is a realization in policy-making circles that in certain industries, the nature of their operations and economies of scale dictate the creation of a monopoly in order to be able to operate and remain viable and profitable as in the case of public utilities such as the Railways, Posts and Telegraph departments. This is in significant contrast to the philosophy, which propelled the operation and application of the Monopolies Restrictive Trade Practices (MRTP) Act, the trigger for which was the existence or impending creation of a monopoly situation in a sector of industry.
- To the MRTP Act every dominance is bad, while in the Competition Act only abuse of dominance is bad: The Competition Act is meant to replace the MRTP Act, which controlled and regulated the growth of enterprises. The MRTP Act presumed that all restrictive trade practices were anti-competitive and required registration of the said agreements. Under the MRTP Act, dominance per se is considered bad. Under the Competition Act it is the “abuse of dominance” that is considered bad. Therefore, the CCI can enquire into any agreement that is in contravention of the Act either in its own knowledge or on receipt of complaints or any reference by the Central/State government only if dominance has been abused by an enterprise.
- Unlike the MRTP Act, the Competition Act is flexible, proactive and industry friendly: The Competition Act in comparison with the MRTP Act is more industry-friendly. It is designed to foster and maintain competition. While the MRTP Act was very reactive, rigid with no teeth, and its Commission acted more like an extended arm of the Department of Company Affairs, the competition Act provides more autonomy to the Competition Commission. The Competition Commission would tend to be more flexible and proactive.
- Unlike the MRTP Act, the Competition Act accepts monopoly in certain relevant markets: The raison d’etre of the Competition Act is to create an environment conducive to competition. However, in a significant departure from the letter and spirit of the MRTP Act, the Competition Act does not openly condemn the existence of a monopoly in the relevant market. This is reflected in Section 3, which states that enterprises, persons or associations of enterprises or persons shall not enter into agreements in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which cause or are likely to cause an “appreciable adverse effect” on competition in India. Such agreements would consequently be considered void. The species of agreements which would be considered to have an “appreciable adverse effect” would be those agreements which directly or indirectly determine purchase or sale prices, limit or control production, supply, markets, technical development, investment or provision of services, share the market by allocation of Inter alia geographical area of market, nature of goods or number of customers or which directly or indirectly result in bid rigging or collusive bidding. Specific examples of the types of agreements, which, if they cause an “appreciable adverse effect”, are “tie-in arrangements”.
- The Competition Act does penalize abuse of dominance: Section 4 clearly stipulates that, “No enterprise shall abuse its dominant position”. “Dominant position” is the position of strength enjoyed by an enterprise in the relevant market, which enables it to operate independently of competitive forces prevailing in the market, or affects its competitors or consumers or the relevant market in its favour. Dominant position is abused when an enterprise imposes unfair or discriminatory conditions in purchase or sale of goods or services or in the price in purchase or sale of goods or services. There is also abuse of dominant position when an enterprise limits or restricts production of goods or services or technical or scientific development, acts in a manner which denies market access, prevails upon contracting parties to be contractually bound by acts which are not a part of the intent of the parties as well as by the use of dominant position in one relevant market to enter or protect another relevant market. Again, the philosophy of the Competition Act is reflected in this provision, where it is clarified that a situation of monopoly per se is not against public policy but, rather, the use of the monopoly status such that it operates to the detriment of potential and actual competitors.
- The Competition Act distinguishes different levels of combinations including those established overseas: The Competition Act also is designed to regulate the operation and activities of “combinations”, a term, which contemplates acquisitions, mergers or amalgamations. A combination is discussed and defined on several levels, including any acquisition where the parties to the acquisition (the acquirer and the enterprise) have assets in India worth more than INR 10 billion or turnover in excess of INR 30 billion or within or outside India, in the aggregate, assets worth more than USD 500 million or turnover in excess of USD 1,500 million. Thus, the operation of the Competition Act is not confined to transactions strictly within the boundaries of India but also such transactions involving entities existing and/or established overseas.
- Under the Competition Act, monopoly per se is not bad: It is also important to understand and appreciate the intent of the Competition Act. The objective of the Act is not to prevent the existence of a monopoly across the board. As pointed out earlier, policy makers have realized that in certain industries, the nature of their operations and economies of scale indeed dictate the creation of a monopoly in order to be able to operate and remain viable and profitable. The word “monopoly” is no longer a taboo in corporate and political India.
- Under the Competition Act, forming a combination to kill competition is void: The Act declares that a person and enterprise are prohibited from entering into a combination, which causes or is likely to cause an “appreciable adverse effect” on competition within the relevant market in India. Such combinations would be treated as void. A system is provided under the Act wherein at the option of the person or enterprise proposing to enter into a combination may give notice to the Competition Commission of India of such intention providing details of the combination. The Commission, after due deliberation, would give its opinion on the proposed combination. However, entities which are not required to approach the Commission for this purpose are public financial institutions, foreign institutional investors, banks or venture capital funds which are contemplating share subscription, financing or acquisition pursuant to any specific stipulation in a loan agreement or investor agreement.
- Restrictions on the applicability of the Act: The sweep of the Competition Act is not such as to include all agreements within its ambit. Thus, agreements which are entered into in respect of various species of intellectual property rights and which recognize the proprietary rights of one party over the other in respect of trade marks, patents, copyrights, geographical indications, industrial designs and semi-conductors have been withdrawn from the purview of “anti-competitive agreements”. The inherently monopolistic rights, which are created in favour of bona fide holders of various forms of intellectual property, have been treated as sacrosanct.
- The Competition Appellate Tribunal: Just as SEBI has an appellate body known as Securities Appellate Tribunal (SAT) to hear appeals filed by persons/companies affected by SEBI's orders, there is a provision for an appellate tribunal under the Competition Act too. The Competition (Amendment) Act 2007 has provided for the establishment and functioning of the Competition Appellate Tribunal (CAT). As per the Act, the Central Government shall, by notification, establish an appellate tribunal to be known as Competition Appellate Tribunal
- To hear and dispose of appeals against any direction issued or decisions made or order passed by the Competition Commission under relevance section of the Act
- To adjudicate on claim for compensation that may arise from the findings of the Commission or the orders of the Appellate Tribunal in an appeal against any finding of the Commission or under any relevance section of the Act.
Case 31.1 Justice Pasayat Becomes the Chairperson of the Competition Appellate Tribunal
Justice Arijit Pasayat, retired Supreme Court Judge, assumed charge as chairperson of the Competition Appellate Tribunal for a tenure of three years. Justice Pasayat retired on May 9.
In May 2009, the Centre notified the provisions pertaining to anticompetitive agreements (Section 3 of the Competition Act) and abuse of dominant position (Section 4) and the regulations would lay down the procedure and modalities for filing of complaints with the Competition Commission of India (CCI).
The government also notified the establishment of the tribunal which will deal with appeals against the decisions of the CCI and also adjudicate on compensation claims.
Talking to The Hindu, Justice Pasayat said that though he had assumed charge, the tribunal was yet to start functioning formally.
A significant aspect of the functions of the Tribunal was that it could even look into an agreement entered outside India if it could have an adverse effect on India.
He said: “The Commission has an investigation arm headed by its Director-General, who can enquire into a complaint suo moto or on a reference.”
Courtesy: J. Venkatesan, “Pasayat Takes Charge of Tribunal”, The Hindu, 28 May, 2009.
A recently retired Supreme Court Judge, Justice Arijit Pasayat, has become the first chairman of the Competition Appellate Tribunal effective from the third week of May 2009.
Though our policy makers have realized the importance of competition for a growing economy in a global market, there is still a blurred vision among them in understanding and implementing a competition policy. As Pradeep S. Mehta argues, “It is important to understand the distinction between competition policy and competition law. Competition policy, which we do not have, needs to be a stated government intent on how it aims to promote competition in our economy. It will envelop various other policies, viz., investment, trade, labour, consumer etc to ensure that wherever there are conflicts, decisions to promote competition would get priority. A good example of this is the continuous de-reservation in the SSI sector. A competition law is a market instrument to ensure that firms behave and trade in a fair manner. However, the competition law cannot be a panacea to cure all ills of the market place.”10
Mehta further argues that the market place comprising enterprises, farmers and households consumes a large number of goods and services whose efficiency and competitiveness are determined by the input costs. When the new Competition Act 2002 was being debated, many business interests lobbied against it, for the valid fear that it might be a new avatar of the control regime's MRTP Commission, and not a modern market regulator. This was based on the assumption that once again like all our new regulatory bodies, we would have retirees manning the system whose knowledge about economics and laws is inadequate. If we take the telecom regulator as an example the CUTS research shows that the telecom sector's phenomenal growth as a consequence of increasing competition is unfortunately true only to a partial extent.11
The incumbent government operator, BSNL, which owns 60 per cent share of the market, reports to the same ministry as the Telecom Regulatory Authority of India (TRAI) does. It gets a more favourable treatment from the government. TRAI, some of whose members and staff are former BSNL employees, also gives it a preferential treatment. One instance of BSNL’s status leading to anti-competitive outcomes is that it operates an Internet service and offers it to consumers as a package deal at a low cost vis-à-vis the charge on the use of the phone time. However, consumers of other Internet service providers, who obtain the service through landline network of BSNL, are not able to get the same pulse rate as is being charged to Internet consumers of BSNL. Independent ISPs cannot, therefore, compete effectively with BSNL and they are fast losing their consumers.12
In the goods sector, particularly the raw material and intermediate goods sector, lack of competition affects our firms. In many areas, there is a dominant player or if there are many, then they implicitly and/or explicitly behave in the same fashion. The chances of abuse are high in India due to high levels of concentration in many goods sectors. We can take the textile input sector as an example. In this industry, both fabrics and garments have a high growth potential following the demise of the WTO's textile quota system by the end of 2004 of the two critical inputs: Reliance is the dominant player in the polyester staple fibre with a market share of 54 per cent while Grasim is the dominant player, almost a monopoly, in the viscose staple fibre with 91 per cent of the market share. Per se, they may not be indulging in anti-competitive practices but the possibility is distinct.13
This adequately makes the point that an effective competition law, including international cooperation to deal with cross-border issues, will promote not only consumer welfare, but also business welfare, i.e., better competitiveness.
- A monopoly is said to exist where at least one person or a company controls one-third of a local or national market. Abuses of monopoly include: (i) high prices and restricted output; (ii) wrong allocation of resources; (iii) abuse of investors by monopolists painting alluring pictures of high profits; (iv) preventing inventions; (v) increasing the instability of the economic system; (vi) unfair trade practices; (vii) undue economic clout; (viii) corruption and bribery and (ix) concentration of economic power.
- Societies have enacted anti-monopoly laws that have attempted to (a) prevent monopoly firms from coming into existence, (b) get them dissolved if they exist already or split into a number of competing firms and (c) prevent monopoly firms.
- A competitive firm in a free market is preferred to a monopoly for a variety of reasons: (i) the consumer stands to gain under it; (ii) firms avoid wastages and duplication of efforts; (iii) firms tend to be efficient in a system of the survival of the fittest and (iv) they maximize the gains for the society as a whole.
- It was the avowed policy of Government of India in the early period to curb monopolies and monopolistic practices. The most important step towards this objective was the passing of the Monopolies and Restrictive Trade Practices Act, popularly known MRTP Act in 1969, and setting up of the MRTP Commission in 1970.
- The declared objectives of the MRTP Act 1969 were to ensure prohibition of monopolies and unfair trade practices, and to ensure that there is no concentration of economic power to the common detriment. Also to curb inter-connected and dominant undertakings.
- Dominant undertakings were those that controlled 25 per cent of production or market of a product with assets of at least INR 30 million.
- A restrictive trade practice “may have the effect of preventing, distorting or restricting competition in any manner and in particular (i) tends to obstruct the flow of capital or resources into the stream or production; (ii) tends to bring about manipulation of prices or conditions of delivery or to affect the flow or supplies in the market relating to goods or services in such manner as to impose on the consumers unjustified costs or restrictions.”
- Other forms of restrictive trade practices include (i) Collusion among firms or formation of cartels; (ii) price discrimination between different groups of buyers; (iii) predatory pricing with a view of eliminating competition; (iv) tie-up sales of goods in high and low demand; (v) forcing full line purchase and (vi) area restriction. A monopolistic trade practice (MTP) is a trade practice which has, or is likely to have, the effect of (i) maintaining prices at an unreasonable level, or (ii) unreasonably preventing or lessening competition, or (iii) limiting technical development or capital investment to the common determent or (iv) allowing the quality to deteriorate.
- The MRTP Act specified a large number of different kinds of industrial agreements that required its scrutiny. Each one of these agreements along with the names of practices to the agreement was required to be registered with the Registrar of Restrictive Trade Practices. (i) Any registered undertaking which proposed to expand its activities substantially should notify the Central Government and obtain its approval; (ii) If there was a proposal to establish a new undertaking, prior permission of the Central Government was to be obtained; and (iii) Prior sanction of the Central Government was needed if there was a proposal to acquire or merge or amalgamate with another undertaking.
- The government amended the Act in 1980 and 1984 on the basis of the recommendations of Sachar Committee, constituted in 1977 to review the working of the MRTP act. In the budget for 1985–86, the threshold limit of assets for companies covered under MRTP Act increased from INR 200 million to 1 billion, which boosted the growth of many large industrial houses.
- The New Economic Policy confers the right of a civil court on the MRTP Commission. It is now empowered to summon a company or a business house, enquire into its business practices and activities, direct it to submit its business accounts and to produce evidence contrary to the complaint against it. It also authorized to initiate investigation suo moto or on complaints received from individual consumers or classes of consumers in regard to monopolistic, restrictive and unfair trade practices.
- Competition in the market place offers several benefits to consumers in particular and society in general. Benefits expected from competitive markets are: Growth of entrepreneurial culture leading to increase in the number of producers and sellers in the market; Increase in investment and capital formation leading to increase in supply capabilities; Cost-cutting technologies through sustained research and development efforts; Reduction in wastage and improvement in efficiency and productivity; Greater customer focus and orientation; Increased possibility for entering and tapping foreign markets; Conducive environment for growth of international trade and investment; Better resource and capacity utilization; Wider range of availability of goods and services and wider choice for consumers.
- On account of these benefits, governments in free-enterprise countries take steps to promote competition. While it is necessary to promote competition, an unregulated competition is bad and may even lead to the destruction of nation’s wealth. The regulation and protection of competition usually requires a competition policy. There are three basic areas of such policy: control of dominant firms by regulation; control of mergers to prevent the possibility of emergence of monopolies; and control of anticompetitive acts like full line forcing and predatory pricing. Among developing countries, restricted competition in the market for goods and services is a more prevalent situation. There are diverse constraints, ranging from anti-competitive practices by firms to government policy restrictions on ownership and entry. Banks, which play a predominant role in financial intermediation in developing countries, maintain cosy relationships with established and often well-connected businesses, a natural outcome in a protected and profitable business environment in which both the borrowers and the lenders operate. Lack of competition in such societies accentuates ownership concentration. Owners of incumbent firms have an incentive to retain control of profitable domestic operations. Concentrated ownership in individual firms may not cause a greater risk of abuse committed by corporate insiders.
- Competition improves the conduct of managers, as they understand that in such markets only the fittest can survive. This, in turn, improves quality of products and reduces prices for consumers, and maintains or increases market share, and return on shareholders’ investment. Benefits of competition can be analysed from two aspects: (i) competition in the product market and (ii) competition in the capital market. Increased competition can increase shareholder and consumer welfare. Competition provides strong incentives for performance. Competition in product markets is generally associated with allocative and productive efficiency. Competition encourages the supply of goods and services at lowest costs and at prices. Limitations on competition in financial markets may result in monopoly exploitation of borrowing firms. The threat of takeover acts as discipline on management. The inefficient use of assets, and poor strategy or lack of leadership are not rewarded in a competitive environment. Thus a firm that remains competitive will be able to get the required funds through the capital market. Competition in product markets and market for corporate control encourage good governance. Competition is not always readily available. There are certain areas where there is no competition in the Indian scenario. These include the non-market areas (e.g., defence). They also include natural monopolies, scale and network effects. At the same time, competition is not the only solution to the myriad of problems that exist in economies.
- A good and effective competition policy, with the objective of restraining the emergence of monopolies and bringing in a competitive market that would ensure benefits to the consumers and overall economic efficiency, should have the following characteristics: It should be capable of controlling the misuse of the market power of dominant firms; It should be able to identify the anti-competitive effects of mergers and acquisitions and provide a prescription to deal with such effects; It should check barriers to entry subject to the provisions of industrial policy; It should be able to identify and monitor collusion, cooperation or alliances between independent firms; It should be capable of monitoring and preventing anti-competitive agreements; It should be able to identify restrictive and unfair trade practices; It must ensure that competition leads to better productivity and efficiency and wider choice to the consumer; The policy should apply to all the major segments of the economy including agriculture, agribusiness, manufacturing, infrastructure, utilities and services; It must provide suitable defences and protection measures to the marginal/vulnerable or weaker enterprises in the small-scale sector, which have national importance; The policy must accommodate international factors and influences in the national interest; The policy should be able to create a level playing field for various categories of enterprises.
- Since the adoption of the economic reforms programme in 1991, corporates have been pressing for the scrapping of the MRTP Act. The Competition Bill, 2001 was introduced in the Lok Sabha in August 2001, and the Bill received the assent of the President of India on 13 January, 2003. The basic objectives of the Competition Bill that is designed to eventually replace the MRTP Act are: (i) Encourage competition; (ii) Prevent abuse of dominant position; (iii) Protect the consumer and (iv) Ensure a level playing field to participate in the Indian economy. The spirit behind the Competition Bill is that big is no more bad, but hurting competition and consumer interest is. The Bill advocated a regulating body called the Competition Commission of India (CCI). The CCI is to be set up as a quasi-judicial body and would have a chairperson and a team comprising 2-10 members. The Commission also has suo moto powers to intervene in any deal, which may directly or indirectly affect competition in any particular industry or segment. The focus of the Competition Act was on three identified areas where anti-competitive practices could prevail. (i) The Act deals only with those agreements between enterprises, which have an appreciable adverse effect on competition; (ii) The Act regulates all agreements, which could result in abuse of dominance and (iii) The Act regulates all mergers, which create a position of dominance post-merger. It is understood that the chairperson of the CCI should (i) be a former Judge of a High Court or (ii) be qualified to be appointed as a High Court Judge; or (iii) either well-versed or has experience of 15 years in any other field of human endeavour.
- With regard to eliminating anti-competition practices, the Commission will have to consider whether (a) there are barriers to new entrants in the market; (b) existing competitors are being driven out; (c) any foreclosure of competition is attempted by hindering entry into the market; (d) benefits to consumers are accruing; (e) improvements in production and distribution of goods or provisions of services and (f) promotion of technical, scientific and economic growth by means of production of goods or rendering of services.
- To determine whether an enterprise is a “dominant” one, the Commission has to consider the enterprise's (a) market share; (b) size and resources; (c) size and importance of competitors; (d) economic strength including its commercial advantage over its competitors; (e) its vertical integration as well its sale or service network; (f) hold-on consumers in terms of their dependence on it; (g) its dominant or monopoly position, whether acquired by virtue of its being statutory, or public sector or government company or otherwise; (h) entry barriers; (i) countervailing buying power; (j) size and structure of market; (k) social cost and social obligations; and (l) relative advantage in the economy by virtue of its contribution to its growth and as such commanding a dominant position so as to have an adverse impact on competition.
- The CCI's power to order an enquiry: (a) on receipt of a complaint; (b) on a reference by Central/State government or a statutory authority; and (c) on its own on the bases of its knowledge and information.
- The CCI's powers in the follow-up of an inquiry (a) To put an end to the impugned agreement else to stop the abuse forthwith; (b) To impose a fine; (c) Order a penalty and (d) To award compensation to the abused parties.
- The CCI has the power to direct the division of a dominant enterprise to see to it that it does not abuse its dominant position any more.
- If any party contravenes any order of the Commission without any reasonable ground, the concerned party shall be liable to be detained in a civil prison for a period up to 1 year and shall also liable to pay a fine not exceeding of INR 1 million.
- The Central Government may, by notification and for reasons specified therein, super-cede the Commission for such period, not exceeding 6 months. The intent of the legislation in India to promote competition is not to prevent the existence of a monopoly across the board. Under the MRTP Act, dominance per se is considered bad. Under the Competition Act it is the “abuse of dominance” that is considered bad. The Competition Act is more industry-friendly, flexible and proactive. The Competition Act also is designed to regulate the operation and activities of “combinations”. An effective competition law, including international cooperation to deal with cross-border issues, will promote not only consumer welfare, but also business welfare, i.e., better competitiveness. With the passing of the Competition Act 2002, the MRTP ACT, 1969 stands repealed and the MRTP Commission stands dissolved. However, even a cursory perusal of the functioning of the CCI suggests that there is merely a change in the nomenclature. Moreover, it has taken a very long time for the government to put in a structure of Competition Commission and give it adequate powers to deal with the increasing numbers of violators.
|abuse of dominance||central government||competition commission|
|control of dominant firms||director general||entrepreneurial culture|
|internally generated resources||MRTP Act||perceived benefits|
|regulation of competition||restrictive trade practices|
- “Domestic liberalization will promote healthy industrial growth but promoting external competition through removal of trade restrictions will hurt it.” Discuss.
- “In the liberalized economic environment, there is a need for less controls and more regulation.” Examine this statement in the light of developments over the last 17 years.
- “The MRTP Act has acquired more teeth although the ‘M’ of the MRTP is no longer operative.” Elaborate.
- “Industrial licensing has helped the implementation of government's economic policies.” Elaborate.
- Critically assess the new industrial policy that India adopted in July 1991. Show how its success depends upon the implementation of reforms in other sectors.
- If liberalization does not mean discarding each and every type of control mechanism, what kind of regulatory framework do you recommend at this juncture to make India competitive in world markets?
- Give a critical appraisal of the new industrial policy with special reference to the aim of integrating Indian industry with the world economy.
- Explain the need for liberalization of industrial policy in India. Also evaluate the impact of this policy.
- What policy changes should be made in India's trade and industrial policies to ensure rapid growth of GDP, while maintaining adequate macroeconomic balance?
- What do you mean by liberalization? Assess its impact on the industrial economy.
- Enumerate the objectives and describe the extent of the Competition Act, 2002.
- Specify certain activities which are presumed to have an appreciable adverse effect on competition.
- Describe the provision as regards prohibition of abuse of dominant position
- Describe the provisions relating to the composition of Competition Commission
- The term of office of chairperson and other members of the Competition Commission
- Resignation, removal and suspension of chairperson and other members
- Salary and allowances and other terms and conditions of services of chairperson and other members.
- Explain the powers of the Competition Commission to inquire into anti-competition agreements and dominant position of enterprises.
- Can a person aggrieved by any decision or order of the Competition Commission file an appeal? If so, with whom?
- What are the powers of the Competition Commission to give its opinion on possible effect of any Competition policy formulated by the central government? Also mention its duties in his regard.
- What are the consequences for a person who contravenes the orders of the Competition Commission?
- Enumerate the penalty provided in case of contravention by companies.
- Define the following terms in the Competition Act, 2002:
- Consumer; and
- What are the functions of Competition Commission of India? What are its powers?
- What are the duties of Director General? What is the procedure of Inquiry under Section 19?
Datt, Ruddar. Economic Reforms in India, Critique. New Delhi, India: Sultan Chand & Company, 1997.
Government of India, Report of the Industrial Licensing Policy Inquiry Committee (Main Report, July 1969), New Delhi.
Hazari, R. K. “Industrial Planning and Licensing Policy”, Final Report, Vol. 1, 1961, New Delhi.
Robinson, E. A. G. Monopoly. London, UK: Cambridge University Press, 1941.
Robinson, Joan. The Economics of Imperfect Competition. London, UK: Cambridge University Press, 1933.
Samuelson, Paul. A. and William D. Nordhaus. Economics. New Delhi, India: Tata McGraw-Hill Publishing Company Limited, 2005.
Weston, J. F., M. L. Mitchell and J H. Mulherin. TakeOvers, Restructuring and Corporate Governance. Delhi, India: Pearson Education, First Indian Reprint 2004.