CARTELS - ANALYSIS OF DRAFT COMPETITION (AMENDMENT) BILL, 2020
Updated: May 10, 2020
This post has been authored by Masira Shaikh and Srija Naskar. Masira is a B.L.S. LL.B candidate at Government Law College, Mumbai. Srija is a B.A.LL.B (Hons.) candidate at the West Bengal National University of Juridical Sciences, Kolkata.
The Competition Law Review Committee (“Committee Report”) submitted to the MCA in August 2019, a set of recommendations to amend certain provisions of the Competition Act, 2002 (“the Act”). Section 2(c) of the Act defines a ‘cartel’, making no reference to buyers, which further builds that “buyers’ cartel” is also beyond the ambit of the current definition. The Draft Competition Amendment Bill, 2020 (“Amendment Bill”) addresses this issue and this is the subject-matter of this post.
The Amendment Bill takes cognizance of the aforementioned lacuna in the existing definition of ‘cartel’ and proposes to fill the gap. Further, the inclusion of other cartels that have been kept outside has also been recommended by the Committee Report.
A growing amount of literature postulates that buyers' cartel has an equal potential to harm the economic efficiency in a manner similar to the effects of seller-power and is a mirror image of it, therefore the treatment enjoyed by both must be symmetric.[i] In spite of this, it has not received requisite attention in the traditional antitrust framework of India as opposed to the practice in the European Union (“EU”) or the United States of America (“US”). Following Section 1 of the Sherman Antitrust Act, 1890 which broadly declares those agreements to be illegal, that unreasonably restrain trade, the courts in the US entertain the possibility of buyers’ cartel. Hence, they are subject to and assessed in accordance with the ‘per se’ approach under the ‘rule of reason’. Under the EU, an 'objects versus effects' approach is followed. This approach dictates, if the object or effects of any agreement leads to Appreciable Adverse Effect on Competition (“AAEC”), then they are deemed to be illegal.[ii]
Regardless of the explicit absence of the term ‘buyers’ in the definition of a cartel as per Section 2(c) of the Act, certain decisional practice of the CCI indicate an implication to the inclusion of the term under Section 3 of the Act. In Pandrol Rahee Technologies Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd. & Ors.,[iii] some allegations had come up against the buyers of the rail fastening system who had resorted to anti-competitive practices. They had adopted means like awarding tender on a single source basis, thereby foreclosing further competition and restraining trade. Despite this, the CCI refrained from making any finding of infringement, observing that the definition of the term ‘trade’ in Section 2(x) relates to ‘production, supply, distribution, storage or control of goods’ and does not include any form of ‘acquisition’, therefore implying that a consumer’s purchasing activity is beyond the scope of Section 3(3). Before departing from this judgment, it is important to note that the Commission took cognizance of the fact that there could be competition concerns in rare cases where a monopoly buyer exercises the option in an anti-competitive manner. Over the course of time, the CCI through its judgments, has explicitly clarified that Sections 3(1) and 3(3) covers both sellers' and buyers' cartel.[iv] Altogether it can be implied that since the presumption of AAEC would apply to buyers' cartel, the incorporation of the term ‘buyer’ therefore makes the Competition Act more comprehensive.
To understand the importance of such an inclusion, it is imperative to get into the merits of it. A buyers' cartel can be portrayed if one focuses on the input side of the market, which possesses ample potential to eliminate competition, primarily through three methods:
(i) Colluding with the rival buyer on material terms to fix the input prices and jointly exert buyer power, thereby eliminating price competition. Collusion can even involve coordination regarding markets to decide where to buy their inputs from and not market sharing, and finally, it can give rise to what are called 'bidding markets', wherein transactions take place through specific bidding processes such as an auction;[v]
(ii) Creation of buyers’ cartel against other buyers’ where certain firms who possess a higher degree of buyer-power exclude a rival buyer or deter a potential new entrant by means like, predatory buying or simple refusal to deal. Such an 'exclusionary conduct' holds the potential of harming the efficiency of an economy to a great extent;[vi] and
(iii) Horizontal mergers often, if not always, directly impact the market by reducing the number of rival buyers, thereby allowing firms to gain buying power. This consequently harms the economic efficiency as the suppliers are left with no market power, which creates a monopsony,[vii] a market-situation characterized by the existence of a single buyer.
This potential to distort the market and adversely affect competition indicates the growing need to address buyers’ cartel.
Hub and Spoke Cartel
According to Section 3(3) of the Act, there lies a presumption that horizontal agreements, including cartels, are anti-competitive in nature, which has the potential to adversely affect competition. In other words, they are presumed to have an AAEC unless rebutted.[viii] Under this section, the Committee has recorded that there exist other certain unique forms of arrangements/agreements, wherein a third party, which in common parlance is known as the ‘hub’, facilitates collusion between two or more competitors i.e. the ‘spokes’.
In such a cartel arrangement, the hub communicates with one or more spokes and organizes the sharing of relevant information with them. Thereafter the spokes come into an arrangement based on the said information. This was pointed out to be a worrisome arrangement as these spokes may get captured in the prohibition against cartels under the analysis of anti-competitive agreements, but the hub may escape liability under Section 3(3).
In a recent judgment,[ix] the CCI expanded on the prevalence of such arrangements in the market and noted the adverse effect that they have on competition. Further, in the same judgement, the CCI elaborated that in order to constitute a hub-and-spoke cartel, a third party platform must be used by spokes to exchange any information that is sensitive as well as information that can encourage price fixing; further, there must be some conspiracy to fix prices which requires the existence of such a collusion.
The Committee deliberated whether there should be an express provision inserted to account for such hubs to clarify the ambit and extent of Section 3(3) of the Act. The Committee finally recommended that, owing to adverse effects of cartels, the Act should expressly cover ‘hubs’, which may presumably be capable of causing AAEC and, therefore, impute liabilities on such arrangements.
The Amendment Bill brings with it, certain loopholes, which will only arise on its practical application. Two of which can be foreseen: first, the differentiation between a cartel and a group. There are no fixed parameters for a buyers’ group, a legitimate group does involve some integration of activities, but the specific activities to integrate will be a function of the economic logic of the particular enterprise.[x] But the usual efficiencies could be in the form of benefits enjoyed by way of lower prices along with the advantage of reduced transportation and storage costs,[xi] which further translates into consumer welfare. As other jurisdictions such as the US have deemed to make any form of cartelization illegal per se, it is necessary for the Indian jurisdiction to take cognizance of the benefits of a buyers’ group as opposed to a cartel.
Second, following the US approach[xii] in respect of hub and spoke cartels and hence excluding the element of knowledge or intention to be taken into account when penalizing the same. Much like the UK courts, the CCI should also look at whether entities intentionally engaged in collusive conduct while assessing unlawful conduct in cartel formation.[xiii]
Regardless of the various hurdles – which arises no matter how meticulously the bill is drafted - this Amendment Bill moves forward with the right intention to bring the much needed change.