Tuesday, March 10, 2015

A Review of the Competition (Amendment) Bill, 2012- II

In this post, I shall continue with my review of the Competition (Amendment) Bill, 2012 from the last post. Clause 6 of the Bill introduces Section 5A which empowers the Central Government to specify, by notification, different values of assets and turnovers based on the class or classes of enterprise for the purposes of Section 5 which defines a combination. The stated object of this proposed new provision is to provide the Government with a tool which is much more attuned to the dynamics of different market segments.

Unlike the current Section 20(3), which envisages a modification in the thresholds for Section 5 only once every two years, the proposed Section 5A is not encumbered by any such restrictions.  Also, the basis for change in thresholds as spelt out by Section 20(3), namely fluctuations in the wholesale price index or exchange rate of the Rupee, is absent in the proposed Section 5A. This perhaps could mean that thresholds may be altered with a specific view to address market anomalies and not merely to adjust the thresholds for inflation.

Critically, the proposed Section 5A retains the aspect of consultation by the Government with the CCI in altering the thresholds of assets and turnover. This raises an interesting question regarding the nature of the CCI. Since the Government is merely expected to consult the CCI and not seek its consent in changing the thresholds, could it be argued that Sections 5 and 5A in particular, and the Competition Act in general, are instrumentalities which further the economic policy/vision of the Government of the day (the Executive)? If so, is the CCI itself a part of the Executive despite performing several adjudicatory functions? Questions such as these were left open-ended by the Supreme Court in Brahmdutt v. Union of India and will hopefully be answered in the on-going Writ Petitions (W.P (C) Nos. 7638, 7087, 6634 and 6610 of 2014) before the Chief Justice of the Delhi High Court filed by auto majors BMW, General Motors, Mercedes Benz and other parties to the auto spare parts decision of the CCI. Among other things, the constitutionality of the CCI is under challenge in these petitions.

The next proposed amendment is the one to Section 26 by Clause 11 of the Bill. Here are the relevant extracts of  Section 26 as they read currently:

Procedure for inquiry under section 19
26. (1) On receipt of a reference from the Central Government or a State Government or a statutory authority or on its own knowledge or information received under section 19, if the Commission is of the opinion that there exists a prima facie case, it shall direct the Director General to cause an investigation to be made into the matter: Provided that if the subject matter of an information received is, in the opinion of the Commission, substantially the same as or has been covered by any previous information received, then the new information may be clubbed with the previous information.

(3) The Director General shall, on receipt of direction under sub-section (1), submit a report on his findings within such period as may be specified by the Commission.

(5) If the report of the Director General referred to in sub-section (3) recommends that there is no contravention of the provisions of this Act, the Commission shall invite objections or suggestions from the Central Government or the State Government or the statutory authority or the parties concerned, as the case may be, on such report of the Director General.

(6) If, after consideration of the objections and suggestions referred to in sub section (5), if any, the Commission agrees with the recommendation of the Director General, it shall close the matter forthwith and pass such orders as it deems fit and communicate its order to the Central Government or the State Government or the statutory authority or the parties concerned, as the case may be.

(7) If, after consideration of the objections or suggestions referred to in sub section (5), if any, the Commission is of the opinion that further investigations is called for, it may direct further investigation in the matter by the Director General or cause further inquiry to be made by in the matter or itself proceed with further inquiry in the matter in accordance with the provisions of this Act.

(8) If the report of the Director General referred to in sub-section (3) recommends that there is contravention of any of the provisions of this Act, and the Commission is of the opinion that further inquiry is called for, it shall inquire into such contravention in accordance with the provisions of this Act.

A reading of Sub-section 6 reveals that if the CCI agrees with the finding of the DG that there is no contravention of the Act, it shall close the matter. The language of Sub-sections 7 and 8, however, seem incoherent and incomplete. Sub-section 7 alludes to a situation where the CCI does not agree with the DG that there is no contravention of the Act, in which case it may direct further investigation by the DG. The reference to “cause further inquiry to be made in the matter or itself proceed with further inquiry in the matter” is to a situation where the CCI may choose not to seek the DG's assistance for further inquiry. If such further inquiry does not yield results, Sub-section 7 does not explicitly empower the CCI to close the matter, but practically speaking one would think the logical consequence would be for the CCI to agree with the DG’s finding of no contravention under Sub-Section 6. After all, the CCI cannot endlessly enquire into the matter. However, if further enquiry reveals contravention of the Act, Section 26 and Regulation 21 of the CCI General Regulations are unclear if the CCI has the power to pass orders based on its findings.  

Similarly, under Sub-section 8 which deals with a situation where the DG finds contravention of the Act, it is unclear if the CCI may pass orders if it agrees with the DG although this appears to be logical conclusion. If, however, the CCI does not agree with the DG, Sub-section 8 does not appear to permit the CCI to close the matter.  Despite the absence of such power to differ with the finding of contravention by the DG and to close matters, the Standing Committee has observed that until February 2014, in 42 cases the CCI differed with the DG’s finding of contravention. In order to avoid such anomalies, the Bill proposed to insert “and make appropriate orders thereon after hearing the concerned parties” in both Sub-sections 7 and 8. Further, one of the recommendations of the Committee is to retrospectively provide a limited window of appeal to parties which have suffered as a consequence of closure of their matters by the CCI despite a finding of contravention by the DG. I am of the view that consequential amendments to CCI General Regulation 21 too must be effect to avoid any further voids.

In addition to the above amendments, the Bill also provides for a hearing to a party on which penalty is sought to be imposed by the CCI. Finally, the Bill seeks to empower the Chairperson of the CCI to approve search and seizure by the DG, who is currently required to seek the approval of Chief Metropolitan Magistrate. However, the Standing Committee has observed that such a change is premature considering that no flaws have surfaced thus far with respect to the existing mechanism. In its parting recommendation, the Committee has drawn the Government’s attention to the following questions/issues:

(i) Whether the Commission should be a body comprising of only retired persons or it should be a smaller multi-disciplinary body consisting of domain experts;
(ii) Whether more substantive amendments are required to enable the CCI to play a more vibrant and meaningful role in the economic development of the country like creation of robust data-base and formulation of coherent norms/principles in prevention/detection of cartels, price-manipulation/rigging and other market practices inimical to competition and orderly functioning of markets;
(iii) Whether the CCI should enhance its capacity to take cognizance of emerging trends and developments in industry relating to “unfair dominance” or “monopolistic practices”, such as cross-holdings in media ownership.
(iv) Protection of consumer interest through periodical studies/surveys on trends of consumer prices in different sectors.
(v) Whether the law should be designed in a manner that is unduly restrictive with rigid thresholds or should it be a facilitator for growth of business and industry while promoting fair play and freedom in competition and reasonable prices for consumers.

In my opinion, these are thought-provoking high-level issues which are worth ruminating over since they have a critical bearing on the role we expect the CCI to play in furthering its mandate under Section 18 of the Act. 

Sunday, March 8, 2015

A Review of the Competition (Amendment) Bill, 2012- I

The Competition (Amendment) Bill, 2012 was introduced in the Lok Sabha on December 7, 2012 and a report on the Bill by the Standing Committee on Finance was submitted to the Lok Sabha on February 17, 2014. However, the Bill has since lapsed due to the dissolution of the 15th Lok Sabha.

The Bill proposes significant changes to the Competition Act, 2002. For instance, the applicability of the current Section 3(5), which permits an IP owner to impose any “reasonable condition” to restrain infringement of his rights, is restricted to copyrights, patents, trademarks, GIs and semi-conductor design layout. The Bill proposes to add an omnibus clause to Section 3(5) which extends its application to any other law for the time being in force which relates to the protection of other forms of intellectual property rights. On a reading of the proposed amendment, it appears that the said provision still does not apply to reasonable conditions applied for the protection of trade secrets for it refers to “any other law for the time being in force”. Perhaps, this is something the new dispensation can look into.

Also, for the sake of abundant clarity and to avoid mischievous interpretations, it would help to clarify that restrictive covenants which Section 140 of the Patents Act frowns upon do not enjoy the safe harbour under Section 3(5) of the Competition Act. That said, even in the absence of such a clarification, it could be reasonably argued that proscriptions under Section 140 of the Patents Act do not qualify as “reasonable restrictions” within the meaning of Section 3(5) of the Competition Act, and are therefore anti-competitive.

Yet another critical amendment proposed by the Bill is the recognition of the concept of joint dominance i.e. position of dominance enjoyed by one or more enterprises, or one or more groups of enterprises. Industry groups have pointed to the complications this concept may pose for it appears to impugn joint conduct even if it does not satisfy the requirements/standards of Section 3 of the Act. It has also been suggested that the introduction of this concept in Indian conditions may even be premature. The CCI and the Ministry of Corporate Affairs have however justified the introduction of joint dominance on grounds that it provides the CCI with the necessary legal tool to deal with collusion between players in an oligopolistic market where cartelization is otherwise difficult to establish. The Standing Committee has recommended that in addition to amending Section 4, consequential amendments must be undertaken to the explanation to Section 4 and to Section 19(4) as well. The Committee has also rightly recommended that the definition of “group” must be shifted to Section 2 so as to avoid confusion regarding the applicability of the definition to the rest of the Act.  That said, given that the nature, scope and rigour of Sections 3 and 4 are yet to be understood with a reasonable degree of certainty, it is my personal opinion that the time is not yet ripe to introduce the concept of joint dominance.

Another amendment which is of particular interest to me is the amendments proposed to Sections 21 and 21A for it has a bearing on the interplay between the CCI and sectoral regulators. Sector 21, as it reads currently, is set out below:

Reference by statutory authority 21. (1) Where in the course of a proceeding before any statutory authority an issue is raised by any party that any decision which such statutory authority has taken or proposes to take is or would be, contrary to any of the provisions of this Act, then such statutory authority may make a reference in respect of such issue to the Commission:

Provided that any statutory authority, may, suo motu, make such a reference to the Commission.

Under the current version, a statutory authority may, on its own or upon an issue being raised by a party to a proceeding before it, refer the mater or issue to the CCI if the decision the authority proposes to take or has taken is contrary to the scheme and provisions of the Competition Act. In a way, this reinforces the overriding effect of Competition Act as spelt out in Section 60 of the Act. That said, under the current version, the decision to refer the issue to the CCI is left to the discretion of the statutory authority. Consequently, if the authority opts not to refer to the matter to the CCI and takes a decision which contravenes the Competition Act, the affected party can only raise the issue in appeal (if available and applicable under the relevant legislation which governs the authority) or may file a writ before the appropriate High Court. Although this appears to be an adverse consequence of the current version, this version does justice to the inherent power of the statutory authority to decide on aspects of conflict of jurisdiction.

The Bill proposes to alter this position by replacing the words “is raised by any party” with “arises” and by substituting “may” in the provision with “shall”. The amendment also proposes to delete the proviso thereby making it mandatory on the part of the statutory authority to refer the matter to the CCI if an issues arises that the decision taken or sought to be taken by the authority runs counter to the Competition Act. Similar changes are proposed to be effected to Sections 21A and 27 as well. Another proposed change is to render the decision taken under Sections 21 and 21A appealable under Section 53A of the Act.

These proposed amendments could give rise to several complications. First, I am of the opinion that the impact of such proposed changes on Sections 21 and 21A cannot be the same in light of Sections 60 and 62 of the Competition Act which set out the position of the Act vis-à-vis other legislations. Therefore, it would be incorrect to mechanically apply the same set of changes to both Sections 21 and 21A. Second, the consequences of mandatory reference on the inherent jurisdiction of a statutory authority to deal with conflict of jurisdictions and to address issues relating to its governing legislation must be considered. Third, to provide for an appeal under Section 53A for a decision taken by the statutory authority under Section 21 could result in undermining the position of the appellate authority which supervises the functioning and decisions of the statutory authority, besides giving rise to multiplicity of litigation. Fourth, by replacing “is raised by any party” with “arises”, it appears that parties may not have the right to raise this as an issue and it is left to the sole discretion of the statutory authority to decide if a reference to the CCI is necessary. This also leads to the conclusion that every statutory authority must have regard to the Competition Act in addition to the specific legislation that applies to it, which does seem onerous. Perhaps, the current version is best left untouched until more instances of jurisdictional conflict surface.

I will deal with the rest of the proposed amendments in the next post. Look forward to comments and corrections from readers.