Will September-October 2020 turn out to be an amuse-bouche in the race between virus and vaccine? The Khaitan Competition / Antitrust Team (KCAT) presents a half-year antitrust review of Indian competition law developments in 2020.
We showcase the most relevant updates on the enforcement, merger control and policy development fronts between April and September 2020.
Among other things, this review has insight on (a) closing of investigations in "oligopsonistic" markets, (b) the crackdown on distribution practices of pharmaceutical companies, and (c) the need for penalty guidelines in India.
The merger review / control section discusses the Competition Commission of India's observations on econometric analysis in "bidding markets".
We deal with platform neutrality and one year of "green channel" mechanism.
The policy development section highlights the merger control guidance note and proposed elimination of ex ante review of non-compete restrictions.
Covid-19 considerations continue to influence cartel penalty immunity
The Competition Commission of India (CCI) closed two long-drawn cartel investigations in the Automotive Bearing case1 and the Composite Brake Blocks case2. Remarkably, the CCI did not impose penalties in either cases - despite its otherwise strict view on penalties against cartelisation.
While the Automotive Bearing case involved cartelisation in the market for industrial and automotive bearings, the CBB case uncovered bid-rigging in tenders floated by the Indian Railways for the supply of composite brake blocks. Both of these cases have been detailed below.
Industrial and automotive bearings
In the Automotive Bearing case, which was initiated pursuant to a leniency application, the CCI reasoned that the "peculiarities of the case" subverted the need for penalty imposition. Instead, a mere "cease and desist order" would serve the "ends of justice". The order is ambiguous about aspects which constituted the "peculiarities" and prompted the grant of immunity to every cartel participant. This resulted in the CCI not distinguishing between the leniency applicant and those who opposed such leniency application, despite conclusive evidence against them.
Intriguingly, the "peculiarities" justified absence of penalty despite: (i) the parties' failure to rebut the presumption of an appreciable adverse effect on competition (AAEC), and (ii) no observations about mitigating circumstances.
The implication of the cases on the Indian leniency regime and / or cartel investigation cannot be overemphasised. The leniency programme is a scheme which allows participants in a cartel to volunteer details of its existence and / or operations in exchange for reduced penalties. The success of any leniency regime banks on the incentives offered by a(n) antitrust / competition authority to encourage cartel participants to disclose their operations.3
Grant of the same penalty benefits to all cartel participants may potentially reduce the incentive associated with filing a leniency application to disclose cartels - besides binding the CCI in future cases with similar allegations.
Composite brake blocks
The CBB case, initiated based on complaints from various departments of the Indian Railways, explicitly cited the economic downturn resulting from COVID-19 as a justification for the CCI's decision to not impose penalties. This was despite the evidence of cartelisation, which under any other circumstance, would have prompted the CCI to impose penalties. The CCB case is the first enforcement matter to explicitly consider COVID-19 as a factor during penalty imposition. Note that refraining from the imposition of penalties due to COVID-19 may also discourage cartel members from approaching the CCI, since members are left with no incentive to make cartel disclosures.
Ongoing 'oligoposony' based analysis in the LPG cylinders market
The CCI continues to be informed by the Supreme Court of India's (Supreme Court) precedent in the Rajasthan Cylinders judgment4 when deciding cases in the "oligopsonistic" liquified petroleum gas (LPG) market.
The Rajasthan Cylinders judgment had held that "oligopsonies" are markets characterised by a small number of buyers for the sale of a good / service. In such markets, buyers exercise a degree of influence over the final price of the product. Such oligopsonistic markets may exhibit a certain extent of price parallelism by sellers. Therefore, evidence of price parallelism does not necessarily lead to a conclusion of concerted practice.
Flowing from the above, the Supreme Court exonerated several LPG cylinder manufacturers from allegations of bid-rigging a tender floated by a state oil manufacturing company (OMC), Indian Oil Corporation Limited (Indian Oil). This was despite the quotation of identical and near identical bids by LPG cylinder manufacturers.
The Supreme Court found that since the market was oligopsonistic, it was the procurer (i.e., Indian Oil) who decided the final price. Therefore, parallel behaviour of the bidders was simply indicative of the peculiar nature of the market and not bid-rigging. The Supreme Court's reasoning was bolstered by Indian Oil's active negotiations with the bidders for the lowering of their quotes (such negotiations are typically held after the submission of bids).
Recent precedents instantiate that the CCI has aligned its decision-making with the findings in the Rajasthan Cylinders judgment.
In August 2020, the CCI dismissed two cases concerning allegations of collusive bidding by LPG cylinder manufacturers in relation to a tender floated by the OMC, Bharat Petroleum Corporation Limited (Bharat Petroleum).5 The CCI found that while the price bids revealed collusive patterns, this finding was not sufficient to implicate the LPG manufacturers. This was because the market is oligopsonistic in nature and therefore, it was Bharat Petroleum that exercised control over the final bid price, through negotiations. Having regard to Bharat Petroleum's influence over the pricing and the holding in the Rajasthan Cylinders judgement, the CCI closed the investigation without any need for analysis of individual conduct of the bidders.
No relief for the pharmaceutical sector
The Macleods case6 stands testament to the CCI's heightened focus upon the pharmaceutical sector. In March 2020, the CCI held that certain pharmaceutical companies had entered into anticompetitive horizontal arrangements with a stockist and druggist association (Association). The arrangement required prospective stockists to obtain the Association's consent - prior to being appointed by pharmaceutical companies. The Association's interference with the pharmaceutical companies' distribution system was found to cause an AAEC and contravene the Competition Act, 2002 (Act).
Surprisingly, the CCI also arrived at a finding of contravention against the pharmaceutical companies despite acknowledging that they had entered such arrangements under duress / coercion from the Association. The fact of duress was merely considered a mitigating factor - and the CCI did not impose any penalty on the pharmaceutical companies.
The CCI's conclusions are noteworthy on two counts. Firstly, the CCI's view diverges from that of the former appeal tribunal, which held that no agreement / arrangement let alone anticompetitive agreement / arrangement subsists if any of the parties acts under duress.7. Secondly, the case marks the first instance of the CCI relying on "coercion" or "duress" as a mitigating factor during penalty imposition.
Competition laws buckle-down on state owned enterprises
India has a legacy of state-owned entities which continue to occupy critical sectors of the economy such as, power and rail transportation. Unlike the former Monopolies and Restrictive Trade Practices Act, 1969 - these state-owned enterprises are not exempt from competition law.
In 2020, both, the CCI and the competition appeal tribunal (i.e., National Company Law Appellate Tribunal (NCLAT)) dealt with cases involving state-owned / state-run enterprises. We highlight two such findings below.
Competition laws grant deference to "consumers choice"8
In July 2020, the National Highway Authority of India (NHAI)9 issued a tender for the procurement of highway engineering consultancy services in India. The eligibility criteria for participation in the tender deviated from the criteria determined by NHAI's parent Ministry. The claimant alleged that this deviation amounted to an abuse of NHAI's dominance in the market for the "procurement of highway engineering consultancy services in India". The CCI observed that in cases concerning tenders, procurers enjoy discretion to decide the best suited tender conditions.10 The CCI also emphasised the "sacrosanct" nature of a consumer's choice and the need to minimise interference with a consumer's decision. For these reasons, the CCI refused to initiate the Director General's (DG) investigation.
Show-cause notice does not amount to expression of "final opinion"11
The NCLAT dismissed an appeal against a "show cause notice" issued by the CCI to certain sub-wholesalers of foreign alcohol in the State of Uttarakhand.12 The notice was issued pursuant to an investigation by the DG, in relation to allegations of abuse of dominant position. It directed the sub-wholesalers to "show cause" as to why their conduct did not contravene the Competition Act.
Interestingly, an appeal was preferred against the CCI's notice. The NCLAT held that the appeal was not maintainable because the notice was not a final order passed by the CCI. In fact, the notice categorically stated that its contents were not a final expression of the CCI's opinion. The NCLAT dismissed the appeal and confirmed the CCI's liberty to pass an appropriate final order in the matter.
Penalty Guidelines - Long overdue?
In March 2020, the NCLAT upheld the CCI's findings that Adani Gas Limited (Adani) had abused its dominant position in the market for supply and distribution of natural gas.13 However, the NCLAT distinguished the CCI's order by reducing the penalty imposed on Adani from 4% to 1% of its average relevant turnover.
The reduction had several mitigating circumstances including, (i) Adani's voluntary offer to revise its gas supply agreements, prior to the completion of the CCI's enquiry and during pendency of the appeal; and (ii) the emergence of new competitors in the market.
Note that this is not the first instance of the appeal tribunal reducing the penalty amount imposed by the CCI. Perhaps the disconnect between the CCI's and the NCLAT's considerations is due to the absence of penalty guidelines. This is unlike other jurisdictions (such as, the European Union and the United Kingdom) where penalty guidelines inform the regulator's decision on the quantum to be imposed.
Clearing the air - Who can file complaints before the CCI?
In Facebook/WhatsApp case14 the complainant, an independent legal practitioner, raised allegations of abuse of dominant position by Whatsapp Inc and Facebook Inc (Facebook). Facebook raised a preliminary objection challenging the complainant's right to file the complaint before the CCI since the complainant was not an "aggrieved party".
The CCI dismissed the allegation noting that the complainant needn't have suffered any specific personal legal injury / harm as a result of the alleged conduct.
Interestingly, the CCI reasoned that the Competition Act envisages an inquisitorial system, where the relevant authority plays an active role in investigating the facts of a case. (In contradistinction, in the CCI's view, an adversarial system is one where the relevant authority must merely act as an impartial referee between the parties). Therefore, the CCI could investigate the matter on its own accord. Further, the CCI could investigate rights in rem (i.e., a right against a specific event / occurrence) such as, against an anticompetitive market. This is as opposed to rights in personam (i.e., right against a specific person typically arising out of rival claims). The in rem nature of rights and inquisitorial nature of the proceedings made it irrelevant that the complainant was not an "aggrieved party".
This comes close on the heels of the NCLAT's decision in Uber / Ola15 where the appeal tribunal had emphasised upon standing requirements.16
02. MERGER REVIEW / CONTROL
Promoting platform neutrality
Concerns surrounding "platform neutrality" are increasingly taking centre-stage during antitrust enforcement. As detailed in the Spotlight section of this newsletter, investigations against online marketplace platforms are expected to scrutinise (i) whether marketplace platforms discriminate against third-parties in favour of their own services; and (ii) whether such discrimination amounts to an abuse of dominant position.17
In line with enforcement trends, the CCI's approval order in Hyundai / Ola18 attests the CCI's readiness to address platform neutrality concerns merger control. The Hyundai / Ola order relates to the approval of Hyundai Motor Company's (HMC) and Kia Motors Corporation's (KMC) acquisition in ANI Technologies Private Limited (Ola) and Ola Electric Mobility (Ola Electric).
The CCI's assessment involved the analysis of vertical linkages between Ola and HMC's India subsidiary - Hyundai Motors India Limited (Hyundai India). The CCI noted that Ola, a cab-aggregator platform, was involved in the procurement of vehicles from various manufacturers (including Hyundai India). Ola would subsequently lease the procured vehicle to taxi drivers enabling them to conduct business on Ola's cab-aggregator platform. Given this, the proposed combination was likely to incentivise Ola to give preference to drivers operating Hyundai India's vehicles - thereby disadvantaging drivers operating on vehicles of competing makes.
Interestingly, neither Ola nor Hyundai India are dominant in their respective relevant markets in India. The parties ultimately allayed the CCI's concerns by undertaking that (i) drivers would not be given preference or discriminated against based on the brand of vehicle they operated, and (ii) that Ola's marketplace would be operated in an objective manner.
The voluntary commitment to maintain platform neutrality as a condition for merger shows the CCI's focus upon issues such as platform neutrality. Would such ex-ante undertakings become commonplace in merger control in the digital economy? We await a copy of the CCI's approval order in Facebook's acquisition in Reliance Jio.19
Radio silence on gun-jumping
Has COVID-19 impacted gun-jumping assessments? In the last six months, the CCI hasn't published a single gun-jumping decision.
The last transaction to have been penalised for gun-jumping was ReNew Power Limited's (ReNew) acquisition of Ostro Energy Private Limited (Ostro) (Transaction) in November 2019. The penalty order, which was made public in early 2020, revealed that the Transaction was interconnected to a separate acquisition, namely Canada Pension Plan Investment Board's acquisition in ReNew (Earlier Transaction).20 While the Earlier Transaction had already been separately notified to the CCI and acquired the requisite approval, the Transaction had not been disclosed to the CCI.
Note that under the Indian merger control regime, if two or more transactions are found to be interconnected, then if any one of the interconnected transactions is reportable, all the steps must be notified to the CCI in a single notice. The parties in the present case defaulted - they failed to notify the Transaction with the Earlier Transaction despite their "interconnected-ness".
The CCI established this "interconnected-ness" on several grounds and in particular (i) simultaneity in the negotiation of the transactions and (ii) references to both transactions in the documents relied upon by the parties during evaluation of the investment opportunity. Resultantly, the CCI imposed a penalty of INR 5,000,000 (approximately USD 66,555) on the Canada Pension Plan Investment Board.
Econometric Assessment in Bidding Markets
The CCI's June 2020 approval of the acquisition of Metso OYJ's (Metso) mineral business by Outotec OYJ (Outotec), contained several observations about merger control assessments in "bidding markets".
In a nutshell, "bidding markets" refer to markets where the supply of any good / service to prospective buyers is made through tenders. Bidding markets are unique because a player's market share doesn't always provide an accurate representation of its market power. As an illustration, consider how winning a sizeable one-time contract of a long duration would result in the high market share of the successful bidder. However, the successful bid is not indicative of the bidder's ability to exert constraints on its competition in another tender. Further, winning or losing even a single sizeable contract can jig-up market shares of every player.
To account for this challenge, the CCI's assessment of the acquisition did not rely solely on the parties' market shares in the overlapping "bidding market" for "iron ore pelletizing equipment island in India". Instead, the CCI also analysed the bidding data (e.g., wins and losses) of the parties for the past 10 years. The analysis was undertaken to gauge the "closeness" of competition between Metso and Outetec. A finding that the parties were close competitors would increase the likelihood of anticompetitive effects arising from the acquisition.
The CCI conducted three analyses of the bidding data: i) frequency analysis21, ii) win-loss analysis22, and iii) runner-up analysis23. The results of the analyses were as follows:
- Frequency analysis: The parties competed for the same tender in over half of the total tenders floated between 2010-2019;
- Win-loss analysis: Metso lost 5 times when Outotec competed for the same tender, however, it never lost when Outotec did not compete. Similarly, Outotec lost twice as often when Metso participated as opposed to when Metso did not participate; and
- Runner-up analysis: The order caveats that the bidding data did not provide exact data on bid runners-up. Regardless, the CCI concluded that each party was a runner-up a significant amount of times when the other party had won the bid.
Based on the analyses, the parties were found to be close competitors of each other. This was noted as a factor which contributed to the CCI's AAEC concerns in relation to the market.
Separately, the CCI also found that requests for proposals / tenders in the bidding market were not floated publicly. On the contrary, a buyer's decision to invite a proposal / bid from a particular supplier was driven by their past relationship. Further, pricing was determined on a case to case basis owing to the customisations required to the product / service for which the tender was floated. In spite of the reliance on historical relationships, private tendering, non-standard product, and lack of price transparency in the bidding market, the parties appeared to command a sizeable market share. For these reasons, they were determined to be close competitors exercising significant market power.
In the CCI's view, these factors increased the likelihood of reduction in innovation competition, higher cost of market entry for potential entrants, and reduction in countervailing buying power – post the acquisition. The parties allayed the CCI's concerns by offering the divestment of Metso's Indian "straight grate iron ore pelletizing business".24 This is one of the few cases where the parties proposed a structural remedy (i.e., divestment) as opposed to a behavioural remedy - to mitigate AAEC concerns. Accordingly, the acquisition was approved subject to the parties voluntary commitments.
One year of green channel
August 2020 marked the one-year anniversary of the adoption of the "green-channel" approval route for merger control transactions.
As background, on 13 August 2019, the CCI had introduced certain amendments to its merger control regulations, i.e., the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (2019 Amendment Regulations). This entailed a "green channel" mechanism, an automatic system of approval for combinations which are deemed to be approved upon filing the notice.
In the last one year, an aggregate of sixteen transactions have benefitted from the green channel route. Parties to the transactions are active in a wide range of sectors including, among others, financial services, infrastructure, pharmaceuticals, airport infrastructure and operations and management, polyester, insurance, banking, logistics and warehousing, power, and mutual funds. So far, there is no discernible trend regarding the sectors that have benefitted the most from the green channel route.
1. In Re: Cartelisation in Industrial and Automotive Bearings (Suo Motu Case No 5/2017) of 5 June 2020 (Automotive Bearing case) - Link.
2. Chief Materials Manager, South Eastern Railway v Hindustan Composite Limited and Others (Ref Case No 3/2016) of 10 July 2020 (CBB case) - Link.
3.In India, the incentive system works in the following manner. The first leniency applicant to make disclosures and help establish the existence of a cartel can secure full immunity. Later applicants can secure reductions in penalties of up to 50% (second applicant) and 30% (third and subsequent applicants), subject to certain conditions. Cartel participants / non-applicants refuting the existence of the cartel are not entitled to any penalty reduction under this framework.
4. Rajasthan Cylinders and Containers Limited v Union of India, 2013 SCC OnLine Comp AT 169 of 1 October 2018 (Rajasthan Cylinders case).
5. In Re: Formation of cartel in the supply of 14.2 kg LPG cylinders fitted with S. C. valves procured by BPCL through Tender No.1000125304 (Suo Motu Case No 09/2014) of 26 August 2020 - Link; and In Re: Formation of cartel in the supply of 14.2 kg LPG cylinders fitted with S. C. valves procured by BPCL through e-Tender No. LPG: EQ:09 In Re: Formation of cartel in the supply of 14.2 kg LPG cylinders fitted with S. C. valves procured by BPCL through e-Tender No. LPG: EQ:09-10:08 dated 17.11.2009 (Suo Motu Case No 5/2014) of 20 August 2020 - Link .
6. M/s Suman Distributors v Bengal Chemists and Druggists Association (Case No 36/2015) of 12 March 2020 (Macleods case) - Link.
7. M/s Lupin Limited and Others v Competition Commission of India and Others (Appeal No. 40/2016) of 7 December 2016.
8. Sandeep Mishra v National Highways Authority of India (Case No 13/2020) of 8 July 2020 - Link.
9. The National Highway Authority of India is an agency administered by the Ministry of Road Transport and Highways. They are tasked with the development, maintenance, and management of India's entire network of national highways.
10. This, of course, is subject to the tenets of the Competition Act.
11. Uttarakhand Agricultural Produce Marketing Board v Competition Commission of India and Others (Competition Appeal (AT) No. 84/2018) of 12 March 2020 - Link.
12. The case also concerns allegations of abuse of dominant position by the Uttarakhand Agricultural Produce Marketing Board, a wholesale licensee of foreign alcohol in the State of Uttarakhand, established under the Agricultural Produce Marketing (Development and Regulation) Act, 2001).
13. Adani Gas Limited v Competition Commission of India and Another ((TA (AT) (Competition) No 33/2017) of 5 March 2020 - Link. It was alleged that Adani abused its position of dominance by included unfair conditions in its gas supply agreements entered with customers.
14. Harshita Chawla v WhatsApp Inc. and Others (Case No. 15/2020) of 18 August 2020 (Facebook/Whatsapp) - Link.
15. Sunil Agarwal v Competition Commission of India and Other (Competition Appeal (AT) No. 11 of 2019) of 29 May 2020 (Ola/Uber) – Link.
16. Click here to access a summary of the Ola/Uber order.
17. See: Rubtub Solutions Private Limited v MakeMyTrip India Private Limited and Another (Case No 01/2020) of 24 February 2020 - Link.
18. Combination Registration No. C-2019/09/682 of 30 October 2019 (Hyundai/Kia) - Link.
19. The CCI approved the Facebook's USD 5.7 billion acquisition of a 9.99% stake in Jio Platforms Limited (Jio), a leading telecom operator. It is anticipated that Facebook (through WhatsApp) will set up a digital marketplace as part of its investment in Jio.
20. Proceedings against Canada Pension Plan Investment Board and ReNew Power Limited under Chapter VI of the Competition Act, 2002 dated 21 November 2019.
21. Parties are likely to be "close competitors" when they frequently compete against each other in bids.
22. Parties are likely to be "close competitors" if they lose more often when the other party participates in a bid.
23. Parties are likely to be "close competitors" if they are runners-up behind each other. In the context of bids, a party may be a runner-up if it faced the successful bidder till the last stage of negotiations.
24. "Straight Grate" is a specific iron ore pelletizing technology which both parties utilised to manufacture iron pellets for consumers.
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