India: Abuse of Dominance

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The Competition Act, 2002 (the Act) is the principal legislation dealing with competition law in India. Despite having been enacted in 2002, the substantive provisions of the Act were only partly brought into force on 20 May 2009. The Act deals with three substantive aspects: the prohibition of anti-competitive agreements, the prohibition of abuse of dominance and the regulation of combinations (merger control).

Section 4 of the Act is the substantive provision dealing with abuse of dominance. The Competition Commission of India (CCI), which despite its relatively short tenure has proven to be a proactive regulator, has imposed several headline fines for abusive conduct by enterprises.¹

Legal framework under the Act

Abuse of dominance or unilateral conduct refers to the conduct of an enterprise that holds sufficient market power in a particular relevant market, such that it can operate independently of market forces and the competitive constraints imposed by its competitors. In keeping with the objective to promote free markets and the freedom of trade and business of enterprises and individuals, the Act does not prohibit any enterprise from actually holding a position of dominance or having substantial market power. However, what is sought to be restricted by the Act is the abuse of such market power or dominance, which would have a detrimental effect not only on competitors, but most importantly, the consumer.

The outlook under the erstwhile Monopolies and Restrictive Trade Practices Act, 1969 (the MRTP Act), however, reflected the old position, requiring large enterprises (which had a presence in excess of prescribed thresholds) to register with the Monopolies and Restrictive Trade Commission. In enacting the Act and repealing the MRTP Act, competition law in India has made significant progress to reflect the more reasoned approach of ‘big is not bad’. The Act prohibits particular types of abusive conduct by dominant enterprises, and enumerates several factors that can be used to determine dominance.

Section 4 of the Act prohibits the abuse of dominance by any enterprise or group² of enterprises.³ The Act prescribes a three-step test for the determination of abuse of dominance:

defining the relevant market;
assessing dominance in the relevant market; and
establishing abuse of dominance.

Each of the above steps is key to establishing liability under section 4 of the Act.

Defining the relevant market

The dominance of an enterprise is always determined with respect to a particular relevant market. The concept of the ‘relevant market’ is critical to competition law, and in the case of an abuse of dominance investigation, sets the parameters for the determination of ‘dominance’.

The relevant market is determined on the basis of relevant product or service market and relevant geographic market. The relevant product market is defined as all those products or services which are regarded as interchangeable or substitutable by the consumer, on the basis of product characteristics, prices and end-use. Apart from such demand-side factors, the CCI considers supply-side factors such as switching costs for producers, etc, in defining the relevant product or service market. The relevant geographic market is defined as a market comprising the area in which there exist distinct homogenous competitive conditions in terms of demand and supply of goods or services, which can be distinguished from the conditions prevailing in neighbouring areas.

As such, the breadth of the relevant market definition is an important factor in establishing whether an enterprise is dominant or not. A classic example is the case of real-estate major, DLF Limited in Belaire Owners’ Association v DLF Limited (the DLF case).⁴ The CCI defined the relevant market extremely narrowly to be the market for ‘high-end residential apartments in the city of Gurgaon’. By restricting the product scope and the geography of the relevant market to a particular suburb, the CCI’s decision that DLF was dominant in the relevant market was but a given. In contrast, in the Coca-Cola cases⁵ (which dealt with the alleged abuse of dominance in relation to the sale of its aerated drinks and bottled water at high prices by Coca-Cola in multiplex theatres), the CCI held that Coca-Cola was not dominant, by defining the market to be all multiplex theatres in India, as opposed to any single multiplex theatre, which would no doubt have led to the obvious conclusion that Coca-Cola was dominant.

The CCI has assessed numerous sectors in the four years since Section 4 of the Act was notified, such as real estate, public utilities, stock exchange services, publishing houses, food and beverages, etc. and appears to be moving towards a trend of more substantive analysis, including econometric data. The CCI has also considered several natural monopoly sectors, such as the coal sector as well as the sports sector. As discussed in greater detail below, the CCI seems to have departed from its usual standards in its assessment of sports federations as a natural monopoly, as is demonstrated from the contradictory holdings in Surinder Singh Barmi v Board of Control for Cricket in India and Dhanraj Pillai v Hockey India.

Assessment of dominance

Dominance is defined as the ability of an enterprise to operate independently of market forces and enables it to affect competitors or consumers or the relevant market in its favour.⁶ Under section 19(4) of the Act, the CCI is required to assess dominance on the basis of the following factors:

market share;
size and resources of the enterprise;
market share of competitors;
economic power of the enterprise, including commercial advantages over competitors;
vertical integration of the enterprises or sale or service network of such enterprises;
dependence of consumers on the enterprise;
legal monopoly or dominant position;
entry barriers, including barriers such as regulatory barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high switching costs;
countervailing buyer power;
market structure and size of the market;
social obligations and social costs;
relative advantage, by way of the contribution to the economic development, by the dominant enterprise; or
any other factor that the CCI may consider relevant for the inquiry.

Thus, there is no bright line market share test, unlike as with other jurisdictions, for the determination of dominance under the Act, even though market share is treated as an important indicator. The CCI has considered market share in most cases of abuse of dominance it has reviewed, but has also considered subjective factors such as vertical integration, countervailing buyer power, economic power of the enterprise, entry barriers, statements in the public domain, etc. This is evident from two important orders passed by the CCI relating to abuse of dominance: the MCX Stock Exchange v National Stock Exchange of India Limited⁷ (the NSE case) and the DLF case.

In the NSE case, the CCI held the National Stock Exchange of India Limited (NSE), one of three players in the market for stock exchange services in the currency derivatives segment, to be dominant based on its overall financial strength, strong historical presence in the market for stock exchange services in other segments and vertical integration in the stock market, despite it having a lower market share than MCX, the informant.⁸ In fact, the market structure during the CCI’s investigation demonstrated that NSE was in fact the number-three market player (based on market share), while MCX was the number-one player. The CCI specifically observed that, ‘In the context of Indian law, this indicator does not have to be pegged at any point but has to be considered in conjunction with numerous factors given in section 19(4) of the Act.’

Further, in its assessment of dominance in the DLF case, where the CCI imposed a penalty of 6.3 billion rupees on DLF Limited for having abused its dominance, the CCI took into account various factors other than market share, such as statements issued by DLF Limited in the public domain (relating to its dominance in the market, in its red herring prospectus, annual report, etc), vast amounts of fixed assets and capital, turnover, brand value, strategic relationships, wide sales network, etc.

Therefore, in the context of Indian competition law, the market share of allegedly dominant enterprises is required to be considered in conjunction with numerous factors given in section 19(4) of the Act.

Abusive conduct

Actions that constitute abuse of dominance within the meaning of the Act include:

exclusionary abuses: these include actions or conduct that could result in the exclusion of competitors or new entrants from the relevant market, such as refusal or limitation of supply, denial of market access, etc; and
exploitative abuses: These include the imposition of exploitative conditions to sale of goods or provision of services, such as excessive or predatory pricing, tying and bundling, leveraging, etc.

Both these types of abusive conduct result in harm to the ultimate end-consumer – directly, through exploitative conduct, and indirectly, through exclusionary conduct. Section 4(2) of the Act specifically lists the following types of abusive conduct:

excessive pricing, which is the charging of excessive prices which do not have any reasonable relation to the economic value of the product or service;
predatory pricing, which refers to the charging of prices that are below the cost of production of a good or service⁹ in the short term, in order to eliminate competition and gain market share;
price discrimination between companies or individuals in the same circumstances, not based on objective criteria (such as volume of business);
rebates and discounts, which are not based on objectively quantifiable criteria, such as discounts conditional on the customer obtaining all or most of its products from the dominant enterprise, or loyalty payments to customers who stock only the products of the dominant enterprise, may be considered as loyalty-inducing rebates;
long-term exclusivity agreements having the effect of causing denial of market access to other enterprises in the relevant market;
refusal to supply any input or intermediate goods to a downstream customer resulting in the denial of market access and reduction of competition in the downstream market;
tie-in arrangements, ie, contractually tying the purchase of one product or service to the purchase of another, without the option to purchase each product or service separately, which could raise serious concerns especially in a network industry (software, media, etc); and
leveraging, ie, the use of a dominant position in one market to enter into or protect its position in another relevant market, indicating that the ‘dominance’ and ‘abuse’ of dominance need not be in the same relevant market.¹⁰

Even though the wording of section 4(2) of the Act indicates that abuse of dominance is to be treated as a per se violation of competition law, exclusionary abuses by definition require the demonstration of the effect of exclusion or foreclosure from the market in order to establish the offence. The CCI has effectively brought in an effects-based test through case law by considering the effects on competition, the relevant market and consumers on account of the alleged abusive conduct.

In terms of standard of proof, the CCI stated in one of its earliest orders¹¹ that the informant is not only required to show or establish through reliable material or data that the opposite party has a dominant position in the relevant market but also that it has abused its dominance by indulging in the conduct enumerated under section 4(a) to (e) of the Act. In terms of standard of evidence required to prove dominance, the CCI has relied on publicly available data or industry reports which indicate that the impugned enterprise has a dominant position in the relevant market, as has been held in several of its orders.¹²

Penalties and sanctions for abuse of dominance

The CCI may impose a penalty of up to 10 per cent of the average of the turnover for the last three preceding financial years on an enterprise found to be abusing its dominance.¹³ The Act also envisages group liability for all group companies which facilitated the abuse of dominance as well as personal liability for all persons who were in charge of and responsible for the business conduct of the company.¹⁴ Apart from the imposition of penalties, the CCI is empowered to order the division of dominant enterprises (through various means¹⁵ such as the transfer of property, rights, liabilities or obligations; adjustment of contracts; and formation or winding up of an enterprise, etc).

The CCI has, in a short span of four years, imposed several headline penalties in abuse of dominance investigations, including a penalty of 6.3 billion rupees on DLF Limited in the DLF case¹⁶ and most recently, a penalty of 17.73 billion rupees on Coal India Limited and its subsidiaries in Maharashtra State Power Generation Limited v Coal India Limited and Others (the Coal India case).¹⁷ At the same time, the CCI is also actively undertaking advocacy efforts to popularise competition compliance and the institution of competition compliance policies by Indian business houses.

It should be noted that the Act empowers the Competition Appellate Tribunal (COMPAT), the appellate authority established under the Act, to adjudicate claims for compensation that may arise pursuant to an order of the CCI or COMPAT finding violations of the Act. There have not been any claims for compensation raised before the COMPAT thus far.

Recent case law relating to abuse of dominance

The CCI’s analysis of predatory pricing and leveraging on the basis of a complaint by MCX Stock Exchange Limited (MCX) against the largest stock exchange in India, the NSE case,¹⁸ was one of the first significant cases relating to abuse of dominance. The CCI’s assessment of pricing strategy in the currency derivatives segment (CD segment) led to the conclusion that NSE’s zero pricing policy amounted to ‘unfair pricing’,¹⁹ a new variant to the predatory pricing concept. The CCI also held that NSE was leveraging its power in other segments of the stock exchange, where it is an established player, in order to strengthen its position in the CD segment. The CCI’s finding of abuse of dominance and penalty²⁰ is currently under appeal before the COMPAT.

The DLF case was another significant decision from the CCI, made early on, which imposed a headline penalty and gave rise to several complaints against real estate companies and an investigation into the real estate sector. The CCI found DLF to be abusing its dominance in relation to the ostensibly unilateral terms and conditions of the apartment purchase contracts, on the basis of a complaint filed by the apartment owners’ association.²¹ The CCI held that the conduct of DLF in arbitrarily changing the terms and conditions of the apartment purchase agreements was unfair and, owing to the lack of countervailing buyer power and its position of dominance, its conduct amounts to an abuse of dominance. While the issue in the matter could also be characterised as a consumer complaint, the CCI brought competition concerns to the fore by imposing the highest penalty it had ever imposed at the time.²² The matter was appealed by DLF before the COMPAT, which recently ruled that the CCI should review and propose modifications to the apartment purchase agreements.²³

While the CCI’s orders were initially not very comprehensive, this trend is slowly changing. As the competition law regime evolves, the CCI is beginning to incorporate (limited) economic analysis into its assessment, by considering various demand-side and supply-side factors in order to determine the scope of the relevant market.²⁴ The CCI has also dealt with the issue of legal and natural monopolies in the railways sector²⁵ and in professional sporting leagues.²⁶ In the first case, the CCI noted that a long-term exclusive contract for the purchase of rails of a particular specification from a government controlled monopoly supplier of rails to the Indian Railways did not amount to an abuse of dominance. The CCI held that the exclusive supply contract did not create entry barriers or foreclose competitors (such as the informant) from entering into the market for rails, on account of the fact that the contract was open-ended and subject to regular price review, with the objective of ensuring regular supply. In relation to professional sporting leagues, the CCI reviewed the conduct of the Board for Control of Cricket in India (BCCI) in organising the Indian Premier League (IPL), a private professional cricket league, specifically in relation to the manner in which media rights, franchise rights and other rights were awarded by the BCCI at the time of establishing the IPL. This was the first time that the CCI has examined the sports sector.²⁷ The CCI (in the majority order) held that the BCCI has allegedly denied access to the market for organisation of private professional cricket in India by undertaking to third parties (by virtue of a clause in the media rights agreement for IPL) to not organise, sanction or support any other professional domestic Indian Twenty-20 league, and it imposed a penalty for abuse of dominance by the BCCI.²⁸Interestingly, the CCI order does not throw light on whether the grant of various rights (which was the actual scope of investigation conducted by the director general’s office) by the BCCI resulted in abuse of dominant position. It is important to note that the one member wrote a separate dissent order wherein the BCCI was found not guilty of abuse of a dominant position. The case is currently under appeal before the COMPAT.

In contrast, the CCI’s ruling in Dhanraj Pillai v Hockey India (Hockey India case) on substantially similar facts, absolved Hockey India, the hockey federation, of abuse of dominance. The CCI examined Hockey India’s conduct with respect to, first, precluding other competing private professional hockey leagues from entering the market, on account of its rules relating to the sanctioning of events; and secondly, restricting hockey players from participating in unsanctioned hockey events, which included disqualification from the national team for such participation. Even though the CCI determined that Hockey India was dominant in the relevant market for ‘the organisation of private professional hockey leagues in India’, the CCI used an effects-based approach to absolve Hockey India of having abused its dominance, as there was no substantive evidence to demonstrate that Hockey India was, in fact, restricting both hockey players and rival hockey leagues (especially given that the rival hockey league in question had never approached it for sanction). The CCI also went so far as to state that the restrictive conditions imposed on hockey players were ‘intrinsic and proportionate’ to Hockey India’s objectives and therefore did not amount to an abuse of dominance. The BCCI case, though decided prior to the Hockey India case by a few months, surprisingly lacks such analysis and balancing of rights.

The Coal India case has once again brought competition compliance to the fore, on account of the magnitude of the penalty imposed.²⁹ The CCI’s analysis showed that Coal India and its subsidiaries barely faced any competition in the market for the supply of non-coking coal for thermal power generation in India, with a market share of approximately 70 per cent, as well as several advantages vested by law, on account of Coal India’s status as a public sector undertaking (PSU). The abusive conduct in this instance was the imposition of one-sided and unfair conditions in relation to the supply of coal to power companies, without any scope for bilateral discussion, as well as the imposition of discriminatory conditions between PSU and private power companies. In addition to imposing a penalty, the CCI ordered that the fuel supply agreements be modified in consultation with all stakeholders. This decision is not only notable for the quantum of penalty imposed by the CCI (which is the highest ever, to date), but also because this is the first instance of a PSU – ie, a government-owned enterprise – being implicated for abuse of dominance under the Act.

Conclusion: the way forward

The introduction of the concept of collective dominance in section 4 of the Act by way of an amendment is likely to be brought about in the near future. The Competition Amendment Bill, 2012 is currently tabled before the Parliament of India.³⁰ The introduction of collective dominance will widen the scope of the CCI’s powers to investigate into possible abusive conduct of enterprises, as enterprises which may not be individually considered dominant may now come under scrutiny as a group. As is evident from the precedents, the CCI’s evidentiary standards for proving the dominance and the abusive conduct require some fine-tuning and clarification, particularly in its delineation of the relevant market and application of predatory pricing. As competition jurisprudence in India evolves, it is expected that the CCI will rely on internationally accepted principles of competition law and focus on reasoned orders, as well as establish penalty guidelines, to ensure that its decisions are premised both, on the law and tenets of natural justice.

The authors would like to acknowledge the contribution of Bharat Budholia, senior associate, and Shruti Aji Murali, associate, in the firm’s Mumbai competition law practice.

Notes

Enterprise is defined as:
...a person or a department of the Government, who or which is, or has been, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services, of any kind, or in investment, or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, either directly or through one or more of its units or divisions or subsidiaries, whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or at different places, but does not include any activity of the Government relatable to the sovereign functions of the Government including all activities carried on by the departments of the Central Government dealing with atomic energy, currency, defence and space.
‘Group’ under the Act, read with the notification of the Ministry of Corporate Affairs dated 4 March 2011, has been defined to mean two or more enterprises which, directly or indirectly, are in a position to
exercise 50 per cent or more of the voting rights in the other enterprise; or
appoint more than 50 per cent of the members of the board of directors in the other enterprise; or
control the management or affairs of the other enterprise.
In M/s Kansan News Private Limited v M/s Fastway Transmission Private Limited and Others (Case No. 36/2011), the CCI considered abuse of dominance by a group of enterprises. The CCI noted that all the opposite parties were related enterprises and formed part of the same ‘group’ in terms of section 5 of the Act. Therefore, the CCI considered the collective market shares and economic resources of the five opposite parties in determining that the opposite parties had abused their dominance. A penalty of 80 million rupees was imposed on the dominant enterprises, which amounted to 6 per cent of their average turnover from 2009–2011.
The concept of ‘collective dominance’, ie, dominance exercised by enterprises which do not have structural links to one another (ie, they do not satisfy the test for ‘group’ under the Act) does not yet exist under the Act but is proposed to be introduced by way of the Competition Amendment Bill, 2012 currently pending before the Parliament of India. However, parallel conduct by several enterprises in a particular market having appreciable adverse effect on competition would be covered under the provisions of section 3(3) of the Act, which prohibits cartelisation.
Case No. 19/2010.
Consumers Guidance Society v Hindustan Coca-Cola Beverages Private Limited (UTPE 99/2009) and M/s Cine Prekshakula Viniyoga Darula Sangh v Hindustan Coca-Cola Beverages Private Limited (RTPE 16/2009).
Explanation (a) to section 4(2) of the Act.
Case No. 13/2009.
Under section 19 of the Act, any person or enterprise may file an ‘information’ with the CCI, bringing to light instances of potential cartelisation or abuse of dominance.
The CCI has also prescribed guidelines for the computation of cost known as the Competition Commission of India (Determination of Cost of Production) Regulations, 2009 (Cost Regulations), for the purposes of predatory pricing analysis. In order to establish that predatory pricing has taken place, the competition regulator is required to determine the cost of production of a particular product or service and establish that such product or service was priced below cost. Accordingly, various alternate cost measures are used, such as average variable cost, long run average incremental cost, average avoidable cost, etc, depending on the specific sector being investigated (for instance, cost of production in a manufacturing industry has different components from that in a service industry or technology-based industry). The Cost Regulations prescribe that average variable cost be used as the default cost proxy.
The CCI adopted this stance in the NSE case.
Shri Sanwar Mal Agarwal v Punjab National Bank, (Case No.08/2010); See also Cinergy Picture Ltd v ETC Network Ltd, (Case No. 2/2010) where the CCI dismissed the complaint on account of the failure of the complainant, Cinergy Picture Private Limited to establish that the opposite party was in a dominant position in the relevant market (broadcast and television entertainment) and to furnish concrete material in relation to unfair or discriminatory conditions imposed by the opposite party.
See Rupesh Sarabhai Patel v The Oriental Insurance Company (Case No. 53/2010), M/s Best Xerox Centre v Xerox Modi India Limited (Case No. 57/2010).
Section 27(b) of the Act.
Section 48(1) of the Act.
Section 28 of the Act.
This amounted to 7 per cent of DLF’s average turnover for the financial years 2008–2009, 2009–2010 and 2010–2011.
Case No. 3/2012. This amount to merely 3 per cent of the average turnover of Coal India and its subsidiaries for the financial years 2009–2010, 2010–2011 and 2011–2012.
MCX Stock Exchange Limited v National Stock Exchange of India Limited (Case No. 13/2009).
It was alleged that the waiver of any transaction costs (such as admission fee, transaction fee, data feed service charge, free market watch software, lowering of cash deposit requirements imposed on members, etc), specifically in the CD segment of its operations, was aimed at making it impossible for MCX, a new entrant into the CD segment, to operate using these revenue streams. Further, it was alleged that the opposite parties had intentionally not facilitated compatibility between ODIN (a market watch software developed by one of the promoter companies of MCX) and NOW (a substitute market watch software developed by a group company of NSE), as a result of which traders in the currency derivatives segment would not be able to monitor multiple segments simultaneously on the MCX stock exchange and the NSE.
A penalty of 555 million rupees, amounting to 5 per cent of the turnover of NSE, was imposed. NSE instituted a price for its CD segment before going on appeal to the COMPAT.
Belaire Owners’ Association v DLF Limited (Case No. 19/2010).
A penalty of 6,300 million rupees, amounting to 7 per cent of the turnover of DLF, was imposed.
The CCI passed a supplementary order proposing such modifications on 3 January 2013, in respect of the agreements relating to DLF’s Belaire property (which was the subject matter of Case No. 19/2010). DLF has appealed the CCI’s supplementary order before the COMPAT.
Prints India v Springer India Private Limited (Case No. 16/2010).
Jindal Steel and Power Company v Steel Authority of India (Case No. 11/2009). The matter is currently under appeal before the COMPAT.
Surinder Singh Barmi v Board for Control of Cricket in India (Case No. 61/2010).
The authors have represented the BCCI before the CCI and are currently representing the BCCI before the COMPAT.
A penalty of 522.4 million rupees, amounting to 6 per cent of the average turnover of the BCCI from 2007 to 2010.
17.73 billion rupees, which amounts to 3 per cent of the turnover of Coal India and its subsidiaries for the financial years 2009–2010, 2010–2011 and 2011–2012.
The Competition Amendment Bill, 2012, was introduced in the Lower House of the Indian Parliament on 10 December 2012. As of the Winter Session 2013 (which ended on 20 December), it is still pending the House’s approval.