INDIAN UPDATE – The Competition Commission of India’s Approach to Penalties: The Need for Guidelines
- Recently, the Competition Commission of India (“CCI”) has been imposing significant penalties in the range of 5% to 10% of the turnover of enterprises violating India’s Competition Act, 2002. In one cartel case, CCI imposed a penalty equivalent to 50% of the profits made by the concerned enterprises.
- CCI’s increasing penchant for imposing significant fines and the Competition Appellate Tribunal’s reluctance to grant unconditional stay on the payment of penalty before a final determination of guilt has brought to fore the issue of quantifying the penalty amount.
- This article briefly discusses the rules that CCI is required to follow while assessing the penalty amount, how they fall woefully short of providing a cogent framework for quantifying the penalty amount and argues for the adoption of detailed guidelines on computation of penalty, possibly on similar lines as in more mature jurisdictions, such as the European Union and the United States.
The Competition Act empowers CCI to impose substantial penalties for infringing the provisions of the Competition 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.
Initially, CCI appeared a bit hesitant in invoking its vast powers and imposing stringent penalties. But its recent decisions, particularly in cartel cases, show that it has shunned its initial reluctance and is using the power to levy fines to send out a strong message — clean up or face significant penalty. In quick succession, CCI has imposed penalties in the range of 5% to 10% of the turnover of the erring enterprises in several cases. In one cartel case, CCI has imposed a penalty equivalent to 50% of the profits made by the concerned enterprises. CCI’s decisions have naturally been challenged before the COMPAT. Simultaneously, the concerned parties have also sought an interim stay on CCI’s decision, including on the payment of fines. While COMPAT has been accepting the appeals and applications for interim stay, it has done so on the pre-condition of payment of a significant portion of the penalty amount. CCI’s increasing penchant for imposing significant fines and COMPAT’s reluctance to grant unconditional stay on the payment of penalty before a final determination of guilt has brought to fore the issue of quantifying the penalty amount. This article briefly discusses the rules that CCI is required to follow while assessing the penalty amount, how they fall woefully short of providing a cogent framework for quantifying the penalty amount and argues for the adoption of detailed guidelines on computation of penalty, possibly on similar lines as in more mature jurisdictions, such as the European Union and the United States.
Section 27 of the Competition Act gives a wide discretion to CCI to decide on the quantum of penalty. It merely states that CCI may impose such penalty, as it may deem fit. Under Indian law, the grant of discretion cannot be absolute or arbitrary and has to be exercised in a fair and reasonable manner. CCI’s recent decisions imposing mammoth penalties tell a different story. Be it the fine of 6.3 billion Indian rupees (approximately 116.6 million USD) on DLF for abusing its dominant position or the fine of 63 billion Indian rupees (approximately 1.16 billion USD) on the top ten cement manufacturers for forming a cartel, CCI’s orders contain no indication of how these figures were arrived at. As noted earlier, fines under the Competition Act are linked to and may extend up to 10% of the turnover of the erring enterprises and in cases of a cartel agreement they may extend up to three times of the profit made by the guilty enterprises. CCI’s decisions say nothing about how it decides to impose a fine equaling the maximum 10% limit in certain cases and in certain others equaling only 5% of the turnover. In a recent cartel case, CCI has even imposed a fine equaling 0.5 times the profit (i.e. 50% of the profit), again without providing any reasons. A broad assertion by CCI that the fines have been fixed taking into account the facts and circumstances of the case cannot be said to meet the requirement of fair and reasonable exercise of discretionary powers.
The current approach of CCI may perhaps end up defeating the very purpose of why the Competition Act provides for levying penalties. First, an order which imposes very high penalties and does not contain a description of how the penalty amount has been determined is bound to be litigated, the obvious expectation being that COMPAT or the Supreme Court of India (“SC”) would strike down such an order. If the orders of CCI are litigated, it would defeat the entire purpose of the carrot and stick approach that CCI has been advocating through its lesser penalty regulation. Second, if the penalty is not commensurate with the magnitude of the offence, it would not have the desired deterrent effect. Moreover, an excessive and disproportionate levy of penalty will end up providing undue and unfair advantage to the infringing parties’ competitors. Faced with unduly burdensome cost of compliance, the penalized firms may not only lose their competitiveness, but being so burdened and simultaneously weakened because of undue advantage accruing to their rivals, they may even be forced to exit the market. In the long run, CCI’s practice may chill competition rather than protect and promote. The immediate question for CCI, therefore, is how to make the process of determining the quantum of penalty transparent and error-free. The first step would be to give the concerned parties an opportunity to be heard separately on the issue of quantum of penalty. Such an opportunity was indeed envisaged in the initial version of Regulation 48 of the CCI (General) Regulations, 2009 (“General Regulations”), which was later amended to effectively do away with the opportunity. The end result is that parties have to make their submission on the quantum of penalty at a stage when they do not even know whether CCI will hold them guilty of infringement. Amending the General Regulations to provide the parties an opportunity to be heard post the determination of guilt by CCI will go a long way in making the entire process of assessing the penalty amount transparent.
CCI can perhaps take solace and at the same time learn from the experience of other competition regulators which have grappled with similar issues in the early days of their competition law enforcement endeavors.
For instance, the process of calculation of the quantum of fines in the European Union had been criticized as being vague and nebulous, and the procedure for calculating the quantum of fines by the European Commission (“EC”) was compared to a lottery system, where random figures appear magically at the end of the decision. EC responded by introducing the Commission Guidelines (“1998 EC Guidelines”) on fines in 1998. These 1998 EC Guidelines were further revised in 2006 and now specify a two-step process for calculating the final amount of fine. In the first step, EC determines a base amount of penalty calculated by taking into account the duration and gravity of the infringement. In the second step, this amount is increased, where aggravating circumstances like retaliation against parties or refusal to co-operate with the investigation are present and reduced where attenuating factors like a passive role in infringement or reasonable doubt exist.
Similarly, in the United States, the Department of Justice (“US-DOJ”) and the US courts arrive at the penalty amount by referring to the United States Sentencing Guidelines (“USSG”) and the Antitrust Criminal Penalty Enhancement & Reform Act, 2004 (“ACPERA”). Similar to the 1998 EC Guidelines, the USSG and the ACPERA also envisage a two-step process of quantifying the penalty amount. First, the US-DOJ/courts arrive at a base amount calculated on the basis of parameters like profit made by the organization and pecuniary loss caused by it. In the second step, the base amount is multiplied by a margin ranging from 0.75 to 4 based on factors such as high level involvement or tolerance of the conduct, prior criminal history, violation of an order of injunction, any obstruction of justice, co-operation and acceptance of responsibility. In short, competition law regulators/courts in two of the most mature competition law jurisdictions — the European Union and the US, prescribe and adhere to a set of objective parameters to calculate penalties for infringements of competition law. They exercise their discretion within the framework specified in penalty guidelines and by taking account of factors such as gravity of the infringement, advantages that the offending party/parties have enjoyed as a result of the infringement, the repeated or occasional nature of the infringement, the extent of participation in the infringement, cooperation with the authority during the proceedings, the presence of competition compliance programmes and the behavior of the offender in eliminating the prohibited practices and repairing the damage caused to the competition.
Calculation of penalty using a set of objective parameters is important for the purposes of efficient competition law enforcement. A lack of guiding principles for quantifying the penalty amount may lead to arbitrary and unjustified penalties, and CCI will invariably see each of its orders being litigated before COMPAT and SC. Pre-empting rebuke from the appellate courts for something that may be addressed by adopting clear and objective guidelines, as noted above, should not be very difficult for CCI. Such an approach will not only help CCI emerge as a stronger regulator but also provide comfort to the industry by reducing the uncertainties and arbitrariness that characterize the present method of assessing penalty.