Are the Original Equipment Manufacturers (OEMs) in the automobile sector in India used to indulge in resale price maintenance (RPM) by dictating minimum resale prices of (at least) cars to their dealers by putting in place a subtle and well-designed mechanism to control the maximum discounts that the dealers may give to the car buyers , in disregard to the competition laws , or they are victims of some emerging clandestine understanding between some dealers , who are finding the antitrust regulator a more suitable forum to settle commercial disputes with the OEMs?
The above question may seem pertinent if you are told that the two largest car makers in India have faced antitrust scrutiny on complaints of precisely the same modus operandi of controlling the dealers' discounts . First it was the case of Hyundai Motors India Ltd. in 2017 1, the second largest OEM in the small and mid-size car segment and now it is the turn of Maruti Suzuki India Ltd., India's largest OEM in the most popular car segments . Let us see the similarities between the two cases.
By way of order dated 04.07.2019, the Competition Commission of India ("CCI/Commission") has directed the Director General to undertake a 'thorough and detailed' investigation to ascertain the factual position and modus operandi resorted by Maruti Suzuki India Ltd ("MSIL") after forming a prima facie opinion that MSIL is undertaking discount control mechanisms with its dealers and thereby indulging in Resale Price Maintenance (RPM).
Background and allegations
The case was initiated suo moto by the CCI based on an anonymous e-mail dated 17.11.2017 ('the e-mail') sent by an anonymous Maruti Dealer alleging RPM resorted by MSIL in its West-2 Region i.e. Maharashtra State other than Mumbai & Goa. The e-mail revealed that the dealers of MSIL in the West-2 Region are restricted from giving extra discount to their customer and if a dealer is found giving discounts higher than the permitted level, penalties are levied based on the number of incidents found in a particular financial year. The informant also attached copies of e-mails which highlighted the penalties levied upon the defaulting dealers and such emails did not mention the purpose of the penalties being imposed.
It was also alleged that the MSIL management sends an e-mail with a "Mystery Shopping Audit Report" to the dealers and ask for clarification regarding the discounts offered. This Mystery Shopping Audit Report is generated pursuant to a mystery shopping audit by MSIL's independent agency wherein a fake customer visits the dealer in order to check whether extra discount is being offered or not along with an audio proof of the same. The penalized dealers are then required to deposit a cheque of the penalty amount in the name of Ms. Swati Kale (wife of Vice-President of Wonder Cars Pvt Ltd- one of MSIL dealers in Pune).
It was also alleged that similar Discount Control Mechanism is also being implemented by MSIL across India- specifically in cities where more than 4-5 dealers operate.
Incidentally , one finds the same allegations and modus operandi in the Hyundai case . In that case too , Hyundai was also found to have Hyundai ensured compliance of its policy of discount control mechanism by engaging "mystery shopping" agencies for policing its dealers through fake customers. The dealer found to have deviated from the prescribed discount by giving extra discount to any customer was penalised with the minimum of Rs. 2 lakhs ( INR 200, 000) for one violation and maximum of Rs. 80 lakhs (INR 8 million) for the sixth violation. Moreover, these penalties on dealers for violating the discount code were to be deposited not with the Hyundai Company but with an advertisement agency to obfuscate the allegation of the company indulging in RPM. However, in addition to RPM , allegations of Tie-in were also found to be true against Hyundai . Hyundai prescribed the engine oil and lubricant through Indian Oil Corporation Ltd. (IOCL) and Shell Oil company (Shell) only at prefixed price . The company penalised the dealers found using engine oil and lubricants other than these. The CCI found that this these practices amounting to Hyundai "tying -in" the sale to its prime product, that is cars, with lubricants and oil, that is, the other product and making the purchase thereof compulsory for its dealers. The lubricants, engine oil of IOCL and Shell were sold as "Hyundai genuine oil" and in case of use of oils of other companies by the customers, the Hyundai warranty could be cancelled in case of failure of specific spare parts. The CCI noted such tying-in arrangement reduced effective competition and violated section 3 (4) (a) read with section 3 (1) of the Competition Act, 2002.
The Commission held a preliminary conference with MSIL on 22.05.2019 during which MSIL filed responses to the allegations contained in the e-mail. MSIL denied exercising any control/supervision over the dealers except to maintain a balance between satisfaction of consumers and uniformity in schemes. MSIL also denied any agreement between MSIL and its dealers which involves a discount control policy. MSIL also stated that the Dealership Agreement inter alia provides for discounts and sets out the relationship between MSIL and its dealers.
MSIL provided that it encourages its dealers to give discounts to the consumer which was evidenced by the fact that when the margin of particular models of vehicles are not sufficient to take care of the costs of the schemes for consumers/Consumer Offers proposed by the dealers, MSIL supports its dealers by contributing to the scheme which encourages dealers to provide discounts and to maximize the benefits for consumers. MSIL also denied imposing a discount control policy which was evidenced by the fact that in several instances, dealers provided discounts higher than the Consumer Offers.
MSIL also denied the existence of any agreement which allows it levy penalties on its dealers in case of discounts being offered and further stated that there is no clause in the Dealership Agreement which allows MSIL to levy any penalty on the dealers for providing discounts higher than those prescribed in the Consumer Offers to the consumers.
Refuting the claim that the penalties are imposed on failure to abide by the discount policy, MSIL stated that the penalties relate to the schemes and guidelines launched by the dealers to ensure consumer satisfaction. MSIL contended that it supports a number of schemes launched by the dealers by making a contribution to the offers so that the entire cost of the offer is not borne by the dealers out of their margins. Resultantly, MSIL monitors compliance of such Consumer Offers owing to (i) its contribution to the scheme and (ii) object of ensuring consumer satisfaction by maintain uniformity in schemes while simultaneously striking a balance between dealer confidence and consumer satisfaction.
CCI prima facie Analysis
Apparently , though arguments made by MSIL seemed somewhat convincing but the CCI , perhaps, infuriated by the fact that it was second such case before it with similar modus operandi , found it more prudent to order an investigation by the Director General (DG).
Relevant Market: CCI noted that MSIL has dealerships and distributorships across the country and its cars are sold across the territory of India having presence of 2627 sales outlets and 3403 service outlets. Therefore, the relevant geographic market was adopted as the territory of India. The analysis was undertaken in the market for sale of passenger cars (upstream market) and distribution of passenger cars (downstream market) in India.
Dominance: CCI observed that MSIL is a market leader in the passenger car segment in India with more than 50% market share in 2017-18 followed by Hyundai Motor India Ltd with 19.65% market share during the same period.
The CCI observed that MSIL had denied the existence of an agreement between MSIL and dealers which amounts to imposition of discount control policy. To this, the Commission held that the definition of 'agreement' under the Competition Act, 2002 ("the Act") includes any arrangement or understanding or action whether or not it is in writing or formal or intended to be enforceable by legal proceedings. The Commission reinforced that this definition of 'agreement' includes within its purview, any tacit or informal understanding between entities.
Pertinently, the Commission observed that although Clause 28.1 of the Dealership Agreement allows dealers to provide additional discounts and MSIL has listed instances where discounts above Consumer Offer has also been provided, however, it was of the opinion that investigation is required to ascertain as to whether such agreement that allows dealers to give additional discounts is actually followed without any restraint. As regards the instances of discounts permitted listed by MSIL, CCI observed that those instances pertained to only 9 dealers in the western region while MSIL has 2627 dealers across India, and therefore, the examples given were too small to arrive at a definite conclusion to rule out instances of RPM. The Commission was also not convinced by the plea that penalties are imposed on account of violation of schemes and guidelines launched by the dealers and held that if that was the case then why were such reasons not mentioned in the e-mails imposing penalties.
Another contention of MSIL that the Mystery Shopping Agencies are appointed by dealers to ensure maintenance of quality standards and consumer satisfaction did not seem plausible to the Commission as it was not clear as to why would a dealer appoint Mystery Shopping Agencies to check quality standard and consumer satisfaction. In addition, the claims of MSIL that it was discharging the role of an independent third party in ensuring compliance of Sales Operating Procedure (SOP) amongst dealers also required clarity as per the Commission.
Accordingly, the Commission was of the view that a thorough and detailed investigation is required to be ordered to ascertain the factual position and modus operandi resorted to by MSIL.
Comment : The CCI prima facie order directing investigation against Maruti Suzuki , allegedly for following the same modus operandi as Hyundai , was , in a way, inevitable . However, unlike Hyundai , the defence taken by Maruti Suzuki seems more plausible and rational given the fact that one cannot give a clean chit to the dealers who may have both genuine and imagined commercial disputes with the largest OEM in India and it may , well be a case of forum shopping to retribute the Japanese owned , largest OEM , against some deserving punishment awarded earlier ! Let us keep our fingers crossed.
Note: This article first appeared on the Antitrust & Competition Law Blog
On 23 July 2019
1 The CCI order was , however, quashed in appeal by the National Company Law Appellate Tribunal (NCLAT) vide its order dated 19.8.2018 (which ,according to me was a case of Type 2 error) . The NCLAT's order has been challenged by the CCI in Supreme Court and the appeal is pending.
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