The nature of CCI regulations

7 min read 02 Jul 2011, 01:27 PM IST

Expert View | Ram Tamara and Manas Kumar Chaudhuri

The nature of CCI regulations

In a previous column, we highlighted the importance of the competition authority—the Competition Commission of India (CCI) in the case of this country—signalling its intent through regulations, dialogue and communications with the industry at large. We argued this sets the right expectations and removes uncertainty in the minds of the regulated.

Since the publication of that column (on 5 May), CCI has finalized India’s merger regulations. The regulations were notified by CCI on 11 May and will concurrently be effective on 1 June with their merger control provisions, that is, sections 5, 6, 20, 29, 30 and 31 of the Competition Act. CCI has by and large addressed the concerns of the industry. Through the processes of consultation with industry associations and other professionals, CCI decided to revise its own draft regulations.

Also read | CCI must show its effectiveness

In the final version of the regulations, several exemptions from filing have been articulated. For instance, (a) notification to CCI is not required for transactions that were initiated prior to 1 June with appropriate binding documents between the parties; (b) acquisition of additional shares by an entity in an enterprise in which it already holds more than 50% of the stock or voting rights, where the acquisition does not result in sole control is exempt from notification to CCI; (c) notification to CCI is not required for any acquisition taking place outside the geographical boundaries of India and entirely in an overseas destination with very insignificant India presence; (d) acquisition of shares of target up to 15% shall not require any oversight of CCI. In addition, the filing fees have been dramatically reduced and now range from Rs50,000 to Rs10 lakh.

CCI’s intention in declaring these exemptions is laudable on the ground that most of the international jurisdictions do not scrutinize transactions that do not cause adverse effects in the market. However, it is noted that CCI has deleted the pre-merger consultation process from the final version of the regulation. This facility may have to be brought back, at least, in the initial phase of implementation of merger regulation by a young competition authority so as to enable industry players to avoid collecting superfluous information before filing.

Enforcement

The regulations set the framework within which competition law will be enforced. However, how they will be enforced is determined by the competition authority. While the regulations do reveal something about the nature of the competition authority, enforcement of the regulations will unveil the true nature. Understanding the nature of the regulator is critical for the regulated. Knowing how the regulator thinks and how it is likely to make decisions reduces uncertainty, and businesses in particular appreciate that.

In this context, the questions before us are the following: What will drive the enforcement agenda of CCI, and what principles will it use to judge and rule on competition issues? Answers to these questions will help one understand the nature of CCI.

Competition law is economic legislation. In other words, at its core, competition law deals with issues relating to market structure and the behaviour of producers and consumers in the marketplace. Even though universally it is agreed that competition law’s goal is to promote competition, there is variation in the enforcement objectives of competition authorities around the world. For instance, in the US, as the nomenclature “antitrust law" suggests, the objective of the competition authority is to curb the creation of monopolies and thereby protect and enhance consumer welfare. In the European Union (EU), however, size does not seem be an issue, but enforcement is geared towards promoting trade and commerce among the member countries and facilitating economic integration.

While the competition authority’s objective might be to protect consumer welfare, its nature will depend on the economic principles it uses to analyse and rule on cases. As everyone knows, it is hard to build consensus among economists. To their credit, it is the fault of a discipline that deals in theories—that by definition are refutable—quite unlike physical sciences that have deterministic laws. In fact, the celebrated “law of demand" itself is a theory that can be refuted. Given this, the manner in which the competition authority views a business practice will depend on the economic theory that it chooses to use. For instance, a firm’s exclusive dealing arrangement with a vendor can be looked at as a mechanism to ensure the quality of a product or service being offered to protect its brand name, or as a practice to consolidate monopoly power by building entry barriers. In the 1960s, US antitrust authorities used the principle of “structure-conduct-performance" in assessing business practices, and every practice was analysed based on whether it created barriers to entry. However, the realization that there could be efficiencies resulting from firms’ complex contractual arrangements is now considered in the way the antitrust authorities analyse firm behaviour.

What does all of this mean in the Indian context? Do we know the nature of CCI?

It is still early days when it comes to CCI and enforcement. However, one could make some educated guesses in this regard. Let us take the case of the recently finalized merger regulations. There is a general feeling among competition law practitioners that CCI will not take a hard stance on mergers and acquisitions, and that the majority of transactions will be approved. Will the enforcement agenda of CCI take into account the economic priorities of the country? India is one of the fastest-growing economies, with a budding and vibrant private sector. However, it also home to the world’s largest population of poor. Private sector growth should not be stifled at this point as it will have serious repercussions on economic growth. Therefore, a competition law enforcement regime that does not increase the cost of doing business, and cause undue burden of compliance for the private sector, would seem appropriate given the circumstances. This consideration would, however, have to be balanced against the objective of protecting consumer welfare, which would seem to fit into India’s democratic credentials. How CCI weighs and balances these twin objectives will be revealed through its enforcement.

CCI has the benefit of knowing the path followed by the US, the EU, the Australians and the South Africans, to name a few active competition law jurisdictions, in terms of the economic analysis they have used to rule on cases. While it seems that there is a general trend towards unification, there are distinct differences across jurisdictions. The principles that CCI will use to analyse and rule on cases will to a great extent depend on the composition of the commission—whether it will be headed by officials who have a solid background in economics, not just as academics but as practitioners who have a good sense of how businesses work. For instance, a good understanding of business practices in India and knowing why and how they evolved is important when CCI has to rule on such practices.

One other area of enforcement that is closely watched by the regulated entities and competition law practitioners is the penalties imposed by the competition authority. Overenthusiasm on the part of the authorities to establish their credibility in society and markets may at times end up in a futile exercise and lead to unproductive results. It has been seen in similar cases that different jurisdictions impose different fines. Specific examples can be given to substantiate the foregoing statement. Penalty systems on either side of the Atlantic can be noted to show how important this aspect is. In the vitamins cartel case, the combined amount of fines and private damages to be paid in the US was approximately $2 billion and nine executives belonging to those in the cartel were handed out jail terms. On the other hand, the fines imposed in the EU in the same case amounted to €855 million. Similarly, the lysine cartel case investigation in the US led to fines and private damages amounting to $230 million and three executives imprisoned compared with the €20 million penalty being imposed in the EU.

In setting a sanctioning system, it is important that CCI respect the principle of proportionality and set penalties that maximize deterrence without incurring “inefficiency costs". If penalties are too small in comparison with the effect of the breach, then the enforcement activity is unproductive and the costs on the competition authority are a deadweight loss. Conversely, if the penalties are too high and have no nexus with the breach caused, then they can lead to inefficiency costs and lack of proportionality. The imposition of a Rs1 crore penalty on Kingfisher Airlines by CCI for non-compliance of its preliminary investigation is much debated and precisely for this very reason.

Ram Tamara is a director at Nathan Economic Consulting India Pvt. Ltd, a wholly owned subsidiary of Nathan Associates Inc. Competition law and economics is a key practice area at the firm. Manas Kumar Chaudhuri is a partner at Khaitan and Co., a full service law firm with a practice in competition law.

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Published: 27 May 2011, 12:01 AM IST

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The nature of CCI regulations

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