Background

The Ministry of Corporate Affairs (MCA) has invited public comments from stakeholders on the  Draft Competition (Amendment) Bill, 2020 (Bill) on or before 6 March 2020. The Bill has been proposed further to recommendations of the Competition Law Review Committee (CLRC) which had reviewed and recommend certain changes to the Competition Act, 2002 (Act) in its report to the Government in July 2019 (CLRC Report). A brief summary of the key changes proposed by the Bill is set out below.

A.        Settlement and commitments

In a welcome change, the Bill proposes the introduction of certain provisions which permit an investigated party to offer a settlement (Please see Section 48A) or voluntary undertake certain commitments (Please see Section 48B) in relation to an anti-competitive vertical agreement or abuse of dominance proceeding.

While details of precisely how the settlement and commitment mechanism will be operationalized through subsequent regulations, the Bill envisage the following:

i.        An application for settlement may be submitted at any time after the receipt of the Director General’s (DG) investigation report but prior to a final order from the CCI. On the other hand, an application for commitments may be filed any time after a prima facie order initiating investigation has been passed but prior to the receipt of the Director General’s investigation report.

ii.     The CCI may at its discretion choose to accept or reject applications for settlement or commitments, after taking into consideration the nature, gravity and impact of the contravention and in accordance with the regulations to be framed under the Act.

iii.     The CCI’s order allowing or rejecting settlement or commitments will not be appealable to an appellate court.

iv.     In addition, a settlement may also involve payment of a sum to be determined by the CCI which can also specify the way the terms of settlement or commitments will be implemented and monitored. Further, the order accepting settlement or commitments can be revoked if the CCI concludes that applicant has not made full and true disclosure or there has been a material change in the facts.

As a general matter, a settlement or commitment process will allow for quicker disposal of cases and both the CCI and an investigated party may be spared from long-drawn investigations. That said, it is not clear if either the settlement or commitment orders passed by the CCI are likely to include a finding of contravention. This might have an impact on whether compensation claim will be allowed against a settlement or commitment order.

B.     Power to revise jurisdictional thresholds

Currently, any acquisition of control, shares, voting rights or assets, or merger or amalgamation which meets the monetary asset and turnover based thresholds under Section 5 of the Act is considered to be a “combination” and is subject to mandatory pre-merger notification to the Competition Commission of India (CCI). The Bill proposes introduction of an “empowering” provision which will permit the Central Government in consultation with the CCI, to prescribe any criteria that will lead to the transaction being viewed as a combination (Please see Proviso to Section 5). This change is ostensibly being introduced to address certain types of transactions (such as those in digital markets) that may not require notification under the existing jurisdictional thresholds. Such transactions would currently entirely escape scrutiny since the CCI has no residuary jurisdiction to assess non-notifiable transactions even if their potential competitive harm is evident.

The Bill also adds that the Central Government (in consultation with the CCI) also has the power to prescribe certain thresholds (relating to assets, turnover or otherwise) below which a transaction shall not be seen as a combination for the purpose of the Act – thereby empowering the Government to fix “de minimis” thresholds, below which transactions would not require notification. (Please see second Proviso to Section 5)

C.     Green channel process

The Bill grants statutory recognition to the CCI’s ‘green channel’ process by providing that the Central Government (in consultation with the CCI) can in the public interest specify a deemed approval process for transactions which are not otherwise exempt from notification to the CCI. Such transactions can be notified in a separate prescribed form and the regular form of notice to the CCI need not be given (Please see Sections 6(4) and (5)). In line with the existing ‘green channel’ regime, this statutory provision will enable the CCI to approve non-contentious transactions. So far, the ‘green channel’ regime is applicable only to transactions involving no overlaps (horizontal, vertical or complementary) between the activities of the parties.

D.     Wider definition of ‘control’

The Bill defines ‘control’ to include the wider test of the ability to exercise ‘material influence’, in any manner whatsoever, over the management or affairs or strategic commercial decisions by one or more enterprise/group over another. (Please see Explanation (a) to Section 5) The CLRC had recommended that the standard of ‘material influence’ may list certain minority rights, the acquisition of which would not be considered to confer material influence. Some indicative factors for determining existence of material influence that have previously been laid down by the CCI in its orders are shareholding, special rights, status and expertise of an enterprise or person, board representation, structural/financial arrangements, etc. - the CCI’s recent decisional practice indicates a gradual shift away from the stricter standard of “significant influence” to a broader “material influence” test and the proposed amendment will codify this change.

E.     Derogation from the standstill requirement

The Bill also proposes that the Central Government (in consultation with the CCI) be permitted to prescribe certain criteria which would exempt certain combinations from the requirement to notify to the CCI or comply with the standstill obligations. (Please see Section 6(7)). This derogation from the requirement to notify to the CCI or comply with the standstill obligations, is envisaged as being applied only in exceptional circumstances, where waiting for approval or the expiration of the statutory merger review period is not feasible – instances where the target is undergoing insolvency proceedings, or has vital assets that would rapidly devalue while awaiting merger clearance.

F.     Dilution of standstill obligation for public bids/hostile acquisitions

Section 6(2A) of the Act imposes a standstill obligation on transacting parties which mandates that no part of a combination be implemented until receipt of the CCI’s approval, or until the expiry of the prescribed statutory period. The Bill proposes to exempt combinations from the standstill obligations under section 6(2A) if the combination involves (a) implementation of an open offer or (b) an acquisition of shares or securities, through a series of transactions on a regulated stock exchange. This is subject to the CCI being notified of the acquisition and the acquirer not exercising any ownership or beneficial rights in such shares until CCI approval.(Please see Section 6A) This amendment enables the acquisition of shareholding in public listed companies while fulfilling the notification requirements of the CCI – in line with the CRLC recommendations. The CCI had, in December 2019, issued a draft notification for public comments, which sought to bring in this change. The Bill seeks to formally codify this into the Act.

G.     Other key changes

a.     Structural changes

i.     Introduction of a Governing Board (Please see Section 8(1A))  : The Bill proposes the setting up of a “Governing Board” which will work alongside the Commission, and shall comprise members of members of the Commission, Secretary of the Department of Economic Affairs, Ministry of Finance or his nominee and four other part-time government-appointed members. The role of the Governing Board is to make regulations on matters relating to competition and the administration of the affairs of the CCI. While the CLRC recommended that the Governing Board will not be involved with adjudicatory (i.e. decision making) functions of the CCI, the Bill does not clarify this position.

ii.    Empowered to constitute panels for carrying out adjudication process (Please see Section 22(4)) : The manner of decision-making, however, remains largely unchanged. While the Delhi High Court (DHC) in Mahindra & Mahindra vs Competition Commission of India & Ors (Mahindra Case) directed the CCI to ensure that at all times, during the final hearing, the judicial member is present and participates in the hearing, the Bill does not take into account the DHC’s decision and still states that all questions which come up before any meeting of the CCI shall be decided by a majority of the whole-time Members present and voting.

iii.    Appointment of Director General (Please see Section 16(1)) : The DG is the investigative arm of the CCI. The Bill proposes to grant the power to appoint the DG to the CCI instead of the Central Government, as is the case presently.

iv.     No change to the composition of the CCI (Please see Section 8(1)) : The CCI to comprise of 1 chairperson and 6 other “whole time” members to be appointed by the Central Government. The Central Government had earlier proposed to reduce the size of the Commission to three members. The Proposed amendment reinstates the original position and does not incorporate the requirement of a judicial member as per the DHC’s decision in the Mahindra Case.

b.      Enforcement functions- key proposed amendments:

i.    Introducing supply side substitutability in the relevant product market definition (Please see Section 2(t)): In addition to the existing demand side substitutability factors, the Bill includes factors of supply-side (i.e. switching costs) substitutability in the relevant product market definition. This is in line with international jurisprudence which recognizes supply-side substitutability while defining the relevant market.

ii.     Expanding the scope of cartels to expressly include (i) buyers’ cartels ((Please see Section 2(c)); (ii) ‘hub and spoke’ arrangements or (iii) a third party monitoring agency appointed by the cartelists to simply monitor the implementation of cartel (Please see Section 3(3)). Both were recommendations made by the CLRC.

iii.     Expanding the scope of vertical restraints to explicitly include restrictions in agreements that are not entered into between persons or entities at different stages of the production chain. (Please see Section 3(4))This is inline with the CLRC’s observations that there may be difficulty in categorizing certain kinds of conduct or agreements that do not squarely fit within the scope of a horizontal or vertical arrangement. Such difficulty was in fact faced by the CCI in Ramakant Kini vs Dr. L.H. Hiranandani Hospital, Powai, Mumbai where parties argued that a hospital and a stem cell bank are neither horizontally nor vertically related, and hence the referral agreement between them cannot be examined by the CCI.

iv.     Extending the intellectual property right (IPR) defence to abuse of dominance : Rights of IPR holders’ to restrain infringement of, or impose reasonable conditions necessary to protect their IPR rights, is proposed to be exempt from provisions of the Act that proscribe abuse of dominance, in addition to the pre-existing exemption from the scope of anti-competitive agreements.(Please see Section 4A)

v.     Expressly granting the CCI the power to close an inquiry after further inquiry, notwithstanding the findings of the DG Investigation Report (Please see Section 26(9)): While in practice it was always the case, the Bill now expressly provides that in cases where (a) the DG has provided its investigation report or (b) after considering the DG’s investigation report, the CCI is of the view that further investigation is required, either by the DG or by the CCI – the CCI can close the inquiry. The Bill provides that before passing any order in instances (a) and (b), the CCI shall issue a show-cause notice (indicating the contraventions alleged to have been committed) and give a reasonable opportunity of being heard to the concerned parties.

vi.     Extensive powers to the DG (Please see Section 41(3) to (14)) : The Bill proposes to confer wider powers to the DG. Any person who fails to (a) produce any documents, information or record, or (b) appear before the DG personally or fails to answer any question which is put to it by the DG, or (c) sign the notes of any cross-examination, shall be punishable with imprisonment for a term which may extend to six months or with fine which may extend to one crore rupees or with both, coupled with a further fine which may extend to INR 5 Lakh for each day of contravention. The power of the DG extends to parties under investigation (including their officer, past employees and agents) and third parties. Further, the DG has now been expressly granted the power to call for any books and records from, or examine on oath any agent of the party being investigated. The term agent has been defined to include any legal advisors, bankers and auditors of such party under investigation.

vii.     Expanding powers of granting leniency : A welcome development in line with the jurisdictions like UK, US, Singapore and Brazil, where a party implicated in a cartel investigation makes a true and vital disclosure of another undisclosed cartel, the CCI is empowered to grant lesser penalty. (Please see Section 46(3)). Further, the Bill includes a provision where the CCI may allow a leniency applicant involved in a cartel to withdraw its application for lesser penalty. However, in case of a withdrawal the CCI is at liberty to use the evidence submitted by the applicant, subject to the admissibility of such evidence. (Please see Section 46(2))

viii.    Mandatory pre-deposit of 25% (or lesser) of the penalty imposed by the CCI in order to appeal before the Appellate Tribunal. (Please see   second proviso to Section 53B(2))

ix.     Definition of ‘enterprise’ to include the ‘economic’ activity test. Under the Bill, to be seen as an ‘enterprise’, any entity (regardless of legal form) would need to be engaged in an ‘economic activity’. (Please see Section 2(h))

x.    Setting maximum cap for imposing penalty on individuals implicated in cartels – in line with the penalty for enterprises, the Bill provides for the imposition of penalty on individuals up to a maximum cap of 10% of an individual’s average income for the last three preceding financial years. Specifically in cases of cartel, the penalty provided for is up to 10% of the individual’s average income for each year of the continuance of the anti-competitive agreement. The definition of ‘income’ will be prescribed separately through subsequent regulation. (Please see Sections 27 & 48)

xi.    Compounding of offences  (Please see Section 59A) : The Bill proposes to confer the NCLAT with the power to compound any “offence” punishable under the Act (other than those punishable with both, fine and imprisonment. Typically, “compounding” refers to a mechanism whereby an offender is discharged of all liability for committing any offence, in lieu of a monetary payment being made to the authority/person empowered to compound the offence. The concerned person may apply for compounding either before or after the institution of any proceeding. While there appears to be a similar dispensation under the (Indian) Companies Act, 2013, the scope, process and procedure for compounding as set out in the Bill has not been detailed and we are examining the implication of this provision.

c.      Merger control functions:

i.     Inserting the methodology for computing ‘turnover’ under the Act. The proposed amendment, in line with the CCI’s ‘Frequently Asked Questions’, clarifies that the ‘turnover’ of an enterprise excludes intra-group sales and indirect taxes. The proposed amendment also clarifies that ‘turnover’ also excludes trade discounts and all amounts generated through assets or business outside India from customers outside India, as certified by the statutory auditor. (Please see Explanation (d) to Section 5)

ii.     Amendments to the definition of ‘group’ to include two or more enterprises exercising ‘at least twenty-six per cent or such other per cent as may be prescribed’ voting rights in another. (Please see Explanation (b) to Section 5) The Act, as it stands today, in the Explanation to Section 5 of the Act, defines group to include two or more enterprises exercising ‘twenty six per cent’ of the voting rights in another. Notably, the Central Government, by way of successive notifications, the most recent one being in 2016, exempted ‘groups’ exercising less than fifty per cent of the voting rights in an enterprise from the of Section 5 of the Act. While as on date there is no impact of this revision, going forward the Central Government may rescind the 2016 notification in light of this amendment. In the event, the 2016 notification is rescinded or otherwise rendered null and void, for the purposes of notifying a combination to the CCI, the parties will have to additionally include enterprises where they exercise at least twenty-six per cent of the voting rights or any other percentage as may be prescribed by the Central Government/CCI.

iii.    Exemption from notification afforded to public  financial  institutions,  foreign institutional investor, bank or  alternate investment fund (Category I) for share subscriptions, financing facilities or acquisitions, pursuant to covenant of a loan agreement or investment agreement. (Please see Section 6(9)) Prior to this proposed amendment, these institutions had to file within 7 days from completing their investment, but are now exempt from the filing requirement.

iv.    Shortening the timelines for review of combinations. The proposed amendment reduces the time period for the CCI to issue its preliminary opinion on whether a combination would cause an appreciable adverse effect on competition, to twenty calendar days (from the present thirty working day period). (Please see Section 29(1A)) The proposed amendment also reduces the overall timelines for the review of a notification to one hundred and fifty days (extendable by up to thirty calendar days to account for ‘clock stops’ where parties are required to provide additional information) from the two hundred and ten day period as presently mentioned in the Act. (Please see the proviso to Section 31(6))

[1] Combination Registration No. C- 2016/10/443 [2] W.P (C) 11467/2018 dated 10 April 2019 [3] CCI order dated 05.02.2014 in Case No. 39 of 2012.