Small Time Cartels: The Robin Hood We Need?

“If competition law is about one thing above all, it is the detection and punishment of hardcore cartels.”^[3]

Introduction: A Brief Overview

As per Section 2(c) of the Competition Act, 2002 (“the Act”) a “cartel” is as “an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price, or, trade in goods or provision of services”. The Act treats any cartel, a due sub-set of horizontal agreements under Section 3(3) with a strict presumption of causing Appreciable Adverse Effect on Competition (“AAEC”). Thus, in other words, the per se rule of illegality is applied which finds an explicit mention in the Raghavan Committee Report[4]. Albeit the Competition Commission of India (“CCI”) may consider both the pro-competitive and anti-competitive effects of the cartel, the rule of current law is that cartel carries a stronger presumption of illegality which can only be rebutted on the satisfaction of the CCI, by means of factors enumerated under Section 19(3). However, the balanced view as portrayed is shattered by bare perusal of the current Indian competition law regime, which leaves little or no room for subjective evaluation of the pro-competitive effects of a given cartel.

Thus, it is quite intriguing to explore the dynamic nature of subject-matter of cartel and in the current article the authors shall particularly focus on the need for differential treatment to be meted to the Small and Medium Enterprises (“SMEs”) cartels in India, by also drawing comparison from the international counterparts.

Indian Competition Regime: The Status Quo

Having a well-established jurisprudence on competition and antitrust, the Act as well as judicial precedents have made no qualms about its applicability to business entities irrespective of their financial stature, size or reputation. Giants in their respective businesses like Amazon, Facebook and Google have often been parties before the CCI justifying their business ventures. While analysing vertical agreements, the size of a business entity has been of extreme relevance, however, notably the same does not apply in the case of horizontal agreements. While an entity with 1% market share may be exempted from liability with respect to entering into a vertical agreement, the same does not stand true when it comes to horizontal agreements.

The primal reason for this difference of treatment is the rule which is made applicable by the CCI for horizontal agreements. While vertical agreements are subjected to the rule of reason (based on the standard of “balance of probabilities” proof test), horizontal agreements as mentioned above are subjected to the per se rule. As per rule of reason, every vertical agreement has to be evaluated on the basis of factors mentioned under Section 19(3) of the Act to see whether the agreement is causing an appreciable adverse effect on competition. If the CCI concludes that the said agreement is contributing efficiencies to the relevant market and is pro-competitive in nature, the parties of the agreement escape any kind of liability. In most cases, size of the parties involved and the market share that they have, play a major role as smaller the size, the lesser chance of it adversely affecting the competition. In fact, SMEs forming a vertical agreement to counter the dominance of major players in the market often improve the competition in any country as it breaks the monopolistic structure prevailing in the relevant market. While, on the other hand, due to the per se rule it is presumed that a horizontal agreement, irrespective of the size of the parties involved, has an AAEC. While it may be argued that it merely is a presumption which can always be rebutted, the CCI has refused to analyse the effects of such a cartel in helping the market, holding it illegal on the basis of it being a horizontal agreement itself.

It was held by the CCI in South Eastern Railway West Bengal v. Hindustan Composites Ltd.[5] that,

A bare reading of the provisions of Section 3(1) of the Act shows that these provisions not only proscribe the agreements which cause AAEC but the same also forbid the agreements which are likely to cause AAEC. Hence, the plea that there is no contravention of the provisions of the Act in the present matter because allegedly no AAEC has been caused as a result of the alleged cartel between the parties, is misdirected and untenable in the face of clear legislative intent whereby even the conduct which can potentially cause AAEC, is prohibited.

In this case, the opposite parties had argued that the relevant market was in the form of monopsony (where there was a single buyer and multiple sellers), hence, even if an agreement existed between the sellers, it did not cause any AAEC and hence, could be overlooked.

Critique of the Indian Application of Law

While the rationale given by the CCI is appreciated, the CCI has unfortunately avoided to appreciate scenarios where SMEs cartelising and entering into horizontal agreements against dominant entities may actually end up helping the market just like vertical agreements.

Hypothetically, in a scenario where a telecom company has 75% of relevant market share, its smaller competitors coming together and forming a horizontal agreement and reducing its market share is not only beneficial from a competition point of view but also arguably avoids creating a monopolistic structure. Granted that irrespective of market share, one entity may or may not be abusive of its position as that needs to be evaluated via factors mentioned in Section 19, however, a large market share does guarantee the entity a “market leader” position in the market where the leader is bound to be the one who sets the course of how business is to be run in that market. The smaller competitors via sharing of resources may end this stronghold and offer services which are better than the dominant entity and hence, as an end result end up being beneficial for the consumers which is the ultimate objective of the Act. The major arguments which have been made against dominant entities in a situation like this is an unlimited source of revenue, which leads to predatory pricing and ousting competitors from the market. The smaller rival companies by coming together can ensure that they can match the prices of the dominant entity and stay in business and hence offer more options to the consumers.

A very pertinent example over here is the telecom industry itself. Post the introduction of Reliance Jio and its deep pockets into the telecom market, smaller players in the market were directly ousted as they were unable to match the prices and services offered by Jio. Moreover, even entities having a sizeable share previously like Idea and Vodafone were forced to come together as a single entity just so they could stay in the market. Reliance Jio as per September, 2020 now has 52.3% of the overall market share.

Considering the above arguments, the SMEs entering into horizontal agreements may sound attractive, however it comes with its own perils as well as the parties may get used to CCI and State coming to its rescue in such scenarios and find new ways to bypass the system. The CCI thus may alternatively limit the duration of such agreements to “short-term agreements only” to balance things out. While the doctrine of parens patriae is usually used to refer to the State’s power to intervene against an abusive parent with respect to family law, applying the same principle, i.e. the CCI intervening in matters where the smaller players are competing against a hugely dominant entity in the same relevant market, the CCI by allowing them to enter into such short-term horizontal agreements to sustain in the market and offer better services to the consumers is certainly an idea that needs to be explored. The CCI by actually analysing the competitive effects of the horizontal agreement in question without outrightly rejecting it might be a good start. The CCI has even failed to observe so far that in a case of a cartel, smaller entities are often forced to follow the market leader to sustain them in the market. In such a scenario, whether the smaller entities that barely have any share in the market deserve to be held liable for partaking in such an agreement is a question that needs to be looked upon.

Plugging the Loopholes: International Law Scenario

On the basis of the aforementioned arguments, SMEs cartels may prove to be instrumental in preserving and promoting competition in the market. Moreover, the grant of exemption/immunity to SMEs cartels has been employed by various other anti-trust regimes.

Germany

The most pertinent example that can be cited is Germany. Albeit German anti-trust law namely the Act against Restraints of Competition[6] (“the German Act”) comes down heavily on the cartelisation and related anti-competitive practices; the Act carves out a few exemptions particularly with respect to SMEs. By virtue of a combined reading of Section 2 and 3 of the German Act, SMEs cartels are exempted provided these cartels point towards rationalisation of economic activities and thereby propel the production or distribution of goods or advance the technical or economic progress without hampering the consumer welfare. Thus, to gain shelter under this exemption, the SMEs cartels should affirmatively be involved in fostering the competition.

Japan and Australia

Likewise, due to the lack of parity between the bigger players and the smaller players in the market, there is a need to shield the smaller parties due to their underlying advantage to foster the competitive and economic spirit in the market. Further, the Japanese and Australian anti-trust legislations endeavour to provide exemption or sort for the small players who may be involved in concerted activities for means of survival in the market.

The Japanese Act namely Anti-Monopoly Act [7](“the Japanese Act”), under Chapter IV, enunciates the exemption to co-operative unions or federations governed under the specified Acts mentioned, one of them being, Small and Medium-Sized Enterprise Cooperatives Act[8]. Additionally, these unions must positively fulfil the criteria under Act such as equal voting rights to the members, mutual support to the prevailing SMEs, inter alia. Thus, this legislation highlights the merits of co-operative unions or federations formed by the SMEs which counter the competitive forces by the larger enterprises. However, this collaboration between SMEs shall be subject to the condition that these collaborations do not result in hampering the competition or such other restrictive effects on the competitive elements of the market.

Moreover, in Australia, there is a statutory requirement under the Competition and Consumer Act, 2010[9] for notification and approval from the Australian Competition and Consumer Commission (“ACCC”) regarding the agreement for collective bargaining between SMEs. Therefore, SMEs cartels are not deemed as anti-competitive instead as a pre-requisite feature; the ACCC has been granted with an element of subjectivity for assessing the cartel.

India: Turning Over a New Leaf

Even in India, the report of Raghavan Committee Report [10]recognised the significance of small and medium scale industries in developing the market and referred to the practice adopted in Germany under the aforementioned German Act[11]. The Raghavan Committee Report recommended introducing similar practice to bridge the yawning gap between the small sectors and their larger counterparts to improve the market economy in India. However, the Raghavan Committee Report was quick to point out that such an exemption should not indulge in making the small market players complacent by providing the exemption rather these exemptions should be moulded to propel healthy competition. Further the Supreme Court in Rajasthan Cylinders and Containers Ltd. v. Union of India[12] has implied modification of the traditional approach of determining the AAEC under the Act. It states that the AAEC may not always be presumed for cartels as there is a possibility of parallel behaviour between the players due to the market conditions, inter alia. Therefore, the Supreme Court gave a hint towards the need to bring in subjective assessment as per the prevailing facts and circumstances at that given point. Besides the CCI in Neeraj Malhotra v. Deustche Post Bank Home Finance Ltd. (Deustche Bank)[13] has signified the dilution of per se rule under Section 3(3) of the Act.

Further, the aforementioned international provisions give a very case-specific characteristic for the determination of anti-competitive or pro-competitive nature of agreements between SMEs. It cannot be objectively determined but there is rather a need for subjective evaluation by the anti-trust regulators. Thus, the natural consequence becomes to introduce rule of reason as opposed to per se rule in such cases. These co-operation agreements/cartels can be formed for myriad reasons ranging from sharing transport costs, advertisement costs, research, inter alia, which essentially improve the efficiency of the SMEs and thereby move towards creating an equilibrium with the larger players of the market. Moreover, another point to be noticed is that though the exemptions for SMEs cartels are provided, these exemptions assert an explicit embargo against agreements regarding price, rebates or such related factors and thus, shield the competitive forces of the market.

Conclusion and Recommendations/Suggestions

The International Monetary Fund (“IMF”) in 2019 donned India with the tag of the “World’s fastest growing major economy.” Overtaking France and England, it also became the world’s fifth largest economy[14] as per 2019 IMF reports. Shedding its License Raj tag, it also has grown leaps and bounds in the “ease of doing business” ranking and is perched at a high 63 from a total of 190 economies all around the world. This, along with monumental policy changes, have inspired a slew of investments and acquisitions in India.

While the hugely popular Walmart group has acquired a majority stake in a popular e-commerce platform like Flipkart, other bigwigs like Amazon have made no qualms about investing billions of dollars in India. With the likes of even Google planning to invest billions in India, it is only a matter of time, that the world’s largest business entities turn their head towards India as their new business market. Even in terms of Indian companies, a giant in its own right, i.e. Reliance is being invested in by social media tycoons, i.e. Facebook.

While this certainly bodes well for the country, a word of caution has to be spread with respect to it killing competition in India. India’s Trade Minister, Piyush Goyal minced no words on Amazon’s investments in India and expressed similar concerns. “How can a marketplace make such a big loss, unless they are indulging in predatory pricing or some unfair trade practices? These are the real questions that need answers”[15], he said, with reference to Amazon facing losses but still managing to remain a dominant entity in its market.

The authors also share a similar concern throughout the article and argue that in short term, the giants in the market may appear to be the messiahs of the common public with dirt-cheap prices and services. But in the longer run, they would only oust the start-ups and the SMEs with their seemingly unlimited wealth and disproportionate bargaining power. To counter such scenarios, if the CCI were to merely adopt the more lenient rule of reason to analyse and judge the effects of small-time cartels rather than the sharp per se rule, this scenario would arguably balance the scales. Moreover, the Act may be amended itself with it providing immunity to SMEs from a Section 3(3) violation, albeit for a limited period of time. While defining what qualifies as an SME or to what degree such protection can be given to these entities, or what should be the duration of such protection, are questions that need a humungous amount of analysis and careful consideration and inspiration may be taken from countries like Germany, Japan and Australia.

Additionally, the authors also recommend an independent economic and market study body, which may be formulated under the Central Government with its duties especially being identifying market areas and sectors where a special approach must be taken to safeguard the competition. Any modifications made to any rule may only be limited to sectors where there’s an extreme and an absolute necessity for the government to intervene so as to preserve the interests of the consumers. It has to be noted that the government has treaded on this path before while granting immunity to “Vessel Sharing Agreements” from Section 3 proceedings as it was argued that apart from increasing the efficiency of services, Vessel Sharing Agreements also resulted in greater participation by small and medium shipping companies leading to increased competition in the industry[16]. A similar action or rule based on extensive market-based research will go a long way in promoting practices of healthy competition while safeguarding the interests of the consumer in the long run.

[1] Student, 5th Year BA.LLB, ILS Law College, Pune

[2] Student, 5th Year BA.LLB, Symbiosis Law School, Pune

[3] Richard Whish and David Bailey, Competition Law, 514 (6th edn., 2008).

[4] http://www.scconline.com/DocumentLink/6LY74mL5

[5] 2020 SCC OnLine CCI 28.

[6] http://www.gesetze-im-internet.de/englisch_gwb/englisch_gwb.html#p0018

[7] https://www.jftc.go.jp/en/legislation_gls/amended_ama09/amended_ama15_01.html

[8] http://www.cas.go.jp/jp/seisaku/hourei/data/smeca.pdf

[9] https://www.legislation.gov.au/Details/C2020C00264

[10] http://www.scconline.com/DocumentLink/6LY74mL5

[11] http://www.gesetze-im-internet.de/englisch_gwb/englisch_gwb.html#p0018

[12] 2018 SCC OnLine SC 1718.