Draft Competition (Amendment) Bill, 2020: Welcome Changes And Missed Opportunities

While the original mandate of the CLRC was broad and envisaged a substantive review of the Act and the competition regime, a review of the amendments suggested in the Bill show that the amendments are limited to: a) correcting any blatant errors identified in practice; b) making explicit in the Act certain principles developed through decisional practice; and c) provisions to improve ease of doing business. The Bill proposes to insert a total of 12 new sections, omits 4 sub-sections and proposes amendments to several other sections.

In this paper, we review some of the welcome changes, certain changes which raise issues and challenges and certain missed opportunities in the Bill.

Welcome changes

• Settlements and Commitments:
• The Bill proposes to add two new sections 48A and 48B to the Act enabling parties to offer settlements and commitments to close antitrust proceedings (except cartels). Settlements usually involve an admission of guilt in exchange for a certain discount on the penalty amount payable and early closure of proceedings. Commitments usually do not involve an admission of guilt but an undertaking to change future conduct to correct the concerns identified in exchange for early closure of proceedings. Settlements and commitments are commonly used tools in developed competition jurisdictions such as the European Union ("EU") to close proceedings and save administrative and judicial time and costs when parties are willing to admit guilt and settle or offer commitments to change conduct. Introduction of such provisions into the Indian system is certainly welcome as in India as well, several parties are often willing to settle or offer commitments in exchange for early closure of proceedings. This would also help the Competition Commission of India ("CCI") and the office of the Director General ("DG") prioritise and allocate its limited resources better. It is understood that the settlement and commitment provisions in the Bill have been kept skeletal because the detailed procedure has been envisaged to be brought in through regulations.
• However, it appears that there are certain lacunae even in the basic principles which ought to be incorporated in the Act. First, the provision for settlement does not specify that an admission of guilt is required by the parties. While the proposed Section 48A(3) does specify that the settlement would be on the terms as may be specified by the CCI, it is unclear whether this would necessarily require an admission of guilt in each case. If the requirement of admission of guilt is brought in through regulations, this may be subject to challenge as the regulations may be seen as going beyond the statute. Similarly, the incentive of offering commitments is that there is no finding of infringement. However, the proposed Section 48B does not explicitly mention that there would be no finding of infringement in a commitments decision. Another major lacuna in relation to commitments is the lack of a provision for market testing of the commitments offered by parties. Since commitments would usually relate to the business conduct of a party, it is well accepted practice that the commitments offered by a party are market tested i.e. other stakeholders such as competitors, suppliers and customers are consulted on the viability of the commitments offered by a party under investigation before accepting them. According to an OECD paper, two common features across most commitment regimes in the world are market testing and adoption of commitments without any legal sanction. These two elements are currently lacking in the proposed provision in the Bill.
• All final orders made appealable:
• Section 53A of the Act allows appeals from the orders of the CCI passed under certain specified sections of the Act to the National Company Law Appellate Tribunal (NCLAT). This provision came up for interpretation in the first major competition case to reach the Supreme Court i.e. Competition Commission of India v Steel Authority of India Ltd and Anr (2010)10 SCC 744. In this case, the Supreme Court was deciding whether a prima facie order of investigation passed under Section 26(1) was appealable under Section 53A. Taking a strict and literal interpretation of Section 53A, the court held that appeals would lie only against orders passed under those sections specifically mentioned in Section 53A. Since the legislature had consciously not included Section 26(1) in the list of appealable orders, no appeal would lie against such an order. An order for investigation under Section 26(1) was merely an administrative direction that did not entail any civil consequences for the party being investigated.
• An unfortunate consequence of this strict interpretation and a drafting error in Section 53A was that certain final orders which are passed after the DG's investigation also became non appealable. A series of decisions of the erstwhile Competition Appellate Tribunal (whose powers have now been transferred to the NCLAT) in Jindal Steel and Power Ltd v CCI and Ors (Appeal No. 45/2012), Arshiya Rail Infrastructure Ltd v CCI and Ors (Appeal No. 136/2012) and Saurabh Tripathy v CCI and Anr (Appeal No. 16/2017) have held that an order passed by the CCI where the DG recommends a contravention of the Act but the CCI disagrees with the DG's recommendation and closes the matter would not be appealable as it is not an order passed under any of the sections specified under Section 53A. This was an unfortunate situation as despite being a final adjudicatory order deciding rights of the parties, no appeal was allowed due to a technical interpretation. Thankfully, the Bill seeks to correct this anomaly by making appropriate amendments to Sections 26 and 53A of the Act.
• Inclusion of supply side substitutability in definition of 'relevant product market':
• 
  It is a well-established principle of competition law that in defining the relevant market, primacy is given to the interchangeability or substitutability of products/services from a consumer's perspective i.e. demand side substitutability. However, as a secondary principle, competition authorities also look at substitutability from a supplier's perspective i.e. whether a supplier is able to switch production to a different product/service in the short term without incurring significant additional costs in response to small but significant changes in price. The often quoted example of supply side substitutability is that of paper. Different grades of paper such as white paper, craft paper, glossy paper etc. serve different end uses and are not substitutable from a consumer's perspective. A consumer looking for plain white paper for printing a legal document would not switch to craft paper if the price of plain white paper increased. However, from a paper mill's perspective, it may be possible for the mill to switch to production of different grades of paper in the short term without incurring significant additional costs in response to changes in price of different grades of paper. Therefore, all grades of paper may constitute part of the same relevant market. The principle of supply side substitutability is recognised by the European Commission in its Relevant Market Notice. Under the Act, demand side substitutability was expressly recognised in the definition of 'relevant product market' under Section 2(t). While supply side substitutability was not expressly recognised under the definition, the CCI, through its decisional practice particularly in decisions relating to combinations has applied the concept of supply side substitutability while defining the relevant product market. The Bill now seeks to expressly include the concept of supply side substitutability into the definition of 'relevant product market' under the Act.
• Explicit inclusion of 'buyers' cartel' in definition of 'cartel':
• Section 3(3) of the Act deals with horizontal agreement between competitors engaged in identical or similar trade including cartels. The definition of 'cartel' earlier only included an association of producers, sellers, distributors, traders or service providers but not buyers. It has long been well established under competition law that a cartel could occur on either side of the market i.e. on the selling side or the procurement side. Arguably buyers' cartels were already included under Section 3(3) at least as far as price fixing is concerned as Section 3(3)(a) covers the fixing of sale prices as well as 'purchase prices'. However, this addition now makes it abundantly clear that buyers' cartels are included under Section 3(3).
• Inclusion of facilitators of cartels and hub and spoke cartels under Section 3(3):
• 
  The Bill proposes to add a proviso to Section 3(3) providing that any enterprise or association of enterprises, person or association of persons, though not engaged in identical or similar trade will be presumed to be part of the horizontal agreement/cartel if it actively participates in the furtherance of such an agreement. This proviso aims at catching two concepts within the scope of Section 3(3). The first is a well-recognised principle of competition law of penalising cartel facilitators. Facilitators of cartels may not be directly involved in the business but may aid in the furtherance of the cartel by facilitating exchange of commercially sensitive information, coordination, monitoring etc. In AC Treuhand, the European courts confirmed that a consultancy firm could be penalised under the cartel provisions for having facilitated the cartel. The proviso also brings in the possibility of catching what are popularly called 'hub and spoke' cartels. A hub and spoke cartel involves a triangular arrangement where a common hub (e.g. a supplier) facilitates a cartel between various spokes (e.g. retailers). The catch in such an arrangement is that the hub and spokes are not engaged in identical or similar trade. Hub and spoke cartels are still an evolving concept globally and there are not many cases till date. The United Kingdom (UK) has prosecuted a few hub and spoke cartel cases. However, strict evidentiary requirements have been laid down.
• Three limbs are required to prove a hub and spoke cartel as laid by the UK Court of Appeal in Argos Ltd and another v Office of Fair Trading, JJB Sports plc v Office of Fair Trading i.e. (i) [where] retailer A discloses to supplier B its future pricing intentions in circumstances where A may be taken to intend that B will make use of that information to influence market conditions by passing that information to other retailers (of whom C is or may be one); (ii) B does in fact, pass that information to C in circumstances where C may be taken to know the circumstances in which the information was disclosed by A to B and (iii) C does, in fact, use the information in determining its own future pricing intentions. Therefore, while there is nothing wrong in having an enabling provision to catch hub and spoke cartels, the CCI would do well to keep in mind the strict evidentiary requirements for proving hub and spoke cartels. Otherwise, there is a risk of over intervention as normal commercial practices may end up being caught. E.g. it is normal commercial practice for a retailer to share pricing information with its supplier in order to determine strategy. This cannot by itself constitute a hub and spoke cartel without the other limbs being satisfied.
• Flexibility for implementation of open offers pending approval of the CCI:
• Open market transactions i.e. acquisitions of shares on the stock exchange constitute a peculiar class of transactions where due to strict stock exchange regulations, once an open offer is made, consideration must be paid to any shareholder who tenders his/her shares to the acquirer almost immediately. However, if such a transaction requires approval from the CCI, then it must comply with the standstill obligation under the Act (Section 6(2A)) i.e. the transaction cannot be consummated until CCI approval. This leads to a conundrum for acquirers in such transactions as payment to shareholders would amount to consummation of the purchase and a violation of the Act. This issue came up before the Supreme Court of India in SCM Soilfert v Competition Commission of India (2018)6 SCC 631. The court took a strict interpretation and held that there was no exemption contemplated for open market transactions and thereby upheld a penalty imposed by the CCI on the acquirer for consummating the transaction prior to CCI approval. The Bill recognises this conundrum and seeks to introduce a provision allowing for the implementation of open market transactions provided that the CCI is notified within such specified time and manner, the shares or securities are maintained in a specified manner and the acquirer does not exercise any ownership or beneficial rights or interest in such shares or convertible securities including voting rights etc., till the CCI approves the transaction. This provision is a welcome change as it recognises a regulatory clash and seeks to provide flexibility in relation to the same.

Issues and missed opportunities

• Introduction of a 'Governing Board':
• The Bill envisages certain structural changes to the CCI and creates a new 'Governing Board' which would consist of: a) members of the CCI; b) Secretary of the Department of Economic Affairs, Ministry of Finance or his nominee; c) Secretary of the Ministry of Corporate Affairs or his nominee; and d) four Part-Time members to be appointed by the Central Government. The Governing Board would be responsible for the general superintendence, direction and management of affairs of the CCI including framing regulations 'in matters relating to competition' and administration of affairs of the CCI, entering into memorandums, agreements or contracts with other statutory authorities or government departments on behalf of CCI, taking competition advocacy measures and assisting the Central Government in the development and implementation of a National Competition Policy. However, the Governing Board would not hear and adjudicate cases and this power remains with the Chairperson and members of the CCI. The rationale behind the Governing Board as set out in the CLRC report is to 'bring in an external perspective, objectivity and more transparency in the functioning of the CCI' and 'ensure a more robust governance structure for the CCI by bringing in an external perspective as well as strengthening the democratic legitimacy and accountability of the CCI'. While these are certainly laudable objectives, neither the CLRC report nor the Bill are able to point to any tangible flaws with the current system or that the current structure of the CCI is not able to achieve these objectives. CUTS, a research organisation had noted in relation to the Indian system that "[f]ortunately, on the operational side, the Commission is relatively independent and the intrusion of the government is negligible. The Act has significantly protected the operational and decision making functions of the Commission through checks and balances provided by the independent judicial branch (The Competition Appellate Tribunal and eventually the Supreme Court)."
• The introduction of the Governing Board appears to go against the stated objectives of objectivity and transparency by vesting wide powers in a board that may be overwhelmingly controlled by the government. Independence of competition authorities from vested interest and political control is an essential pre-requisite for a robust competition law enforcement. According to an OECD paper, almost all competition laws across the world aim to ensure independence of the competition authorities from political and government interference. The Treaty of the European Union explicitly recognises this principle in relation to the European Commission and provides that "[i]n carrying out its responsibilities, the Commission shall be completely independent. Without prejudice to Article 18(2), the members of the Commission shall neither seek nor take instructions from any Government or other institution, body, office or entity. They shall refrain from any action incompatible with their duties or the performance of their tasks".
• The CLRC report tries to compare and borrow from experiences of other regulators in India such as the Securities and Exchange Board of India ("SEBI") or the Reserve Bank of India ("RBI"). However, it should be noted that unlike these regulators, while the CCI is also an expert body, the adjudicatory function carried out by the CCI is the primary and probably the most important of its functions. The consequences of CCI's adjudicatory powers can be grave and severe for parties. It would not be wrong to suggest that a majority of the CCI's resources and time are dedicated towards the adjudicatory function. Therefore, ensuring independence of this key adjudicatory function from political and governmental interference becomes all the more critical.
• While the CLRC report states that the adjudication of individual cases will be left to the CCI, the provisions as currently envisaged in the Bill do not appear to ensure sufficient independence to the CCI from governmental control. No qualifications have been prescribed for Part-time Members and no provisions have been made to ensure their independence from Governmental control. Since they are appointed by the Central Government there are concerns that they may 'toe the Government line' in all decisions of the Governing Board. This would mean that six (6) members out of a possible thirteen (13) members would be government officials or toeing the government line which is a significant number given that all decisions of the Governing Board are to be taken by a simple majority of members present and voting. Further, the role of superintendence and management and the power to make regulations "on matters relating to competition" confers a very wide power on the Governing Board to steer enforcement priorities and resources of the CCI. Finally, there is no clear provision for protecting the individual decision making process of the CCI from interference by the Governing Board. In our view, the Central Government may need to reconsider the very need for such a Governing Board.
• Even if such a Governing Board is considered absolutely necessary, the Central Government may consider inserting suitable provisions to: a) prescribe qualifications for Part-time members and provide security of tenure and terms of payment which would ensure independence of Part-time members from Government or political influence; b) clarify in greater detail what is meant by "matters relating to competition" and that this does not include the power to decide, influence directly or indirectly or steer the enforcement priorities or resources of the CCI; c) make explicit that the Governing Board would not interfere or influence directly or indirectly the decision making process of the CCI.
• No provision for judicial member:
• 
  In Mahindra Electric Mobility Ltd and Anr v Competition Commission of India 2019 SCCOnline Del 8032, the Delhi High Court held that all final orders of the CCI must be passed in the presence of a judicial member. As discussed above, this was to ensure judicial expertise and independence from executive influence while passing adjudicatory orders. This is critical given the important judicial function carried out by the CCI. It is unfortunate that the CCI has been functioning without a judicial member for over two (2) years now. While the CCI did recently put out a notification for filling up the vacancy for a judicial member, the Bill provided a good opportunity to crystallise the requirement for a judicial member into law. As the Act stands currently, it is not mandatory to have a judicial member as part of the CCI. However, no amendments have been suggested in the Bill in this regard.

Overall, many changes proposed in the Bill are welcome as they crystallise well settled principles into law. However, one retrograde step certainly appears to be the introduction of the Governing Board and the Bill appears to have missed a step in not introducing into the law the requirement of a judicial member.

(Avinash Amarnath is an Advocate-on-Record at the Supreme Court of India. Srishti Sharma is a 5th year law student at the Institute of Law, Nirma University. Views are personal)