Competition commission and importance of regulatory risk

Competition commission and importance of regulatory risk

India’s new competition law became fully enforceable only in June this year, but the Competition Commission of India (CCI) has already passed two orders with large penalties for alleged violations of its law. In the case of DLF Ltd, the penalty imposed by the antitrust regulator is as high as Rs630 crore.

With CCI acting tough, should Indian investors start pricing in potential regulatory risks for stocks that are perceived to be abusing their dominant positions?

Kotak Institutional Equities has come out with an interesting report that says CCI’s recent action against DLF raises the possibility of regulatory intervention in some other sectors where it sees possible anti-competitive practices.

The brokerage has identified cement, and oil and gas sectors as the most vulnerable to potential regulatory action by CCI, adding that several stocks in these sectors do not factor in potential regulatory risks.

For example, with respect to the cement sector, the report says, “High cement prices at a time of weak demand and large excess capacity raises the possibility of price collusion." It also discusses other reasons why prices may have remained high—the possibility that companies independently decided to reduce operating rates in a bid to increase prices and, hence, profitability; increasing consolidation in the industry leading to higher pricing power; and a delay in the ramp-up of new capacities.

But it also notes the history of charges of cartel pricing, and that the industry was investigated by the Monopolies and Restrictive Trade Practices Commission (MRTPC).

With the new competition law in place, CCI is in a much better position compared with MRTPC to tackle issues such as cartel pricing.

This is not to say that cement companies are engaging in cartel pricing, or that CCI is likely to penalize them in the near future.

But it clearly makes sense for investors to be aware of such regulatory risks and price them in.

Of course, experts in the field argue that both with DLF and in the case involving the National Stock Exchange of India Ltd, CCI’s arguments may not hold in the appellate tribunal.

A Mint report last week pointed out that experts are questioning the DLF order, citing that CCI has used a narrow definition of the relevant market such that it supports its conclusion of dominance by the company.

It’s possible, therefore, that CCI’s orders may be overturned by the Competition Appellate Tribunal.

In this backdrop, should investors still be careful about the regulatory risks associated with competition law? It must be noted here that even when CCI doesn’t initiate a formal investigation, companies are likely to be careful in areas related to pricing, knowing that a tougher antitrust regulation is in place.

Of course, if CCI makes a formal investigation, it may result in a penalty. But, even otherwise, pricing power of some firms may get affected, leading to lower-than-estimated profits.

Investors will find it worthwhile to take note of Kotak’s warning and price in these regulatory risks wherever applicable.

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