Table of Contents:

Why Competition?
The New Regime Background &
Introduction
The Competition Act, 2002 - Key
Provisions
Impact of competition law in
distributorship model.
Risk Mitigation - Critical Steps
www.luthra.com
1

Competition in market is
BENIGN:

Reduces prices

Improves quality

Boosts choice

Facilitates better governance

Promotes efficiency

Encourages innovation

Punishes THE LAGGARDS

Ensures AVAILABILITY OF GOODS in abundance of acceptable

quality at affordable price (AAA)

www.luthra.com
2

Five Dimensions of the Act:

Anti-competitive Agreements (ACAs)

[Sec. 3]
Abuse of Dominance (AOD) [Sec. 4]
Combinations, include acquisition of shares,
voting rights, assets/control, mergers,
amalgamations and takeovers [Secs. 5 & 6]
Advising, on a reference, to Government in
respect to its policies/law
Advocacy creating awareness
(All these dimensions of law are in force)
www.luthra.com
3

Powers of the CCI:

Issue directions to discontinue or not to re-enter (Cease
& Desist orders) in relation to ACA/AOD);
Grant interim relief during enquiry;
Impose penalty on producers, distributors, suppliers of
up to three times of average profits or up to ten percent
of average turnover for each year of continuance of
agreement, whichever is higher, in case of cartel like
behavior;
Impose penalty which shall be not more than ten
percent of the average of the turnover for the last
years , for other violations.
www.luthra.com
4

Contd
Impose penalty on delinquent directors and functionaries
who are delegated with requisite powers;
Declare anti-competitive agreements void;
Order division of dominant enterprise or groups;
Approve/approve
combinations;

with

modifications

Any other orders which the CCI may deem fit.

www.luthra.com
5

or

block

Institutional Framework:
The CCI Primary body to implement the law;

Office of the DG to assist the CCI in carrying out investigation

The COMPAT- For appeals against CCI Orders and to

adjudicate Claims for Compensation.
Supreme Court of India For appeals against orders
of COMPAT.
Central Government Vested with power to supersede
the CCI; issue directions; grant exemptions from
applicability of the Act.
www.luthra.com
6

Powers of the DG:

Requisition of information from the parties
Requisition of information from ex-employees,
distributors etc.
The DG can summon and record evidence
during investigation.
DG can exercise the powers of Search and
Seizure (Dawn Raids).
DG are vested with the powers of a Civil Court
to aid Inquiry/Investigations

www.luthra.com
7

Relevant Market
Relevant Market includes relevant product market
and relevant geographic market.
Relevant Product Market comprises all those
products
or
services
which
are
regarded
as
interchangeable or substitutable by the consumer.
United Brands v. Commission It was argued that bananas
were in the same market as other fruit. The ECJ held that the
banana constitutes a separate market since it has special
features distinguishing it from other fruits, like it is the only
fruit which can be consumed by infants and the elderly.

www.luthra.com
8

Contd

Relevant Geographic Market refers to market

comprising the area in which the conditions of
competition are distinctly homogenous.
This could be a small town, state, across the nation or
even global.
For instance, relevant geographic market in the DLF
case has been considered as Gurgaon on the basis that
the conditions of competition between Delhi and
Gurgaon and distinctly homogenous and they cannot be
treated as the same (pending appeal). Further, in the
cement cartel case, the relevant geographic market is
considered as India since the same conditions are
prevalent pan-India regarding sale of cement.
www.luthra.com
9

Anti-Competitive Agreements
(ACAs):
Section 3 prohibits agreements in respect of
production,
supply,
distribution,
storage,
acquisition or control of goods or provision of
services, which causes or is likely to cause an
appreciable adverse effect on competition
(AAEC) within India.
The Act declares that agreements entered into
in contravention of the above prohibition shall
be void.
www.luthra.com
10

Horizontal and Vertical Agreements

Raw
Mate
rial
Man
Supp
ufact
lier
urer
Wholes

Raw
Mate
rial
Man
Supp
ufact
lier
urer
Wholes

aler

aler

Retailer

Retailer
www.luthra.com
11

Raw
Mate
rial
Man
Supp
ufact
lier
urer
Wholes
aler
Retailer

Horizontal Agreements
(Presumption of AAEC):
Agreements between enterprises or persons engaged in
similar trade of goods or provision of services.
Agreements including cartels that:
(a) fix prices,
(b) limit or control production,
(c) allocates markets or customers, and
(d) rig bids/collusive bidding
are presumed to have an appreciable adverse effect on
competition (AAEC)
The prosecutor needs to prove existence and not the
harm caused.

www.luthra.com
12

e.g. DISCUSS ABOUT PRICE INCREASE, TIMING OF PRICE

INCREASE WITH COMPETITORS

Retail
Retail price
price is
is too
too
cheap.
cheap. Why
Why dont
dont
we
we increase
increase the
the
wholesale
wholesale price
price
by
by 5%?
5%?

I agree. Lets
implement the
price increase
next month.

Competitors Sales
Person

Medtronics
Sales Person

www.luthra.com
13

e.g. DISCUSS ABOUT CUSTOMERS AND

TERRITORY WITH COMPETITORS
West district of A
city is our territory.
Do not sell your
products in our
territory.

Medtronics Sales Person

www.luthra.com
14

Okay. East district is

our territory.
Promise to us that
you will not sell your
products at our
territory.

Competitors Sales Person

Contact with former boss

(Fictional Case)
Long time no see. I did not
know you were working to
get this business for
Medtronic. Why dont we
keep in touch and exchange
information?

Medtronic sales
person

Ex Medtronic Sales
Person working at
Competitor

What should you say? Think of a script.

www.luthra.com
15

Answer
" I agree. Give me your contact details so that we can
No
exchange information.
" It is really nice to see you again. Why dont we go
out for dinner tonight. There are lots of things that we
No
should talk.
Leave the place after saying "It is nice meeting you
again. But we are competitors now, and competing
Yes
with each other for this deal. It is against our
companys policy to interact with competitors. I am
afraid I will have to say I have to go.
www.luthra.com
16

Vertical Agreements
(Rule of Reason)
Agreements between enterprises at different stages
or levels of the production chain.
What is the Rule of reason analysis?
A rule of reason analysis involves determining
whether conduct can be justified on the basis that
its pro-competitive gains outweigh its anticompetitive effects.
Agreements are not deemed anti-competitive
unless if they cause or are likely to cause AAEC in
India.
www.luthra.com
17

Examples of Competition issues in

vertical relationships
Vertical agreements include:
(a)tie-in arrangements any agreement requiring a
purchaser of goods, as a condition of such purchase,
to purchase some other goods.
(b)exclusive supply- any agreement restricting in any
manner the purchaser in the course of his trade from
acquiring or otherwise dealing in any goods other
than those of the seller or any other person.
(c) exclusive distribution agreement- any agreement
to limit, restrict or withhold the output or supply of
any goods or allocate any area or market for the
disposal or sale of goods.
www.luthra.com
18

Contd
(d) refusal to deal- any agreement which restricts, or
is likely to restrict, by any method the person or classes
of persons to whom goods are sold or from
whom
goods are bought;
(e) resale price maintenance- any agreement to sell
goods on condition that the prices to be charged on
the resale by the purchaser shall be prices stipulated
by the seller unless it clearly stated that prices lower
than those prices may be charged.
The scope and ambit of above concepts is broad as the
definition has been made inclusive.

www.luthra.com
19

Factors for Determination of

AAEC:
Creation of barriers to entry;
Driving existing competitors out of market;
Foreclosure of competition by hindering entry
into market;
Accrual of benefits to consumers;
Improvements in production or distribution of
goods or supply of services;
Promotion of technical, scientific and economic
development;

www.luthra.com
20

Risks The Leniency Provision

The Act provides for imposition of lesser penalty by the
CCI in cases of violation of Section 3 where a person
makes FULL, TRUE and VITAL disclosure of a cartel to
the CCI; for e.g. Samsung Electronics received full
immunity (100%) from fines under the Commission's
leniency programme in the LCD Cartel case. LG got a
50% reduction.
The Leniency System is targeted at cartel participants
and seeks to induce participants to break rank and turn
approver against other cartel members.
A successful applicant can avail the benefit of a
reduction in penalty in the range of up to 100% or 50%
or 30% keeping in view the first mover advantage.
www.luthra.com
21

Exclusions:
Section 3 does not:
- restrict right of IPR holder to prevent
infringement
of
IPR
or
impose
Reasonable Conditions on use of such
IPR;
- restrict right of a person to export
goods from India.

www.luthra.com
22

Abuse of Dominant Position

The Act does not prohibit dominant position it only
frowns upon the abuse thereof.
Dominant Position refers to a position of strength
enjoyed by an enterprise or group in the relevant
market, in India, which enables it to Operate
independently
of
competitive
forces
prevailing in the relevant market; or
Affect its competitors or consumers or the relevant
market in its favor.
Group is open ended.
www.luthra.com
23

Contd
Determination of
Position involves:

Abuse

of

Dominant

Identifying the relevant market

Establishing the dominant status of the
enterprise or group; and
Evaluation of the conduct to determine
whether it falls within abuses listed under
the Act.
www.luthra.com
24

Types of Abuses

EXPLOITATIVE ABUSES i.e., conduct which results in

exploitation of others in the value chain, for e.g.,
imposition of unfair or discriminatory conditions
imposition of unfair or discriminatory prices e.g.,
predatory pricing.
EXCLUSIONARY ABUSES conduct which interferes with the
competitive process, for e.g.,
Denial of market access;

Making conclusion of contract subject to acceptance of

supplementary obligations

Limiting production of goods, provision of services;

scientific development;

Using dominance in one relevant market to enter into or

protect other relevant market ;
www.luthra.com
25

Determination of Dominant
Position - Factors
Market share of the enterprise
Size and resources of the enterprise
Size and importance of the competitors
Economic power of the enterprise
Vertical integration of the enterprises
Dependence of consumers on the enterprise
www.luthra.com
26

Contd

Dominant position as a result of statute

Barrier to entry

Countervailing buyer power

Market structure and size of market

Social obligations and social costs

Contribution to the economic development

Any other factor (residuary factor)

www.luthra.com
27

Regulation of Combinations
Merger Control:
The Act regulates combinations (merger
control) which involves an ex ante assessment
of changes in the structure of the relevant
market.
No combination can take effect unless the
transaction is approved by the CCI.
Combination Regulations sets out the
procedure of filing notice, fee payable and
timelines.
Failure to file notice of a reportable transaction
attract penalty.
www.luthra.com
28

Contd
Combinations include:

Acquisition of control, shares, voting rights, or assets

of another enterprise; or

Acquisition of control where the acquirer already has

control over a similar/identical business or

Merger or amalgamation of enterprises

where such transactions cross the asset or

turnover thresholds set out in the Act.
www.luthra.com
29

Risks Impact on Companies

High penalties/liability for compensation;
Possible extra fine and/or imprisonment for
breach of CCI orders;
Legal Expenses;
Loss of Reputation;
Agreements rendered null and void;
Division of dominant enterprise;
Loss of business from the harmed parties;

www.luthra.com
30

A word of caution in
communication?
Email, SMS, FAX, Communication in any e-mode are
admissible evidence.
Skillful communication is imperative.
Do not sound guilty .
Do not use expression like destroy after reading.
Avoid the exaggerated use of power words(e.g.
well destroy them, we will nail them to the
wall)
Avoid giving the false impression that a customer is
being given favored treatment( e.g. None of our
other customers is getting this special
discount).
www.luthra.com
31

Contd
Do not give false impression that some action is
being taken as a result of an agreement between
competitors ( e.g. Everyone in the industry
agrees that prices are too low).
Be carful with the use of the word market (e.g.
we are dominant).
Marking a document personal and confidential
or keeping it in your personal files or home
office or computer does not mean that it wont be
discovered.
Do not use the term market when referring to
distribution channels.
www.luthra.com
32

Role of Chartered Accountants

Sensitize the client about the need for and
usefulness of having competition compliance
program
Review all purchase and sale agreements
Prepare customised competition compliance
manual
Prepare ready recokner of Dos and Donts
Impart training on Competition Regime
Have due diligence of transaction from
competition law
www.luthra.com
33