Interplay between Settlements and Penalties

The overhauling amendments to Competition Act, 2002 (Act) are on the verge of enforcement only awaiting the Government’s notification. Introduction of a settlements regime is a much welcome change, providing businesses an opportunity to get closure on long drawn investigations and from a regulator’s perspective achieve expeditious market correction.

Under the amended Act, parties under investigation can propose a settlement after receiving the Director General’s (DG) (i.e., the investigative arm of the CCI) investigation report and before the CCI’s final order confirming violation or exculpating the party. The settlement proposal must include either a settlement amount or certain remedial measures that the party is willing to undertake to alleviate the competition concerns, or both.

The CCI may accept or reject the settlement proposal after taking into consideration the nature, gravity and impact of the investigated conduct. The settlement amount is a critical element in accepting or rejecting the settlement proposal. Therefore, there must be some discernible basis for a company to arrive at an adequate and proportionate settlement amount based on the expected penalty if the inquiry was to proceed ordinarily. To opt for settlement, companies need to have a fair degree of certainty on their exposure to penalty. Settlement with the regulator in some sense is hedging bets against a heavy penalty plus a long-drawn inquiry followed, by appeals. Therefore, there is a compelling need for clear step-wise guidance on calculation of penalties.

Current Penalties Framework And CCI’s Decisional Practice

The extant penalties framework is subject to an upper ceiling but is still broad and ambiguous. The CCI can impose a penalty of up to 10% of the average turnover for the last three preceding financial years upon the company (Average Turnover Metric) for vertical restraints and abuse of dominance. For cartels, the CCI has an option of imposing a penalty based on Average Turnover Metric or up to three times of the profit of the infringing producer, seller, distributor, trader, or service provider for each year of the continuance of cartel or 10% of its turnover for each year of the continuance of cartel, whichever is higher (Cartel Profit Metric).

The CCI has imposed penalties on contravening parties, ranging from no penalty to the maximum 10% penalty, and in some cases even imposed a token penalty. There is no guidance for the CCI to determine: (i) the percentage (between 0-10%) in the case of the Average Turnover Metric (for vertical restraints, abuse of dominance and cartels); or (b) multiplier (i.e., between 0 to 3 times) in the case of the Cartel Profit Metric. As a result, sometimes, the CCI’s reasoning for arriving at these values is inconsistent.

In 2017, the Supreme Court’s decision in the Excel Crop Care case provided some guidance on penalty computation. In this decision the Supreme Court: (i) limited the scope of the penalty levied to the turnover attributable to the products/ services, which are the subject of the entity’s contravention i.e., ‘relevant turnover’; and (ii) set out a two-step methodology for arriving at a penalty amount- first, for the CCI to determine the relevant turnover of the contravening party and; second, to make appropriate adjustments to the relevant turnover based on certain mitigating and aggravating circumstances/ factors.

In a number of cases post this decision, the CCI did impose penalties based on the entity’s relevant turnover for e.g. in the case concerning the public procurement of LPG cylinders (Cylinders Case). However, guidance in the Excel Crop Care case didn’t address the issue of vagueness in the statutory penal power. In practical terms, businesses cannot still foresee or assess their penalty exposure except maybe understanding the highest fine that may be imposed on them.

This is one of the reasons why several CCI decisions have been successfully challenged before appellate authorities/courts, which remanded matters to the CCI for reassessing penalties, period of infringement, reconsidering reasons for imposing the penalty, etc.

Penalty Guidelines – What is Required?

The amendment requires the CCI to have guidelines regarding the appropriate amount of penalty. To ensure the consistent and unambiguous imposition of penalties, the penalty guidelines must provide a cogent step-wise process for arriving at a penalty amount. This approach is followed by CCI’s global counterparts in the European Union and the United Kingdom, i.e., the European Commission and the Competition and Markets Authority.

The first step should be determination of the base amount of penalty (e.g., 30% of the relevant turnover) as a percentage of turnover/income of the contravening entity, which can then be increased or reduced based on multiple factors. This percentage may be determined through a case-specific assessment, based on factors such as: (i) the likelihood harm to the competition, including consumers; (ii) nature and demand of the product/services involved; (iii) structure of the market, including the market shares of the undertaking(s) involved in the violation, market concentration and barriers to entry; (iv) market coverage of the violation; (v) the actual effect of the conduct on competitors and third parties, etc.

As an illustration, a multi-product enterprise which is under investigation understands that its average turnover from the product under investigation is Rs 10 lakh. The guidelines should indicate to it that based on the factors listed above (for the first step) for e.g., the duration of violation and harm to consumers, the base amount for penalty will be around 20% of relevant turnover i.e., Rs 2 lakh.

After determining the base amount, the second step should be the upwards or downwards adjustment of the base amount. This adjustment should be done based on mitigating and aggravating circumstances, which should be spelt out in the guidelines. Certain aggravating factors that can be considered are — extent of company’s role in the contravention, being a repeated offender, hindering the DG investigation, continued conduct even after the CCI’s intervention, intentional rather than negligent violations, etc. Similarly, some mitigating factors that can be considered are cooperating in the investigation, unhelpful external circumstances facilitating the violation, termination of the infringement as soon as the CCI initiates an investigation, inability of the party to pay, market correction measures undertaken by the party, the benefits the enterprise has given to consumer, etc.

In the second step in the above illustration, the CCI should adjust the base amount of Rs 2 lakh either upwards or downwards based on aggravating and mitigating factors. Assuming there aren’t enough mitigating factors and there are aggravating factors like non-cooperation during the investigation and continuing conduct, the CCI may accordingly adjust the base amount upwards. This clarity can assist the company to meaningfully consider whether and how to go about a possible settlement with the CCI accounting for the penalty exposure, litigation cost and gestation period, etc.

Conclusion

The penalty guidelines are likely to be open for stakeholder consultation, and it remains to be seen what they will entail. The need of the hour is clear and precise guidance on penalty calculation by the CCI, not only for certainty but also for the settlements regime to work. The penalty guidelines will be key to a successful settlement procedure as they will give parties a base to work off, while designing the settlement proposal including the settlement amount. These guidelines will also aid the CCI in having consistency in determining penalties and following a more reasoned approach in its decision.