Highlights:

•  The Competition Amendment Bill, 2012 (‘Bill’) has been introduced in the lower house of the Indian Parliament and if passed, will bring significant changes to Indian competition law.
• Most significant is the introduction of the concept of ‘joint dominance’ under Section 4 of the Competition Act, 2002, providing for an enabling provision which will give the Government of India the flexibility to specify sector/industry specific asset or turnover thresholds, which trigger the pre-merger notification requirement.
• The Bill seeks to make way for easier operation of the Act’s ‘search and seizure’ provisions and several other small, yet significant, changes that would further enhance the powers of the Competition Commission of India (‘CCI’) and pose a new set of challenges for entities doing business in India.

Main Article:

Competition Amendment Bill, 2012: An Overview

The Indian competition law is all set to undergo significant changes. In June 2011, the Government of India (‘GoI’) had set up an expert committee to examine and suggest modifications to the Competition Act, 2002 (the ‘Act’). Based on the recommendations of the expert committee, GoI introduced the Competition Amendment Bill, 2012 (‘Bill’) in the lower house of the Indian Parliament, the Lok Sabha. However, the Bill was not tabled for voting by the Lok Sabha and will most likely come up for voting in the upcoming budget session of the Parliament.

The Bill seeks to introduce significant changes to the Act. Most notably, the Bill seeks to introduce the concept of ‘joint dominance’ under Section 4 of the Act, and provides an enabling provision which will give GoI the flexibility to specify sector/industry specific asset or turnover thresholds, which trigger the pre-merger notification requirement. In terms of procedure, the Bill seeks to make way for easier operation of the Act’s ‘search and seizure’ provisions. The Bill also seeks to introduce several other small, yet significant, changes to the Act. To sum up, these changes, if passed by both the houses of Parliament, will further enhance the powers of the Competition Commission of India (‘CCI’) and pose a new set of challenges for entities doing business in India.

This article seeks to identify the key changes sought to be introduced by the Bill and provides a brief assessment of the likely impact they will have on the operation of the Act.

Introduction of the concept of ‘joint’ dominance:

Section 4 of the Act prohibits the abuse of dominant position. The current text of Section 4 does not envisage the concept of ‘joint’ dominance. It merely seeks to prohibit abusive unilateral conduct by an ‘enterprise’ or its ‘group’. The Bill seeks to alter this provision by introducing the concept of ‘joint’ dominance by modifying the current text of Section 4(1) of the Act to read as: “No enterprise or group jointly or singly shall abuse its dominant position.”

The inclusion of the terms ‘jointly or singly’ in the existing text of Section 4(1) of the Act means that CCI will now be able to scrutinize business conduct of an enterprise, even if such an enterprise does not qualify as being dominant on its own. Rather, CCI may now assess dominance on the basis of combined or joint ability of two or more enterprises to act independently of the competitive forces in the relevant market.

IMPLICATIONS

The introduction of the concept of ‘joint’ abuse of dominance raises several concerns some of which have been set forth below:

i.   It is unclear how CCI will implement the provision on ‘joint’ abuse of dominance. Globally, competition courts and tribunals have been extremely reluctant to invoke the concept of ‘joint’ abuse of dominance. For instance, in the United States of America (‘U.S.’) the attempts by the Federal Trade Commission or the Department of Justice to bring claims of joint abuse of dominance have almost always been turned down by the U.S. courts. Similarly, the European Commission (‘EC’) has been very reluctant to apply the provision on ‘joint’ abuse of dominance. In limited instances, where EC has invoked the concept of ‘joint’ abuse of dominance, it has done so only after finding evidence of structural linkages between the allegedly dominant enterprises. The application of the concept of ‘joint’ dominance by EC has been so reduced that its 2008 Guidance Paper on Enforcement Priorities in applying Article 82 of the EC Treaty to Abusive Conduct by Dominant Undertakings (‘Guidance Paper’), merely recognises ‘joint’ abuse of dominance as a theoretical concept and limits the scope of the Guidance Paper to abuses committed by an undertaking holding a single dominant position. While more mature jurisdictions appear reluctant to invoke the concept of ‘joint’ dominance, the Bill paves way for the inclusion of this concept under the Act. Introduction of this concept increases the uncertainty surrounding the application of Section 4 of the Act (which deals with abuse of dominance).

ii.  The Bill increases the risk of scrutiny both under Section 3(3) of the Act (which deems certain agreements entered into between enterprises as having an appreciable adverse effect on competition (‘Adverse Effect’)), as well as under Section 4 of the Act. In concentrated markets, a small number of firms may be able to easily observe each other’s actions and thus behave in a manner that may be characterized as co-operative rather than competitive. Typically, if the number of firms is sufficiently small, and important market characteristics such as prices and capacity are sufficiently transparent, firms may behave in a co-operative manner without the necessity of resorting to explicit discussions or agreements. Such behaviour will ideally be examined under Section 3(3) of the Act, which deals with anti-competitive horizontal agreements. In the absence of clear evidence on concerted action (which may be lacking in concentrated markets), it may be difficult for CCI to establish a case under Section 3(3) of the Act. In such an event, CCI may bring a case under Section 4(1) of the Act, which does not require it to show the existence of an agreement or concerted action. Introduction of the concept of ‘joint’ dominance is thus likely to blur the distinction between Section 3(3) and Section 4 of the Act.

iii. The introduction of the concept of joint dominance under Section 4 of the Act is likely to increase the cost of compliance for enterprises doing business in India. Section 4 of the Act contains a list of business practices which become abusive when carried out by a dominant enterprise. In other words, these business practices are perfectly legal and permissible if they are carried out by a non-dominant enterprise. The introduction of the concept of ‘joint’ abuse of dominance would mean that an enterprise which was, on its own, not likely to be considered as a dominant enterprise, may now become one. Consequently, its business practices, which were permissible thus far, may become susceptible to scrutiny once the Bill becomes Law. Firms, which were traditionally not concerned about compliance risks under Section 4 of the Act, will now have to tread with caution and re-assess their business practices.

Changes to the “search and seizure” norms

The current text of Section 41 of the Act already empowers CCI’s investigative arm – the Directorate General (‘DG’) to carry out “search and seizure” (commonly known as “dawn raids”) operations. However, DG has appeared reluctant to use its powers under Section 41 of the Act, and this provision has largely remained unutilized.

The Bill seeks to make it easier for DG to carry out dawn raids. Specifically, by replacing the requirement to seek prior sanction from the Chief Judicial or Metropolitan Magistrate with a requirement to seek prior sanction from the Chairperson of CCI instead, the Bill makes it easier for DG to carry out dawn raids. Additionally, the Bill makes certain other small but important changes to the procedure with regard to dawn raids.

Firstly, the Bill increases the trigger points for conducting dawn raids. The current text of Section 41 of the Act empowers DG to carry out dawn raids only when it considers that certain evidence is likely to be destroyed, mutilated, altered, falsified or secreted. Whereas the Bill expands the trigger point for conducting dawn raids to also include instances where, in DG’s view, a person or enterprise has omitted or failed to provide the information or produce documents as required by the notice; or would not provide such relevant information.

Secondly, the Bill empowers DG to record statements of a wider group of people. The current text of Section 41 of the Act empowers DG to record statements (on oath) of only the past and present officers, employees or agents of the company under investigation. The Bill empowers DG to record statements (on oath) of all persons having knowledge of such information or documents that it thinks are being withheld or are likely to be destroyed.

In sum, the Bill makes it easier for DG to conduct dawn raids. However, the removal of judicial oversight, expansion of the list of trigger events for conduct of raids and the power to record statements of all persons who may, in DG’s view, have information that it may be searching for that is likely to provide DG with unbridled powers.

Raid on an individual’s premises seriously impinges on its right to privacy and must hence be conducted in the rarest of rare cases. For this reason, the existing Act as well as most Indian statutes analogous to the Act also provide for judicial oversight over the decision to conduct raids. This helps check the investigating body from transgressing its powers. Nevertheless, post the amendment, this safeguard envisaged in the existing Act is likely to be reduced once the power to sanction raids shifts from Magistrate First Class, or the Chief Metropolitan Magistrate to the Chairperson of CCI. Moreover, since DG is the investigative arm of CCI, and conducts investigations once CCI has formed its prima facie view about the existence of a case, the Chairperson may suffer from institutional bias while deciding whether to sanction a raid or not. The Chairperson has an inherent interest in ensuring that CCI’s prima facie decisions result in final convictions. Consequently, the likelihood that the Chairperson may sanction raids in situations which may not necessarily require the extreme step of raids would increase.

Opportunity to be heard before imposition of penalty

Section 27(b) of the Act empowers CCI to impose penalties upon contravention of Section 3 and Section 4 of the Act. For entering into anti-competitive agreements or abusing dominant position, the penalty may go up to 10% of the average turnover of each erring enterprise for the three financial years immediately preceding the finding of guilt. The penalty gets harsher in case of cartel agreements, and may extend up to the higher of 10% of the average turnover, or three times the profits made by the guilty enterprises during the entire duration of the cartel agreement.

The current text of Section 27 of the Act is broadly worded and gives CCI significant discretion while determining the quantum of penalty. Moreover, the current text of Section 27 of the Act does not provide for an opportunity to be heard on the issue of quantum of penalty. Consequently, parties to an investigation under the current scheme of Section 27 of the Act are required to make submissions on the quantum of penalty at a stage when neither the contravention, nor their role in such contravention, has been established.

The Bill seeks to provide parties to an investigation a separate opportunity to make submissions on the issue of quantum of penalty. By doing so, the Bill seeks to make the process of computation of penalties more transparent and predictable.

Expansion of the list of intellectual property related exemptions

The current text of Section 3(5)(i) of the Act provides an important gateway for enterprises to protect and make use of their intellectual property rights, without falling foul of Section 3 of the Act. To prevent infringement of their intellectual property rights, enterprises are permitted to impose reasonable restrictions in their agreements with other business partners.

However, the limited exemption or gateway under Section 3(5)(i) of the Act, for imposing reasonable restrictions, is available only with respect to intellectual property rights recognized under six specific statutes listed therein. These statutes do not recognize or protect several forms of intellectual property, including ‘trade secrets’, and ‘know-how’. Consequently, a number of commercial arrangements, particularly arrangements involving transfer of technology in the form of ‘trade secrets’ and ‘know-how’ are not likely to benefit from the limited exemption envisaged under the current Section 3(5)(i) of the Act. Arguably, CCI may view the restrictions imposed to protect ‘trade secrets’ and ‘know-how’ as being anti-competitive.

The Bill seeks to bridge the above mentioned gap by inserting a catch-all provision towards the end of the current text of Section 3(5) (i) of the Act, which reads as, “any other law for the time being in force relating to the protection of other intellectual property rights.” In essence, such a provision will ensure that an enterprise is not denied the flexibility to impose reasonable restrictions for protecting its intellectual property rights, simply because certain rights are not protected under the six statutes listed under the current Section 3(5) (i) of the Act.

Sector-specific thresholds for combinations

When the merger control related provisions under Section 5 and 6 of the Act were brought into force in June 2011, GoI had increased the asset/turnover thresholds which trigger the prior notification requirement by a significant 50%. While the Indian industry was largely satisfied with this change, GoI was concerned that in certain sensitive sectors, such as pharmaceuticals, the increase in thresholds coupled with removal of restrictions on foreign direct investment (‘FDI’) limits could completely remove its oversight.

GoI was particularly keen to maintain its oversight on foreign investments in preexisting Indian companies in the pharmaceutical sector, i.e. brownfield investments which it would have lost subsequent to the easing of FDI norms. It feared that easing of FDI norms in the pharmaceuticals sector would lead to the entry of large foreign companies who may, in turn, acquire smaller home grown pharmaceutical companies. To address these concerns, GoI constituted Arun Maira Committee on FDI Policy in Pharmaceutical Industry had recommended that CCI be empowered to examine acquisitions of domestic pharmaceutical firms by foreign enterprises. However, since smaller Indian pharmaceutical companies may not meet the relatively higher asset/turnover thresholds prescribed under the Act, even CCI could not scrutinize such acquisitions. Accordingly, GoI seeks to introduce a new Section 5A in the Act which would give it the flexibility to specify separate asset/turnover thresholds for any class or classes of enterprises which it considers sensitive and would like CCI to monitor.

The introduction of the new Section 5A to the Act is likely to lead to over-regulation, and the creation of uncertainty in how the competitive effects of a combination (merger, acquisition or amalgamation) will be assessed, and may make the process of pre-merger notification more cumbersome.

IMPLICATIONS

i. The inclusion of such an empowering provision under the Act may lead to the dilution of asset/turnover thresholds prescribed under Section 5 of the Act, for transactions in various other sectors, which GoI may, from time to time, consider as being “sensitive”. The new Section 5A therefore paves way for increased intervention by GoI in the administration of merger control rules under the Act.

ii. The new Section 5A is likely to result in non-economic factors being considered by CCI while evaluating combinations. Prior to the introduction of Section 5A, the accepted wisdom was that transactions involving smaller companies are unlikely to cause an Adverse Effect in India, and hence need not be notified to CCI for its scrutiny. The asset/turnover thresholds that may be prescribed under the new Section 5A are likely to be lower than the asset/turnover thresholds prescribed under the current Section 5 of the Act. While reviewing the special category of transactions that meet the thresholds which may be prescribed under the new Section 5A, CCI will have to make a departure from the assumption that transactions involving smaller companies do not cause an Adverse Effect. Such a situation may warrant a different approach to how CCI carries out its Adverse Effect analysis. It is likely that CCI may be guided by larger political-economy considerations, which may have been responsible for the introduction of different thresholds for a class of enterprises under the new Section 5A.

iii. Further, the introduction of sector specific thresholds is also likely to add another layer of complexity to the merger control regulations. For instance, in transactions involving conglomerates which have presence in several industrial sectors, parties will now have to conduct an additional examination of which set of thresholds would apply. This is likely to make the pre-merger filing process more cumbersome.

In sum, it appears that the likely benefits of GoI’s attempt to keep an eye on transactions in the pharmaceutical sector through the merger control related rules may pale in comparison to the hurdles that it may create.

Other amendments

In addition to the above changes, the Bill also introduces several other changes to the existing text of the Act. To reduce the likelihood of friction between CCI and other sector-specific regulators, the Bill seeks to make it mandatory for sector-specific regulators to seek CCI’s views when they think that an issue may raise competition concerns. Equally, the Bill makes it mandatory for CCI to consult with sectoral regulators in the event that an issue of overlap between the Act and other sector specific laws arises.

The Bill clarifies the definition of the term ‘turnover’ to exclude the taxes, if any, levied on sale of such goods or provision of services. The Bill also amends the definition of the term ‘group’ to now include two or more enterprises which exercise 50% or more of the voting rights in the other enterprise. In another change aimed at clarifying the existing text of the Act, the Bill seeks to introduce express language to extend the scope of Section 3(4) of the Act to agreements for the provision of ‘services’. It also seeks to reduce the ‘waiting period’ for merger clearance from the existing 210 days to 180 days. The revised 180 days outer limit for clearing transactions may, however, be extended if CCI requests additional information from notifying parties and the clock stops ticking for the time period allowed for furnishing such information.

On the procedural front, the Bill creates certain additional opportunities for parties to an inquiry to make submissions during the course of an inquiry. The Bill also makes an important change in the constitution of the Selection Committee, which recommends the names of eligible persons to be considered for the post of Members of CCI. The Bill proposes to include the Chairman of CCI as one of the members of the Selection Committee.