The Competition Commission of India (CCI) has come of age through its much-awaited decision in the Neeraj Malhotra v. Deustche Post Bank Home Finance case. Through this first final order— after anti-competitive agreements and abuse of dominance provisions of the Competition Act (2002) were notified last year—the commission has sought to address criticism that it has been inordinately shy of interpreting the Act’s substantive provisions. This is a landmark event in the evolution of India’s competition law, after parliamentary approval of the statute in 2003 and a subsequent amendment in 2007.
The order relates to a prepayment penalty levied by banks and non-banking financial companies on housing loans. Typically, any attempt by borrowers to prematurely close a loan for a housing project attracts a penalty ranging between 1% and 4%.
The extensive order (CCI’s analysis of the complaint occupies 311 pages) comes close on the heels of the Supreme Court’s trust reposed in the commission’s abilities in the Steel Authority of India Ltd (SAIL) judgement. In it, the apex court said that the appellate authority’s interference with CCI’s orders at the interim stage was unjustified.
The court’s extraordinary reliance on regulations drafted by CCI instantiated Indian jurisprudence’s shift towards a “deferential” standard of judicial review. This was a departure from an earlier trend in which the judiciary, while looking at the specifics of a particular case, would de novo overturn analysis undertaken by expert bodies.
Application of the de novo standard, for instance, explains the penchant of the Securities Appellate Tribunal to reverse Securities and Exchange Board of India decisions (see “The future of competition”, Mint, 16 December 2009).
Has CCI, in the Neeraj Malhotra case, redeemed itself and justified the Supreme Court’s “steely” faith reposed in it to act as a responsible, expert body?
The verdict, at best, appears humdrum. At worst, it highlights the commission’s failure to apply rigorous economic analysis of law. In this case, through a majority order of 4-2, CCI has held that the prepayment penalty levied by banks does not fall foul of competition law. Owing to the fragmented nature of the market, the commission did not find the provisions relating to abuse of dominant position to be applicable. With respect to the provisions on anti-competitive agreements, it did not find the prerequisite of such an agreement between banks.
Interestingly, the chairman of the commission recused himself in the case. Therefore, one will perhaps need to wait for another CCI order to understand whether the chairman would push for a more stringent application of economic theory to law.
One of the critical arguments advanced by banks in favour of the prepayment penalty had been what they termed asset liability management (ALM). As noted by the minority (P.N. Parashar and R. Prasad) in this case, the majority order lacks a comprehensive economic analysis of ALM. Further, the majority fails to appreciate that through the prepayment penalty, banks seek to expand the network effect, whereby they increase the switching and transaction costs for existing borrowers who are unfairly locked in. The majority unnecessarily concentrates upon all borrowers, including future ones.
The majority as well as minority orders, however, do benefit from comparative law. They rely on several jurisdictions, such as France, the US, the UK, the European Union (EU) and South Africa. They also borrow from advanced analysis through Organisation for Economic Cooperation and Development (OECD) documents.
Domestically, there is reference to judgements from the Supreme Court as well as the National Consumer Disputes Redressal Commission. CCI’s open-mindedness about analysing precedents from India and abroad bodes well.
One of the curious aspects of the case is that the complainant, Neeraj Malhotra, though an advocate, failed to respond to the commission once the director general filed the investigation report.
This raises questions about the jurisprudence of competition law evolving through the appellate tribunal, and subsequently through the Supreme Court in this case. Since the informant is missing, it is unlikely that he will file an appeal at the appellate tribunal. This has a serious implication—it means that, in the meanwhile, CCI’s order will guide the arrangement of affairs in businesses’ lives.
The informant’s failure to approach the appellate tribunal should not necessarily be a big setback for borrowers. The enactment states that “any person aggrieved by any order of the Commission” may approach the appellate tribunal. The broad phraseology should enable any borrower to pursue an appeal against CCI’s order.
Indian competition law does not require an informant to prove harm to be able to approach the Competition Commission. So long as an appreciable adverse effect on competition is manifest, the harm caused to demand and supply serves as proxy for that caused to consumers. A similar approach seems to have been taken for appeals—any person aggrieved by a commission order will be able to pursue the case at the appellate stage.
Hence, despite CCI’s order having gone in favour of the banks, this is merely the beginning of the battle. The endgame is yet to play out.
Rahul Singh is a New Delhi-based competition lawyer.
Comments are welcome at firstname.lastname@example.org