Calibrating the Pulse of Competition Law in India

An EY Fraud Investigation & Dispute Services report

Calibrating the pulse of Competition Law in India

2 | Calibrating the pulse of Competition Law in India - An EY Fraud Investigation & Dispute Services report

ContentsExecutive summary 5

Competition Law in India 6

Emerging trends in India’s Competition Law 10 ► Need to sensitize organizations on importance of complying with 10

Competition Law

► e-Discovery in Competition Law-related investigations 12

► Dawn raids — a reality this year 13

► Unstructured and widespread data hindering economic analyses 14

► Penalty guidelines — need of the hour 15

► Lukewarm response to “Leniency” applications 16

► Concerns about data-sharing at Trade Association meetings 17

3Calibrating the pulse of Competition Law in India - An EY Fraud Investigation & Dispute Services report |

ForewordWith the increasing impact of competition-related regulations in recent years in India, including rising levels of fines, many large companies have been accused of cartelization or of abusing their dominant positions in their markets. This has led to considerable time and money being spent on dealing with investigations by the Competition Commission of India (the Commission or the CCI) in addition to battles fought through the appellate tribunal and courts, and mandated changes enforced in companies’ operations.

There are concerns about the penalties imposed by the Commission, the effectiveness of the competition-compliance programs of Indian and multi-national companies in the country and the lack of general awareness of competition laws among Indian companies.

In light of these evolving trends, we have conducted a survey to elicit the views of leading competition law jurists and practitioners in India and abroad on the areas mentioned above as well as about competition economics, e-Discovery, dawn raids, competition risk management, leniency, the role of trade associations, etc., vis-à-vis practice of competition law in India. We are pleased to share the findings of our study in this report.

We would like to express our appreciation of the people and organizations that contributed to our research. Our report would not have had the same value without their support and that of all the others who made the survey successful.

We hope you find this report relevant and insightful.

Arpinder Singh Partner and National Leader Fraud Investigation & Dispute Services Ernst & Young LLP



Executive summary• Rise in complaints filed to CCI: Although relatively young in terms of its life span, the CCI has

received more than 500 complaints alleging violations of the Competition Act 2002 so far. These relate to “anti-competitive” agreements and organizations abusing their dominant position in domains as diverse as stock exchanges, travel, real estate, pharmaceuticals, mining, technology and entertainment in the private and public sectors. The number of complaints filed is increasing exponentially.

• Low awareness of need to comply with Competition Law among Indian corporates: EY’s survey indicates that more than 80% of Indian enterprises are unaware about Competition Law, the effect it seeks to achieve and the likely consequences of contravening it. In the case of multi-national corporations (MNC’s), most of them are aware about the law, and have adopted mechanisims to comply with its mandates. Inadequate programs and training are conducted by Indian corporate organizations on the law.

• Dawn raids — a reality this year: Under the Competition Act, the Director General — Investigations (DG), the investigating authority of the Commission in India, is empowered to conduct searches and seizures. There is a general perception in the market that industry may see many more dawn raids in the coming year. Accordingly, the need for e-Discovery will increase to enable examination of electronic records in such investigations and subsequent disputes.

• Unstructured and widespread data hindering economic market analyses: Our survey indicates that there is inadequate data available for conducting clear and viable economic analyses in anti-trust situations. There is a huge demand for efficient data management for effective analyses of the market.

• Penalty guidelines —need of the hour and personal liability: The Commission has levied penalties, penalizing individuals for their role in the anti-competitive conduct of Indian companies. In many cases, it has not provided reasons for imposing different levels of penalties. In more than 90% of the cases, the enterprises have appealed before the Competition Appellate Tribunal (COMPAT).

• Lukewarm response to leniency applications: So far, only two leniency applications have been filed before the CCI. Our survey indicates that companies are still adopting the wait and watch approach and are not opting for leniency, in contrast with what happens in some mature jurisdictions.

• Concerns on data-sharing at Trade Association meetings: Our report indicates that trade associations constitute the collective voice of the industry and need to be educated on competition law. There is a perception in the market that trade associations often play an important role in various possible anti-competitive activities. They should not ask for or share data that can be used to abuse their position or act in an anti-competitive manner.


Competition Law in India

The first competition law in India was the Monopolies and Restrictive Trade Practices Act of 1969. This was based on the command and control economic architecture prevalent at that time. It was a direct instrument for moderating the growth of big business and had no provision for regulation of combinations and to impose fines for violation of the law.

To introduce the post-liberalisation philosophy of promoting competition rather than curbing monopolies, The Competition Act (Competition Act) was passed in 2002. In 2009, the Commission was established under the Act as an autonomous body with a Chairperson and six members. Furthermore, an appellate body, COMPAT, was set up in 2009, with the final appeal lying with the Supreme Court of India.

Salient features of competition law in India:

• Ban anti-competitive agreements

• Prohibit enterprises from abusing their dominant positions

• Regulate combinations (acquisitions, and acquisition of control and mergers) that have or are likely to have an adverse effect on competition in India

Operations under the Competition Act

It has been more than five years since provisions relating to anti-competitive behavior and companies abusing their dominant position came into effect. Mergers and acquisitions have been operational for about three years. Though relatively young terms of its life span, the CCI has received more than 500 complaints alleging violations of Sections 3 (anti-competitive behavior) and 4 (abuse of dominance in the market) of the Act relating to anti-competitive agreements and abuse of dominance in domains as diverse as stock exchanges, travel, real estate, pharmaceuticals, mining, technology and entertainment in the public and private sectors.

While administering the Competition Act, the CCI has imposed severe penalties on various enterprises, the most notable of these being its penalty ofINR17.73 billion on Coal India; INR3.17 billion on United Phosphorus, Excel Crop Care and Sandhya Organics; INR63 billion on cement companies in the cement cartel case; and INR6.3 billion against one of the largest real estate players in India and INR550 million against one of the largest stock exchanges in India, in abuse of dominance cases (upheld by the COMPAT). The Commission has also received some leniency applications for reduced penalties in a couple of cartel cases. With regard to mergers and acquisitions, around 200 proposals have been decided so far.

“There are lots of hopes and expectation from the CCI. From here onwards, it can either become a well-respected regulator of the country or become a defunct organisation like MRTPC.”

Rahul Singh Research Associate, University of Oxford and Assistant Professor of Law & Director (Law),

Centre for Competition and Regulation, National Law School of India University, Bangalore


Particulars of information filed 2009–10 2010–11 2011–12 2012–13 2013–14 2014–15

(until Aug’14) Total

Information filed by private parties

32 71 89 86 90 55 423

Suo moto cognizance by CCI

0 5 0 6 6 4 21

Matters referred by Central/State Government

0 0 4 2 7 7 20

Matters referred from the MRTPC

50 0 0 0 0 0 50

Total 82 76 93 94 103 66 514*

Anti-competitive activity 2010 2011 2012 2013 2014 (till August) Total

Cartel 1 13 3 1 2 20

Bid rigging - 1 3 2 1 7

Anti-competitive agreements/arrangements

* 6 12 10 3 31

Abuse of dominant position 2 9 7 22 9 49

Combination - - - - - -

Total^ 3 29 25 35 15 107

*Total information filed and available on the CCI website www.cci.gov.in

^Source: www.cci.gov.in

Chart 2: Cases referred by CCI for Investigation and inquiry to the Director General

Chart 1: Information filed with the CCI

“For the year 2014, competition law jurisprudence is going to develop in two key areas, first, industry specific things will emerge specifically in telecom sector and second issues concerning intellectual property rights vis-à-vis competition law will emerge.”

Balbir Singh Partner, DSK Legal


Cases referred by International Antitrust Authorities for Investigation are provided below:

Chart 3: US Department of Justice —Antitrust Division & Other Federal Agencies (investigation cases)

Anti-competitive activity 2010 2011 2012 2013 TotalSherman Act Section 1— restraint on trade 46 47 31 25 149

Sherman Act Section 2 — monopoly 2 2 2 2 8

Others* 7 3 1 0 11

Total 55 52 34 27 168

* This category includes investigations of potential violations of the Clayton Antitrust Act, 1914, and the Robinson-Patman Act, 1936, among other statutes.

Anti-competitive activity 2010 2011 2012 2013 TotalTotal number of investigations of cases about which the European Commission has been informed*

169 163 112 121 565

Cases in which an envisaged decision has been submitted by the National Competition Authority (NCA) during the period indicated**

94 88 91 60 333

Total 263 251 203 181 898

*Investigations conducted on cases by the NCA or the Commission

** Cases reaching the envisaged “decision” stage — only submissions from the NCA under Article 11(4) of Council Regulation (EC) No 1/2003 of 16 December 2002 on

implementation of its rules on competition, laid down in Articles 101 and 102 TFEU.

Chart 4: European Competition Commission (investigations)

YearNumber of mergers filed before US Antitrust Authorities — DoJ and Federal Trade Commission

Number of mergers filed before European Competition

Commission

Number of combinations filed before Australian Competition

and Consumer Commission2010 1166 274 118

2011 1450 309 87

2012 1429 283 62

2013 1326 277 53

Total 5371 1143 320


Chart 5: Cases before COMPAT“The regulatory trends revealed by this survey reflect what we have seen more generally around Europe. In particular, incentives for market participants to report aberrant conduct, an increasingly proactive and sophisticated regulatory approach and the severity of penalties imposed on corporates and individuals means that directors and other corporate officers in market sensitive positions ignore competition regulations at their peril. In this context, it is surprising and concerning that an estimated 80% of India enterprises appear to be under informed and hence under prepared in this important area of compliance.”

Richard Indge Partner,

Fraud Investigation & Dispute Services, Ernst & Young, London

Source: CCI Annual Reports for the years 2010, 2011, 2012, 2013 and 2014

*11 appeals pending at end of 2011

** 14 appeals pending at end of 2012

***118 appeals pending at the end of 2013

Appeals filed with COMPAT

CCI orders upheld by COMPAT/Appeal

disallowed

2010 2011 2012 2013 2014 (till October)

17

1

36142

2010 2011 2012 2013 2014 (till October)

NA

8*0

7**21***

60


Emerging trends in India

Need to sensitize organizations on importance of complying with Competition Law EY’s survey indicates that more than 80% of Indian enterprises are unaware of Competition Law, what it seeks to achieve and likely consequences of their contravening it.

The survey also reveals that most multi-national corporations (MNC’s) in India are aware of the country’s Competition Law and have adopted mechanisms to comply with it.

Most MNCs use the compliance frameworks of their parent companies abroad. They have “Indianized” and tailored these to comply with India’s Competition Law.

Almost 70% of the respondents believed that Indian enterprises do not have in place control mechanisms and their documents (vendor contracts, supply and distribution agreements, etc.) are not verified at the grass-root level for their compliance with the regulations of Competition Law. There is therefore an urgent need to train the employees of such organizations and instill in them the importance of complying with the mandates of the Law.

The fines levied by the CCI and the advocacy measures taken by it indicate the immediate need for companies to review their existing business practices for compliance under the Act.

At various forums and meetings, the Commission has been asking companies to put in place compliance programs in order to ensure that their business practices do not violate the Law’s regulations.

According to the CCI, the creation of a compliance system will enable organizations to detect violations early and help them take the requisite preventive steps.

Incentivizing existent compliance programs and practices

Creation of such a system by the CCI will help companies avoid fines or mitigate their severity, pre-empt the possibility of their concluding potentially void agreements, and reduce the costs and negative effects of litigation and regulatory intervention.


Elements of a Competition compliance program

A well-formulated and streamlined compliance program should address the business realities faced by enterprises.

Advantages of maintaining a competition compliance program

Broadly, a competition compliance program offers the following advantages:

• It helps to reduce costs and the negative aspects of litigation and connected matters.

• It enables enterprises to detect potential violations (if any) at an early stage and take remedial measures, and thereby provides them with a competitive advantage.

• It helps companies enhance their reputation and build goodwill.

• It inculcates a culture of compliance throughout organizations.

• It realizes the severity of the punishment that may be meted out for violation and that enterprises contravening the provisions of the Act may suffer damage to their reputation, thereby nullifing years of careful marketing and brand development.

“Compliance Programmes will have to be custom-made for each enterprise and an “off the shelf’ programme is very unlikely to serve the purpose and should be modelled on the competition law jurisprudence of India.”

Karan S. Chandhiok Partner, Chandhiok & Associates

“A Compliance Programme should be implemented to ensure that it is of practical use on a day-to-day basis. A sophisticated legal treatise may not be the appropriate document for the employees who look after the work on a day to day basis and may not be legally trained.”

Vyapak Desai Partner, Nishith Desai & Associates


Major costs of non-compliance

While having compliance programs in place may be beneficial for organizations, non-compliance, if detected, may prove to be costly for them. The CCI is invested with the power to conduct investigations and dawn raids, and take decisions. Therefore, the possibility of their being convicted is high for non-compliant enterprises. The consequent results may be one or more of the following:

• Heavy fines for non-compliance: In the case of anti-competitive agreements and abuse of dominance, a 10% fine levied on the company’s average turnover for the preceding 3 years of violation. In the case of a cartel, the penalty can be up to three times of its profit for each year of its violation of regulations or 10% of its turnover for each year of its violation, whichever is higher. The CCI can also divide an enterprise for abuse of dominance.

• Parties approaching the COMPAT for compensation may need to deposit large amounts, depending on the type of violation.

• It could include legal and other costs involved in handling cases of infringement of Competition Law.

“We would commend a Competition Compliance programme… We would also suggest a high-level Competition Compliance Committee to drive the agenda in your organizations. Last, but by no means least, the compliance programme should receive not only your attention but should also be put up for periodic review by the Board of Directors. On our part, we are thinking of requesting SEBI to include effective competition compliance in their listing guidelines under Clause 49.

Mr. Ashok Chawla Chairperson, Competition Commission of India,

Roundtable on “Competition Compliance for Good Corporate Governance” - Welcome Address,

January 24, 2013

e-Discovery in Competition Law-related investigationsMore than 90% of information is stored in the form of electronic documents today. Currently, the amount of electronically stored information is at an all-time high. It is evident that business is increasingly relying on electronic documents. However, while organizations have years of experience in formulating and implementing strategies to manage paper documents, management of electronic documents is a relatively modern phenomenon.

of the respondents stated that the use of e-discovery tools will be useful in Competition-related cases and disputes.

90%

“Enterprises that have entered into agreements or are in the process of negotiating agreements, especially agreements with competitors, should take precautions to ensure that they remain on the correct side of law.”

Samir R. Gandhi Partner, AZB & Partners


“In the event the amendment in the Competition Act is passed, the investigation process will become very challenging for the CCI and the office of the DG, especially in relation to procedural aspects of law. e-Discovery services may also witness a flurry of activity in relation to collection of primary and secondary evidences.”

Manas Kumar Chaudhri Partner, Khaitan & Co.

“Under the Competition Act, the CCI has all the powers to conduct search and seizures (dawn raids). The amendment to the Competition Act is not an answer. It is really up to the will, approach and the courage of the CCI to conduct the dawn raid operations and exercise its powers under the Competition Act.”

Dushyant A. Dave Senior Advocate, Supreme Court of India

According to 90% of the respondents, there is a need for organizations to use e-Discovery solutions to examine their electronic records in anti-competitive cases (e.g., in response to requests from the Commission or to search for anti-competitive activity to help them formulate leniency applications).

e-Discovery technology enables enterprises efficiently and cost-effectively assess the breadth of their data, identify responsive information and cull non-responsive Electronically Stored Information (ESI), and thereby reduce the cost and time required for review.

Enterprises from all industries are appreciating the need for them to maintain strong record- management systems. e-Discovery services are helpful when an adjudicating authority is in the process of evaluating evidence and passing orders. Although e-Discovery services are at a nascent stage in India, they are becoming popular, particularly due to the rise of corporate litigation.

There is a need for specialist agencies to dig out relevant data to respond to the investigation questionnaire circulated by the DG — Investigations.

After the DG circulating the investigation questionnaire to the entity, the entities require services to use techniques such as filtering of keywords, clustering of concepts, analyses of domains and de-duplication. This can significantly shrink the size of a responsive data set.

Dawn raid: a reality this yearThe shock is always enormous when a competition authority raids companies anywhere in the world. Under the Competition Act, the DG is empowered to conduct searches and seizures. Pursuant to these provisions, the DG needs to procure an order from the CMM, Delhi, to undertake a search and/or seizure. As on date, there has been no case before the CCI where any search and seizure order has been obtained by the DG. Therefore, the effectiveness of the existing provision is untested.

The respondents were asked about the efficiency of existing legal provisions relating to the DG’s power to search and make seizures. They were also questioned on the proposed amendment in the Competition Act, whereby the chairperson of the CCI will be able to pass an order to the DG to conduct dawn raids.

According to 75% of the respondents, dawn raids will increase the level of compliance to a great extent.


Need for empirical survey and analysis

It is important for companies to take a decision on how they will present data in ways that best reflect their business and operational structures.

An effort should be made to systematize relevant data from the Competition point of view to facilitate assessment of exposure to anti-competitive practices and resultant risks.

Gathering, reviewing and benchmarking data to support an objective evaluation of whether a company’s antitrust program is appropriate to prevent, detect and respond to anti-trust violations is essential.

Accurate data can be used to measure whether a company’s anti-trust compliance program processes and related controls are appropriately designed and are being applied consistently and adequately throughout its operations. It can be used to evaluate the effectiveness of these controls and improve them where required.

Minimal qualitative data is generally maintained by companies. This is particularly true in the unorganized sector. Authenticity of data is questionable in this sector, and therefore, the option of relying on it is dubious.

“Enterprises should be encouraged to proactively maintain accurate records of data. The CCI should be more pro-active in asking for data/ studies from the parties involved so as to form a sound analysis on a case to case basis.”

Ramji Srinivas Senior Advocate, Supreme Court of India

“There should be creation of several state competition commissions for spreading the awareness of benefits of competition laws and for helping the local traders and people understand (at the grass root level) about the impact and reach of competition law.”

R. Prasad Former Member,

Competition Commission of India

Unstructured and widespread data hindering economic analysesAccording to 75% of the respondents, there is no comprehensive data available for conducting a clear and viable economic analysis in an anti-trust situation due to the lack of qualitative data available for reasoned economic analyses.

According to 25% of the respondents, the problem arises due to the lack of qualitative data available for reasoned economic analyses.

Merger cases referred to the competition authorities are mentioned below:

2011

15 96

2012

52

2013

35

2014 (till October)

total combination filings

198No. of combination filings

Chart 6: Pre-merger combination filings before CCI


“It was held that being multi-product companies, only the ‘relevant turnover’ ought to be considered while imposing the penalty i.e. the turnover generated from the product under investigation, rather than the overall turnover of the enterprise. “

Rahul Goel Partner, Dhir & Dhir

“Since the penalties imposed by the CCI are very huge, it will be prudent to have something like informal guidance mechanism to understand or take a view of CCI about an activity on which could be categorised as an anti-competitive activity.”

Shashivansh Bahadur Partner, Dua Associates

Penalty guidelines — need of the hour Penal provisions under the Competition Act are fundamental for enforcement of the law. They are essential for deterring acts prohibited by the law. The issue, “Can a penalty be so large as to endanger the very existence of a company?”, was repeatedly highlighted by all the respondents during our survey.

Penalties imposed under the Competition Act on enterprises are typically financial in nature. In some cases, the CCI imposes penalties on some senior officials in enterprises.

So far, penalties have been imposed by the CCI, but in most of the cases (more than 90%), enterprises have not paid the fines levied and have appealed to the COMPAT. Therefore, the effect of the penalty is yet to be gauged. However, the COMPAT has upheld the decision of the CCI on imposition of a penalty of INR6.3 billion against one of the largest real estate players in India and INR550 million against one of the largest stock exchanges in India. Both have appealed to the Supreme Court.

Method of calculating penalties and the need for guidelines on penalties

So far, the Commission has not been inconsistent in levying penalties. For example, in the cement cartel case, it imposed a penalty amounting to 0.5% of the profit made by cartelizing cement companies, of 5% of its average turnover in the NSE case, of 7% in the DLF case and of 6% of its average turnover in the BCCI case. In the Assam Drugs Dealers Association case, it imposed a penalty at the maximum rate of 10% of its average turnover. In the Bengal Chemist and Druggist Association case, the penalty imposed was 10% of its average turnover for the Association and its officer bearers and of 7% for its Executive Committee members. The Commission has not provided reasons for levying different levels of penalties and most of these have been appealed against to the COMPAT on these grounds.

Relevant turnover

In a recent appeal against the decision of the CCI in the Aluminium Phosphide Tablet case , the COMPAT, by its decision of 29 October 2013, introduced the concept of “relevant turnover” in Indian Competition Law jurisprudence.

The critical issue in the appeal was that of calculation and imposition of penalties. The COMPAT reiterated the doctrine of proportionality while imposing penalties, emphasizing that the CCI must not only give reasons while imposing these, but must also consider all relevant factors, including the financial health of a company and the likelihood of it being forced to close down on account of the harsh penalty. However, the matter is sub-judice before the Supreme Court at present. It is important to see how the Supreme Court interprets the word “turnover” under the Competition Act.

Chart 7: Cases in which penalties were imposed

20112010

3

6.86

-

-

12

72.162012

3

18.322013

10

26.652014

(till October)

No. of cases

Amount of penalty (in billion)

28Total cases

124Total amount of

penalty


Lukewarm response to Leniency applicationsThe Leniency program is used by the Competition authorities as a key tool to detect infringements by cartels by providing total immunity from fines or less than full immunity to participants in cartels in return for their informing Competition authority about the existence of the cartel.

The Competition Act and the Competition Commission of India (Lesser Penalty) Regulations 2009 (Lesser Penalty Regulations) has set out the Leniency policy. Under Lesser Penalty Regulations, Leniency provisions cover undertakings (or persons) that have been members of a cartel and are willing to provide information to the Commission and cooperate with it in terminating the cartel’s activities. Under the Act, cartel activities include agreements of any kind entered by undertakings and/or associations of undertakings, which are engaged in identical or similar trade of goods or provision of services.

The respondents were asked about the efficiency of existing legal provisions relating to the Leniency policy in the Competition Act. According to 80%, the CCI needs to instil more confidence in corporate organizations to elicit more leniency applications.

According to 90% of the respondents, industry is concerned about issues relating to confidentiality and the discretionary power of the CCI.

According to 70% of the respondents, there is a problem with the manner in which penalty provisions are drafted under the Competition Act, and there is a lack to clear guidelines/ procedures for parties approaching the CCI for leniency.

“The leniency application process is very porous and will have to be monitored carefully for proper enforcement. The problem lies in the way the lesser penalty provisions are worded. The provision empowers the Commission to impose lesser penalty if it ‘may’ deem fit, in contrast to the US anti-trust provisions, which mandates the Department of Justice to necessarily (the word used in the US laws is ‘shall’) grant the immunity from penalties.”

Amitabh Kumar Partner, JSA


Concerns on data-sharing at Trade Association meetingsTrade associations are unique forums at which competitors from the same industry or sector meet to discuss issues of common interest, find common solutions and further their common commercial/professional interests. Their activities have, however, been subject to close scrutiny by the CCI.

Despite their many pro-competitive aspects, trade associations continue to be cautious about stepping outside the boundaries mandated by the Competition Law. This is because by definition, trade associations offer opportunities for repeated contact between direct competitors and involve cooperation among them in the same trade. Casual discussions of prices, quantities, customers, territories and market shares, terms of sales, advertising restrictions and future business strategies, can lead to agreements or an informal understanding. This could easily spill over into illegal coordination, so called cartelization or formation of anti-competitive agreements.

The respondents were asked about the role of the trade association in cartel cases. All of them (100%) felt that there is no doubt that trade associations add value to the industries/sectors in which they operate, but they may also facilitate anti-competitive conduct — inadvertently or deliberately.

100%

All the respondents (100%) suggested that the Commission should encourage all associations and their members to put in place Competition-compliance programs, and that associations can also try to develop guidelines on best practices for their members in order to create awareness of acceptable and unacceptable behavior under the Act.

100%

According to 80% of the respondents, they are the collective voice of industry and need to be educated on the nuances of the Competition Law. Trade associations are not only at risk of violating the Law, but can also benefit from it. They need to be aware of how they can take advantage of opportunities offered by the Act to benefit the industry. They can identify marketplace-related issues and can often help to resolve these by liaising between the CCI and industry. They may draw the attention of the Commission to anti-competitive practices emanating from government laws/policies and urge it to take up this issue with the Government as part of its advocacy.

80%


MethodologyFor this study, EY conducted in-depth interviews with former members of the CCI, senior advocates, leading lawyers and senior legal professionals for their views on competition laws in India.


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Calibrating the Pulse of Competition Law in India