Canadian COMPETITION LAW

December 20, 2010

Dr. Derek Ireland

As many of you know, competition law in India has had a long and difficult history.  India’s first competition law, the Monopolies and Restrictive Trade Practices Act (MRTPA) of 1969 was based on the British model of the period.  The MRTPA was for the most part ineffective for its first 20 years, largely because the economy continued to be dominated by government, state owned enterprises, and privately owned business groups and other larger companies that were supported and protected by government.

The MRTPA was further weakened as part of India’s ambitious post-1991 liberalization program, when the Act was amended to remove merger review and water down the provisions that could be used against dominant and other larger firms.  Therefore, most enforcement of the MRTPA over its final two decades involved consumer protection cases and restrictive trade practices, which often involved disputes between companies rather than business arrangements and conduct that hurt competition and consumers.

Work on a new competition law began in the late 1990s, which culminated in a more modern and comprehensive statute, called the Competition Act 2002, which was approved by the Indian Parliament in December 2002.  Unfortunately, enforcement of the new law was held up for over five years because of a court challenge that were taken all the way to the Indian Supreme Court.  Based on the Court’s decision, the Competition Act was amended and then passed in September 2007.  The new Competition Commission of India (CCI) was staffed and made operational through 2008 and 2009, and the sections on anticompetitive agreements and abuse of dominance started to be enforced in September 2009.

However, enforcement of the merger section has been delayed up to the present day, pending consultations on and finalization of the merger regulation, which reportedly has been the subject of intense and to date highly effective business lobbying.  As a result, mergers and acquisitions have not been subject to review under competition law in India for nearly two decades.

The consensus view of Indian competition law scholars is that the case law from the old MRTPA will be either useless or harmful to the enforcement of India’s now competition law.  In short, the new competition law is essentially starting from scratch.  Therefore, not surprisingly, early enforcement of and the first case decisions under the non-merger sections of the Competition Act 2007 have been both interesting and controversial.  This is indicated by the quite extensive media and blog coverage of the first major CCI decision over the past few weeks.[1]

In its first order, the CCI cleared 16 Indian banks from the allegation that they had acted as a cartel in fixing penalty rates of homeowners who are foreclosing their housing loans.  Attempts by homeowners to prematurely close a loan on their home are subject to a penalty of 1% to 4%.  The banks contended that the prepayment penalty is important to what they call asset liability management (or ALM).  In the 170 page order that was passed by six CCI members on December 2 2010, four of the six members decided that there was no violation of section 4 of the Indian Competition Act on abuse of dominance.  The majority order stated that: “”There is no bank/HFC in the market which can be deemed to be dominant by any of the parameters used for determining dominance. The question of abuse of dominance, therefore, does not arise.”

However, there are aspects of the majority decision that are both interesting and controversial.  While the majority order concluded that there was no violation of either section 3 on anticompetitive agreements or section 4 on abuse of dominance, the two dissenting CCI members agreed with the second conclusion but not with the first.  The two dissenting members contended that the Indian banks and home loan companies had contravened the provisions of various sub-sections of section 3 of the Indian Competition Act; and that the majority order lacked a comprehensive economic analysis of the defendants’ arguments regarding asset liability management.  The CCI Director General in his earlier report to the CCI also contended that the defendants had violated sections 3(3)(b) on agreements limiting or controlling provision of services and section 19(3)(a), (c) and (d) on anti-competitive agreements.

Three issues from this first decision are important and perplexing for future cases under the Indian Competition Act: (i) the allegation of a cartel was assessed under both section 3 and section 4 of the Act; (ii) all six CCI members agreed that there was no violation under section 4 on abuse of dominance – which is hardly surprising given that the allegation involved 16 banks and home loan companies; and (iii) based on the media reports, the majority order placed more emphasis on dominance and the limited risk of unilateral effects rather than the risk of coordinated effects through strategies of joint dominance and explicit or tacit collusion, which typically would be more important to an investigation of a cartel allegation.  For these and other reasons, one legal critic of the CCI’s first order concluded that the decision was humdrum, illustrates the CCI’s failures to apply rigorous economic analysis to its cases, and provides limited guidance for business behaviour and future CCI enforcement cases.[2]  He notes as well however that this decision represent only the beginning of the competition law enforcement process in India.

[1] See for example: Kian Ganz “Breaking exclusive: CCI makes first decision, clears bank loan charge ‘cartel’” Legally India: News for Lawyers December 7, 2010; and Shweta Shroff Chopra “CCI: Well Begun!” News Centre Wednesday December 15, Principal Associate Designate, Amarchand Mangaldas

(Amarchand Mangaldas represented HDFC, which was one of the parties being investigated by the CCI in this case).

[2] Rahul Singh “The contours of competition: The antitrust authority’s first final order raises more questions than it answers about India’s competition law” Monday Dec. 13 2010.

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