CCI Imposes Rs 200 Crore Fine On Maruti Suzuki Finding Its Discount Control Policy Anti-Competitive

The Competition Commission of India has imposed a fine of Rs 200 crore on India's largest car manufacturer Maruti Suzuki India Ltd (MSIL) for its discount control policy enforced on dealers.

The CCI imposed the fine under Section 27(b) of the Competition Act 2000 and directed MSIL to "cease and desist" from following its discount control policy which penalized dealers and individuals for giving extra discounts.

The market watchdog initiated the proceedings in 2017 acting suo motu on an anonymous e-mail received from a purported MSIL dealer, wherein it was, inter alia, alleged that MSIL's sales policy is against the interest  of customers as well as the provisions of the Competition Act, 2002 (the 'Act'). It was alleged that the dealers of MSIL were not permitted to give discounts to their customers beyond that prescribed by MSIL in the announced 'consumer offer'. If a dealer is found giving extra discounts, a penalty is levied upon the dealer by MSIL. This is called the 'Discount Control Policy' of MSIL. It was averred that, as such, a cartel is formed by MSIL within the dealerships, which is a policy of MSIL.

Based on the anonymous complaint, the CCI registered a suo-motu case titled "In Re: Alleged anti-competitive conduct by Maruti Suzuki India Limited in implementing discount control policy vis-à-vis dealers" and issued notice to MSIL.

In 2019, the Commission had ordered a preliminary enquiry by the Director General after forming a prima facie opinion regarding contravention of the Competition Act.

The DG's enquiry found that MSIL entered into agreements with its dealers across India for imposition of Discount Control Policy amounting to Resale Price Maintenance (RPM),and monitored the same by appointing Mystery Shopping Agencies (MSAs) and enforced the same through the imposition of penalties.

"Resale Price Maintenance" (RPM) is defined under Explanation (e) to Section 3(4) of the Act as including "any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged".

The CCI observed that  RPM can prevent effective competition both at the intra-brand level as well as at the inter-brand level.

"When a minimum RPM is imposed by the manufacturer upon the distributors, the distributors are prevented from decreasing the sale prices beyond the imposed limit. In other words, the mechanism does not allow the distributors to compete effectively on price. As such, stifling intra-brand competition results in higher prices for consumers," the order said.

Since MSIL has the largest market share in the passenger vehicle segment, the Resale Price Management (RPM) by it negatively impacted competition not only among its dealers but also competition with other brands.

"When a significant player such as MSIL imposes minimum selling price restrictions in the form of maximum discount that can be offered by the dealers, RPM can decrease the pricing pressure on competing manufacturers.

This is more so in case of dealers who may be in an interlocking relationship with multiple manufacturers. When all dealers of MSIL are selling vehicles at similar prices, the prices of MSIL vehicle models can be easily comprehended by other players in the market. Being aware of the similar prices of MSIL's dealers due to prevalence of RPM in the passenger vehicle segment, the other OEMs can easily monitor MSIL's prices and also factor it in their pricing strategy, thereby softening competition. As such, it relaxes competitive pressure upon them and they can price their competing models accordingly, which due to the prevalence of RPM, may be priced higher than a competitively determined price. This enomenon creates an obstruction for consumers to avail the benefit of competition in pricing across different brands as well".

MSIL argued that the only agreement which MSIL has with its dealers is the 'Dealership Agreement'. In the said agreement, there is no provision to restrict discounts. In fact, Clause 28.1 of the Dealership agreement specifically allows dealers of MSIL to provide discounts as they deem fit. The dealers are free to charge a price lower than the Maximum Recommended Retail Price from consumers. MSIL submitted that it does not have the authority to penalise any dealer for giving additional discounts.

The CCI rejected this argument by noting :

"Under the Competition Law, an 'agreement' may not be a formal  agreement entered into in writing between two parties. Any kind of mutual arrangement or understanding between them or action in concert may qualify as an 'agreement' between the parties for the purposes of Competition Law. The definition of 'agreement' under Section 2(b) of the Act is very wide and covers all possible agreements/arrangements/understanding, not only in written form but also in tacit and informal form.

 As such, the argument of MSIL that, since the only agreement entered into between MSIL and its dealers is the Dealership Agreement and the same contains no clause restricting discounts but rather allows dealers to offer any discounts as they deem fit; it cannot be said to have any agreement with its dealers for enforcing Discount Control Policy, is not tenable. Such agreement/arrangement/understanding between MSIL and its dealers may exist dehors the Dealership Agreement entered into in writing between them".

In conclusion, the CCI said :

"...the Commission concludes that MSIL not only entered into an agreement with its dealers across India for the imposition of Discount Control Policy amounting to RPM, but also monitored the same by appointing MSAs and enforced the same through the imposition of penalties, which resulted in AAEC(Appreciable Adverse Effect on Competition) within India, thereby committing contravention of the provisions of Section 3(4)(e) read with Section 3(1) of the Act".

The fine of Rs 200 crores has to be deposited within 60 days from the date of receipt of the order.

Click here to read/download the order