Navigating Cartel Detection: Assessing Leniency Plus In Indian Competition Law

According to Section 2(c) of the Competition Act, 2002^[3], a cartel includes “an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services”. This act also prohibits the formation of agreements (including those formed between cartels) that are likely to have an 'appreciable adverse effect' on competition within India and prescribes penalties and fines for the same. The detection of cartels, however, poses a major challenge to the government. Thus, the law provides leniency programs to encourage companies to report cartel activities that might otherwise go undetected. These programs generally offer reduced fines or immunity from prosecution in exchange for cooperation and the provision of information about cartel activities.

General leniency programs offer the cartelists immunity from sanctions concerning the second anti-competitive agreement. However, Leniency Plus or Amnesty Plus is an extension of the same, as it also provides reduced sanctions for involvement in the first cartel. Thus, the 'plus' mechanism^[4] puts forward added incentives in the form of extra leniency to detect and penalize more cartels in light of the tedious act of cartel detection.

Developments In The Indian Legal Framework

The leniency applications were governed by Section 46 (4) of the Competition Act 2002^[5] read with the CCI Lesser Penalty Regulations, 2009^[6] which offered a reduction of up to 100% in sanctions to the first applicant and proportionate reductions for subsequent disclosures. The CCI may impose a lesser penalty on a person involved in a cartel alleged to have violated Section 3 of the Competition Act 2002^[7], if such person made a full and true disclosure in respect of alleged violations and such disclosure is vital.

The Competition Law Review Committee suggested the introduction of leniency plus^[8] in 2019 to provide for enhanced anti-cartel enforcement by substantially reducing the time and effort spent by CCI in detecting cartel activities in light of the increased incentives. Such a provision would offer evidence to the CCI regarding violation of the Competition Act and would align with international practices. Leniency Plus is implemented in numerous jurisdictions like the US, UK, Singapore, Canada and Brazil to unveil the cloak of secrecy donned by cartels.

In line with these recommendations, the 'leniency plus' or 'lesser penalty plus' mechanism was introduced under Section 46(4) via the Competition (Amendment) Act 2023^[9] along with the draft CCI (Lesser Penalty) Regulations, 2023^[10], to incentivize additional cartel disclosures by existing leniency applicants. The CCI solicited public comments on these Draft Regulations and received inputs from a variety of stakeholders including industrial associations, legal experts, think tanks, academicians and others. In exercise of its powers conferred by sub-section (1) and clauses (ga), (gb) and (gc) of sub-section (2) of section 64, read with section 46 and clause (b) of section 27 of the Competition Act, 2002, the CCI has notified the Competition Commission of India (Lesser Penalty) Regulations, 2024^[11] through a Gazette Notification dated 20 February 2024.

Regulation 5 of the 2024 Regulations provides for up to 100% monetary reduction in fines relating to the second cartel along with up to 30% reduction relating to the first cartel in cases where the CCI forms a prima facie opinion as to the existence of a second cartel based on information provided by the cartelists. Certain prerequisites for the applicants to be qualified for the leniency plus scheme are –

• The applicant must have an existing investigation going on for a cartel to which it has already disclosed to the CCI.
• The applicant must cease to participate in the cartel from the time of its disclosure.
• The applicant must provide vital disclosure in respect of alleged contravention of the provisions of section 3 of the Act such that the CCI is able to form a prima facie opinion.
• The applicant must provide all relevant information, documents and evidence as may be required by the Commission.
• The applicant must co-operate genuinely, fully, continuously and expeditiously throughout the investigation and other proceedings.
• The applicant must not conceal, destroy, manipulate or remove the relevant documents in any manner that may contribute to the establishment of a cartel.
• The applicant must not give any false evidence or omit to submit any material information knowing it to be material.

If the applicant is the first to make a vital disclosure by submitting evidence of a cartel to the CCI, such evidence should enable the CCI to form a prima facie opinion regarding the cartel's existence. Such disclosure has to be in relation of contravention of Section 3 of the Competition Act 2002, in a matter which is under investigation by the CCI. Such an applicant may be eligible for the benefit of reduction in penalty of up to or equal to 100% of the penalty imposed by the CCI. The second, third and subsequent applicants are required to disclose evidence that adds 'significant added value' to the evidence already in possession of the CCI. It is clarified that 'significant added value' means the extent to which the evidence provided enhances the ability of the CCI to establish the existence of a cartel. The second applicant is eligible for reduction of monetary penalty up to or equal to 50% of the penalty imposed while the third and subsequent applicants may avail benefit up to or equal to 30% of the penalty imposed.

Further, if there are more than one applicant for lesser penalty plus with regard to a newly disclosed cartel, then the Commission would examine the subsequent applications in the order of their priority status only when the first application is rejected. If the CCI believes that a 'full, true and vital' disclosure has not been received, it might reject the leniency application. The CCI would also consider the probability of the detection of the second cartel in the absence of a 'lesser penalty plus' provision. It holds the power to forfeit the application if it receives false information or notices the omission of material information.

However, the Commission is mandated to provide the opportunity of being heard to the applicant before final rejection of the application. The applicant may also withdraw his application before the investigation report has been submitted by the Director General to the Commission. In case of such withdrawal, the DG or CCI shall be at liberty to use any information, evidence or document submitted by the applicant except admission.

Examining The Obstacles To Effective Implementation

The leniency provision is not popularly known in India, as evidenced by the fact that only 7 leniency applications^[12] were received from 2009-2018, which is comparatively lesser than in countries like the UK and the US. Such a low turnout might be attributed to the greater profits anticipated from the continued cartelization as opposed to the minimal monetary relief granted for disclosure, coupled with the uncertainty of the penalties being imposed. It has been observed that the amount of fines levied by the CCI fails to deter firms involved in cartels from anti-competitive activities.

The CCI also often vaguely passed orders with disregard for the proportionality principle whereby the relief granted must be proportionate to the relevance of the information disclosed. For instance, the CCI ordered a 75% leniency without any rationale in the first-ever leniency case – the Brushless DC fan cartel case^[13]. Similarly, in the Dry Cell Batteries case^[14], the CCI granted small reductions in penalty to the second and third applicants, despite the lack of a 'vital disclosure' and 'significant value' by them. Thus, there exists a lot of ambiguity concerning the concepts of 'significant value addition' and 'cooperation' and the standard of proof (amount of information) to be shared to obtain the benefit of leniency programs.

The marker system in India has not been properly formulated. The need for this arises in a situation where applications are received from one cartel's members at the same time. This order is instrumental in determining the reduction of penalty and acts as an incentive for whistleblowers. Although the Indian law does specify that an applicant shall be 'marked' after making an application before the Commission either through a written or oral mode, however, a truly efficient marker system would be one where markers are granted subject to receipt of 'vital information'.^[15] Such a marker system is in place in the European Union since 2006. Moreover, there are not adequate provisions to safeguard the confidentiality and secrecy of whistleblowers. This is evident in the fact that Phoenix Conveyer Belt being the first leniency applicant is public knowledge.

These ambiguous and inconsistent decisions often lead to appeals being filed^[16] in the appellate courts where the CCI is often unsuccessful. These appeals strain the resources of the CCI along with causing a dip in the reputation as an efficient regulator due to failure to defend its position.

To create deterrence as envisioned by the CCI, there must exist a sufficient threat of criminal sanctions exceeding the prospective advantages of participating in the cartel. In the presence of reduced penalties, firms might deliberately adopt the 'collude and report' policy^[17] wherein they engage in joint action and earn high profits. Then, they report the cartel to the anti-competitive authorities to gain relief under a leniency mechanism.

Investigations carried out based on the information acquired from the leniency plus mechanism would be an additional adjudicative step for the CCI. It would require substantial finances and manpower, while CCI is already going through a shortage of resources. It would take the CCI more time to pass orders after verifying the truth of the information provided. Such a policy might increase the financial burden through increased costs for law enforcement without any commensurate returns in terms of decreased collusion rates.

Studies also show that introduction of leniency plus may stabilize cartel development^[18] and increase the sustainability of certain cartels. Furthermore, exploiting leniency plus in the ways discussed is difficult in practice, however, cartels are able to change their behaviour over time to adapt with the regulations.^[19] Thus, leniency plus is unlikely to be effective and might even be counter-productive.

Potential Solutions

Having addressed the afore-mentioned concerns, certain changes can be incorporated so as to improve the efficiency of the leniency program as it is in other jurisdictions such as the US, the UK, Brazil and Canada.

In India, the competition law penalises the executives of cartelists for 10% of the average income^[20] of the last 3 years which is generally reimbursed by the companies, thus, failing to be a deterrent. Countries with successful leniency mechanism involve strict penalties on individuals that are driven to the regulator under individual leniency programs. The US Department of Justice insists on jail sentences because “avoiding jail sentences is the greatest incentive for seeking amnesty”^[21], and there is ample reason to believe that the threat does in fact work in generating a race to the courthouse. Introduction of criminal sanctions along with the possibility of individual leniency is likely to significantly incentive executives to make use of leniency.

Deterrence might also be achieved through the disqualification of directors^[22] participating in a cartel from their position in the company for a long time period. This method has witnessed success in the UK, Russia and New Zealand. It also involves lower administrative costs than criminal action. Further, it alters the managerial framework of the firm such that the possibility of collusion is reduced due to changes in the mechanism of information exchange.

India can also adopt the optional leniency program which is in place in the UK and South Korea which provides for an opt-out clause^[23] for the applicant from criminal prosecution.

Most importantly, CCI needs to commit to transparency and consistency and abandon its ad-hoc approach of decision-making in order for the leniency program to be successful. It ought to be penalising non-compliance and lack of cooperation in a stringent manner. Consistency in implementation of the laws makes the system predictable and increases the confidence of the market players. The recent amendment which requires CCI to publish penalty guidelines is a commendable step towards increasing transparency, however, an adherence to the same is required to foster trust.

Since its introduction in 2009, the leniency program in India has had limited success at detecting cartels. The primary reason behind limited usage of leniency is CCI's apparent ambiguity and conservative outlook towards assigning penalties. The recent amendment attempts to fix some of these issues but inadvertently introduces loopholes which render the policy counterproductive and more prone to exploitation. In order for the provision to be appealing to market players, they should have confidence in CCI's decision-making abilities based on consistency and transparency. Aggravated penalties levied on applicants would also substantially strengthen the enforcement mechanism by creating a strong deterrent effect. Introduction of criminal liability for executives of companies participating in cartels would further augment anti-cartel enforcement. The policies of director disqualification and opt-out clauses might also be implemented. This is likely to significantly boost the leniency program and lead to the intended 'race to the courthouse'.

Views are personal.