Recent Amendment of Leniency Provision under the Competition Act, 2002

Introduction

Cartels refers to the collaborative conduct of competing firms that work together over a period to deliberately elevate prices beyond the competitive levels in the market. This involves the coordinated action of rival firms under an agreement to manipulate the market conditions and reduce competition, ultimately leading to higher prices or restricted output, detrimental to consumers. In India, Cartels are considered to be anti-competitive practices and are prohibited under the Competition Act, of 2002. Therefore, any agreement that is likely to cause an appreciable adverse effect on competition in India is prohibited under section 5 of the Competition Act. This includes agreements related to price fixing, bid rigging, Market allocation and other practices that restrain competition. This act also prohibits abuse of dominant position by enterprises practising predatory pricing, denying market access and unfair conditions under section 6 of the Competition Act.

What are the basic procedural steps for investigation and the imposition of sanctions?

The basic procedural steps are as follows:

Step 1: Inquiry into alleged cartelization: The CCI possesses the authority to inquire into any suspected cartel arrangement in the following situations:

1. Upon receiving information from any person or their association;
2. Receiving a reference from the Central Government the State Government or a statutory authority;
3. Suo moto (on its motion); or
4. Upon receipt of a leniency application.

Step 2: Prima facie order passed by the CCI: CCI may pass the following orders:

Scenario 1: No Prima Facie Case (Insufficient Evidence): If the Competition Commission of India (CCI) believes that there is no prima facie evidence, then, it will close the matter by the order made under Section 26(2) of the Competition Act.

Scenario 2: Prima Facie Violation (Enough Initial Evidence): If the CCI determines that there is prima facie evidence to indicate a potential violation of the law, it shall instruct the Director General (DG) to conduct a detailed investigation and issue an order under Section 26(1) of the Competition Act, directing the DG to investigate the matter.

Step 3: Investigation by the DG: The DG is the investigative arm of the CCI and collects further information and evidence.  The DG shall submit a report to the CCI, containing its findings on the allegations made, all the evidence, documents and statements collected while conducting an investigation, along with the DG’s analysis (“DG’s Report”).

Step 4: Inquiry by the CCI upon receipt of the DG’s Report: Upon receipt of the DG’s Report, the CCI has the following options:

1. If DG finds no contravention, the CCI may:
   • invite objections from any of the parties concerned to the DG Report;
   • agree with the findings of the DG and close the matter; or
   • disagree with the findings of the DG and direct a further investigation or support a further inquiry
2. If DG finds an infringement, the CCI may:
   • agree with the findings of the DG and pass any orders under Section 27 of the Act; or
   • If CCI believe that there is a need for further inquiry relating to contravention before concluding.

Step 5: Imposition of Sanctions:

1. Penalties for Companies:

• If a business is found involved in a cartel (anticompetitive collaboration), the Competition Commission of India (CCI) under section 27 of this act, is empowered to impose a penalty, of up to three times the enterprise's profit for each year of the cartel or 10% of its turnover for each year, whichever is higher.
• The definition of turnover has been expanded to include global turnover for all products and services, not just those related to the cartel.
• Presently, there are no specific guidelines to determine the penalty amount. However, the Amendment Act allows the CCI to create penalty guidelines for a more standardized approach to determining penalties.

2. Landmark judgment:

• In Excel Crop Care Limited v. CCI, the Supreme Court clarified that penalties should be based on the "relevant turnover," which includes the turnover related to products and services affected by the violation.
• However, the Amendment Act has changed this by expanding the turnover definition to include global turnover for penalty calculations. This amendment includes global turnover as the relevant metric for penalties under Section 27, applicable to both companies and individuals.

3. Penalties for Individuals:

• If individuals are found responsible for a company's cartel behaviour under Section 27 of the Competition Act, the Competition Commission of India (CCI) has the power to impose penalties.
• The maximum penalty is 10% of their average income for the three preceding financial years.
• Section 48(1) assumes guilt for individuals who were in charge and responsible for the company's conduct during the violation. The penalty can be rebutted if they can prove the violation occurred without their knowledge or if they did due diligence to prevent it.

4. Individual Sanction:

• Besides penalizing the company, individuals such as directors and officers responsible for the company's affairs during the violations may also face monetary penalties.
• The CCI has the authority to impose non-monetary penalties, such as cease and desist orders or any other orders it deems appropriate.
• Thus, if a company engages in a cartel, it may face significant financial penalties, and individuals in charge may also be penalized. The CCI has the power to apply both monetary and non-monetary penalties to address anticompetitive behaviour.
• Under Section 48(3), if individuals are involved in the company's contravention, their involvement is considered established, and this cannot be rebutted.
• This extends to any individual associated with the company's contravention, not limited to those in charge at the time.

Leniency Provision Recent Amendment: The Competition Commission of India (CCI) has introduced a new 'lesser penalty plus' system to encourage individuals and cartels already under investigation to provide information about other cartels unknown to the regulator. This scheme builds upon the existing 'lesser penalty' leniency regime, where the CCI can reduce or waive penalties for entities involved in cartels if they fully disclose violations. Now, under the 'lesser penalty plus' regime:

1. Second Participant Benefits:
   • If a second participant in a cartel confesses, they can receive a waiver of up to 50% of the penalty.
   • If this participant reveals the existence of another cartel, they can get an additional 30% reduction in penalties and a full waiver for the newly disclosed cartel.
2. The objective of the Regime:
   • The government introduced this regime to tackle cartels, which are challenging to uncover without insider disclosures.
   • The hope is that reduced penalties for those who provide information, coupled with higher penalties calculated based on a company's global turnover introduced last year, will make it easier to detect cartels.
3. Conditions for Penalty Reduction:
   • To qualify for a penalty reduction, the participant must cease involvement in the cartel, make vital disclosures, provide all relevant information, fully cooperate, and refrain from manipulating documents.
   • Failure to meet these conditions may lead to the rejection of the application, with the CCI using the information to initiate an inquiry into the alleged violation.
4. CCI Discretion:
   • The CCI has discretion in determining the extent of the penalty reduction.
   • Factors considered include the stage at which the disclosure is made, existing evidence, the quality of disclosed information, and compliance with specified conditions.

This new 'lesser penalty plus' system aims to enhance the effectiveness of the leniency regime, potentially leading to the discovery and penalization of cartels in India.

Are there any sector-specific offences or exemptions?

• Exemption for Vessel Sharing Agreements (VSAs):
  • Previously, there was an exemption for Vessel Sharing Agreements (VSAs) involving carriers of any nationality operating ships from any Indian port. This exemption allowed such agreements as long as they did not involve practices like fixing prices, limiting capacity, or allocating markets.
  • While this exemption was in effect, parties involved in VSAs had to submit relevant documents to the Director General of Shipping for review.
  • However, it's important to note that this exemption has not been renewed by the MCA.
• Exemption for Joint Venture Agreements:
  • According to the Proviso to Section 3(3) of the Competition Act, there's an exemption for joint venture agreements.
  • If a joint venture agreement contributes to increased efficiency in the production, supply, distribution, storage, acquisition, or control of goods or provision of services, it may be exempted from being considered anti-competitive.

A cartel formed outside Jurisdiction is prohibited?

Section 32 along with Section 19(1) of the Competition Act empowers the CCI with extra-territorial jurisdiction, this means the CCI can investigate and take action against cartels operating outside India, that have the potential to cause or are likely to cause an AAEC within India.