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Antitrust and competition issues in India are governed by the Competition Act 2002 and the Companies Act 1956.
The Competition Act 2002 was enacted by Parliament in December 2002 and received the assent of the president of India in January 2003. The Competition Act 2002 was amended by the Competition (Amendment) Act 2007. The Competition Act 2002, as amended, prohibits anti-competitive agreements and abuse of dominant position, and regulates combinations. The Competition Act also promotes competition advocacy. The government of India has published provisions relating to anti-competitive agreements and abuse of dominant position and other related provisions of the Competition Act (see the notification dated 15 May 2009). However, the provisions relating to regulation of combinations are yet to be published.
The Competition Act provides that anti-competitive agreements are void and prohibits an enterprise or a person from entering into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services that causes or is likely to cause an appreciable adverse effect on competition in India. Generally speaking, 'horizontal agreements' are covered under this provision. Horizontal agreements will either be judged by the 'rule of reason' test or be illegal per se.
Agreements entered into between enterprises or associations of enterprises, or persons or associations of persons or enterprises (including cartels) that directly or indirectly determine purchase or sale prices; limit or control production, supply, markets or technical development, investment or provision of services; directly or indirectly result in bid rigging or collusive bidding; or share the market or source of production by way of allocation of geographical area of markets or the type of goods or services or the number of customers in the market are presumed to have an adverse effect on competition and are considered to be per se illegal. There is a presumption that such agreements would have an appreciable adverse effect on competition. However, joint venture agreements are excluded from the category of anti-competitive agreements if they increase efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services.
Tie-in agreements, exclusive supply agreements, exclusive distribution agreements, refusal to deal, and resale price maintenance agreements causing or likely to cause an appreciable adverse effect on competition in India are considered anti-competitive. These types of 'vertical agreement' have been subjected to review by the Competition Commission of India (CCI), which is the regulator under the Competition Act. The provisions relating to anti-competitive agreements do not apply to agreements relating to protection of intellectual property rights or agreements for export of goods.
Abuse of dominant position
An enterprise is said to be dominant if it is able to operate independently of competitive forces prevailing in the relevant market or affect its competitors, consumers or the relevant market in its favour. Abuse of dominant position by an enterprise or a group has been defined in the Competition Act to include directly or indirectly imposing unfair or discriminatory conditions or prices in purchase or sale of goods or services; restricting or limiting production of goods and services, or the market, or limiting technical or scientific development relating to goods or services to the prejudice of consumers; indulging in practices resulting in denial of market access; or using dominance in one market to move into or protect other markets. Certain factors such as market share, the size and resources of enterprise, the size and importance of competitors and the economic power of the enterprise would have to be given due regard by the CCI when determining whether an enterprise enjoys a dominant position.
Regulation of combinations
The Competition Act seeks to regulate 'combinations', including acquisitions, mergers or amalgamations of enterprises. Notifications of combinations are mandatory. Acquisitions of one or more enterprises by one or more persons, or mergers or amalgamations of enterprises, are combinations if they meet the jurisdictional thresholds based on assets and turnover. The Competition Act prohibits enterprises from entering into combinations that cause or are likely to cause an appreciable adverse effect on competition within the relevant market in India. Various factors have been listed that the CCI has to take into account to determine whether a combination will or is likely to have an appreciable adverse impact on competition in India.
Thresholds for parties having assets or turnover in India are different from parties that have assets or turnover within and outside India. A territorial nexus means minimum presence in the Indian market at least of any two globally merging companies. The minimum threshold requirement for determining territorial nexus is assets worth 5 billion rupees in India or turnover worth 15 billion rupees in India from the combined entities. As per the draft Competition Commission of India (Combination) Regulations, each of at least two of the parties to the combination must have assets of 2 billion rupees or a turnover of 6 billion rupees in India.
It will be mandatory for qualifying transactions to notify the CCI within 30 days of executing the merger and acquisition disclosing the details of the proposed combination of a merger or an acquisition, if the said merger or acquisition falls within the threshold limits. As per the Combination Regulations, triggering events are the date of execution of any agreement or documents for acquisition of shares or control, or the last date of approval of the proposed merger or amalgamation by the board of directors of the enterprise concerned. In the case of an acquisition of shares or acquisition of control, the acquirer is required to notify the CCI. In the case of a merger or an amalgamation, all the persons or enterprises to the combination or to the proposed merger or amalgamation are required to jointly notify. Where the CCI acts suo moto, the party to whom the notice has been issued is required to notify the transaction.
The CCI is required to give its decision on the transaction within 210 days, failing which the combination is deemed to be approved. However, as per the Combination Regulations, the CCI may form a prima facie opinion as to the existence of appreciable adverse effect on competition - within 30 days of receipt of the notice if the notice is in Form 1, and within 60 days of receipt of the notice if the notice is in Form 2. Thus, the CCI will not be required to wait for the entire period of 210 days in a situation when it is prima facie of the view that a combination does not have an appreciable effect on competition.
The CCI has been empowered to give its opinion on a reference made to it by the central government or a state government on possible effects of any competition policy (including review of laws related to competition) formulated by the government. It has the power to promote competition advocacy and create awareness and impart training.
Competition Commission of India
The Competition Act seeks to ensure fair competition in India through the CCI. The CCI was made functional with effect from 20 May 2009; Dharendra Kumar is the chairman and there are six other members. The central government has the power to appoint a director-general and other advisers and consultants to assist the CCI in inquiries. KK Sharma is presently the acting director-general.
The CCI has the authority to inquire on its own motion, on information or on a reference made by the central government, the state government or statutory authorities, or upon receiving a complaint. The CCI also has the power to investigate agreements, combinations or abuse of dominant position outside India that have an appreciable adverse effect on competition in India.
If, after an inquiry, the CCI finds that the provisions of the Competition Act are being contravened, it may direct that the agreement or abuse of dominant position or combination should not be given effect, or should be discontinued, or it may impose penalties, direct an amendment to an agreement or combination, or make recommendations to the central government.
The Competition Act provides for imposition of hefty penalties in cases of contraventions. If, after inquiry, the CCI is of the opinion that any enterprise has abused its dominant position, or that any agreement is an anti-competitive agreement within the meaning of the Competition Act, it may, inter alia, impose a penalty of up to 10 per cent of the average turnover for the past three financial years. In cases of cartels, the CCI may impose on each member a penalty of up to three times its profit for each year of the duration of the cartel. The CCI may also impose a lesser penalty, inter alia, in case a member of a cartel has made full and true disclosures in respect of the alleged contraventions, and such disclosures are vital. The Competition Commission (Lesser Penalty) Regulations 2009, which were published by the government on 13 August 2009, contain regulations for imposing lesser penalties. Entities that fail to notify a qualifying combination to the CCI could face penalties that may extend to 1 per cent of the total turnover or the assets of the combination, whichever is higher. The Competition Act also empowers the CCI to impose fines that may reach up to 100,000 rupees for each day of non-compliance with the directions or orders issued by the CCI, subject to a maximum of 100 million rupees. Further, if the orders or directions of the CCI are not complied with, or there is a failure to pay the fine imposed, the CCI can order imprisonment for a term of up to three years, or a fine of up to 250 million rupees.
The Competition Act also provides for establishment of a three-member quasi-judicial body, the Competition Appellate Tribunal (CAT), to hear and dispose of appeals against any directions or orders passed by the CCI. CAT was established with effect from 15 May 2009, with its headquarters based at Delhi. The appeals from CAT will lie to the Supreme Court of India.
The CCI has initiated a number of inquiries in matters relating to anti-competitive agreements and abuse of dominant position, the first complaint being filed by the Multiplex Association of India against the forum of film producers and distributors on the day the CCI became operational. The complaint was filed alleging, inter alia, that the film producers and distributors had formed a cartel and were involved in anti-competitive practices by stopping the release of films in the multiplexes. The matter is currently pending with the CCI.
The code-sharing agreement between Kingfisher airlines and Jet Airways is also being investigated into by the CCI after a complaint was made by a passenger in this regard. Kingfisher and Jet Airways had entered into a code-sharing agreement in 2008 for minimising losses. It is alleged that the arrangement between the two airlines amounts to formation of a cartel and may also be an abuse of dominant position as both airlines together control about 60 per cent of the market share.
Direct-to-home (DTH) service providers are also in the CCI's sights. The acting director-general has stated in its report to the CCI that the DTH service providers have not adhered to the norms specified by Telecom Regulatory Authority of India (TRAI) for interoperability of the set-top boxes, which would allow consumers to shift from one service provider to another without having to purchase a new set-top box. The director-general has noted that the DTH service providers have violated provisions of the Competition Act relating to anti-competitive agreements and abuse of dominant position.
CAT has also received its first appeal against an order of the CCI. Steel Authority of India Limited (SAIL) filed the appeal. The CCI had ordered an investigation into the agreement between SAIL and Indian Railways relating to an exclusive supply agreement for supply of rails. As alleged in the complaint, the agreement was anti-competitive because it has or will have an appreciable adverse effect on competition in India, as it would impact the right of other steel manufacturers and suppliers. In view of the fact that CAT had issued notices of admission to SAIL, CAT has ordered that the notice issued by the director-general to SAIL should not be given effect without the leave of CAT. Earlier, the director-general had directed SAIL to furnish information within a week, which was challenged by SAIL in CAT.
CAT is also looking into matters that were transferred to it from the MRTP Commission, which was set up under the Monopolies and Restrictive Trade Practices Act 1969 (the MRTP Act). The president of India promulgated the Competition (Amendment) Ordinance 2009, with effect from 14 October 2009. The Ordinance has amended section 66 of the Competition Act, which provided for the Monopolies and Restrictive Trade Practices Commission (the MRTP Commission) to exercise jurisdiction for a period of two years in respect of cases or proceedings filed before the commencement of the Competition Act. The MRTP Commission was established under the MRTP Act, which was the first substantive legislation in India aimed at regulating free and unfettered trade. With effect from 14 October 2009, all cases pending before the MRTP Commission stand transferred to CAT. So far, CAT has disposed of more than 80 cases that were pending before the MRTP Commission.
The Companies Act
The Companies Act 1956 regulates issues concerning transfer of shares along with mergers and amalgamations. These provisions relating to transfer of shares were originally a part of the MRTP Act and were incorporated into the Companies Act in 1991.
The Companies Act restricts acquisition of equity shares of a public company, or a private company that is a subsidiary of a public company, by certain classes of persons in excess of 25 per cent (including any previous share holding, if any) of the paid-up equity capital of the company. Acquisitions that exceed the threshold require prior approval of the central government.
In addition, the Companies Act restricts transfer of shares of a company by a body or bodies corporate under the same management that holds in aggregate 10 per cent or more of the nominal value of the subscribed equity share capital of the company. Transfers that exceed the threshold require notification to the central government. The Companies Act also restricts the transfer of shares of a foreign company, having an established place of business in India. Bodies corporate that hold 10 per cent or more of the nominal value of the equity-share capital of such companies require approval of the central government prior to transferring any shares in such companies to an Indian citizen or a body corporate incorporated in India. The central government may direct that a transfer or acquisition should not be given effect if it is satisfied that as a result of such transfer a change in the controlling interest of the company is likely to take place, and that such change would be prejudicial to the interest of the company or to the public interest. The above restrictions relating to transfer of shares would apply only if the acquirer of the shares is a dominant undertaking, or would become one by virtue of the acquisition or, in case of transfer of shares, the transferor is a dominant undertaking. Dominance means a 25 per cent or more share in the relevant market in the production, supply, distribution or control of the total goods that are produced, supplied, distributed or controlled in India or a substantial part thereof; or the provision or control of any services that are provided in India or any substantial part thereof. These provisions, however, do not apply to government companies, statutory corporations or financial institutions.
Failure to comply with the provisions may attract penalties, which may extend to imprisonment for up to three years or a fine of up to 50,000 rupees, or both. The Companies Act also governs matters relating to a compromise or arrangement between an Indian company and its creditors or shareholders, or an amalgamation of two or more Indian companies. Such a compromise or arrangement must be sanctioned by the High Court possessing jurisdiction in the matter.
In matters relating to acquisition of shares of a listed company, the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 1997 (the Takeover Code) are also applicable.