The end to Indian anti-trust

Print edition : January 17, 2003

The Competition Bill, which formalises the process of `liberating' Indian monopolies from the constraints set by state policy in the past, is inadequate to either prevent or deal with anti-competitive behaviour.

THE Competition Bill, which would alter substantially the nature and thrust of anti-trust intervention by the government, is among the 43 Bills that were passed by Parliament in the winter session that ended recently. With its passage, the Monopolies and Restrictive Trade Practices (MRTP) Act that governed the government's anti-trust agenda is to be scrapped and the MRTP Commission is to be replaced by a Competition Commission of India (CCI).

This event marks the completion of a process in which the earlier practice of limiting the size and spread of business groups involving related or interconnected units has been given up in favour of ensuring that size is not so much the issue as the adoption of practices that limit or reduce the extent of competition. This transition had begun much earlier when the government had done away with the definition of a dominant group or undertaking based on asset size, allowing the erstwhile `monopolistic' groups to invest freely in new areas or expand in existing areas, subject to the industry-wise regulations that were in vogue. Inasmuch as these industry-wise regulations were being relaxed in any case, the process of "liberating" Indian monopoly from the constraints set by state policy in the past had begun. The competition Bill formalises this process and sets out the redefined framework for anti-trust intervention.

By adopting the legislation the Government of India has implicitly accepted a number of arguments on the nature and role of monopoly. The most crucial is that the market dominance that results from size may not in itself be inimical from the point of view of competition. This position could possibly be justified on three grounds. First, it could be based on the view that while concentration and oligopoly could spell the end of "free competition" it need not negate competition altogether. In fact, competition between large firms could be even more intense, resulting in more rapid innovation as well as price competition, both of which benefit consumers. Second, it could be argued that given the capital-intensive nature of new technologies in many areas, innovation may require firms to be large both in terms of capital investment and in terms of output relative to domestic market size. Third, it could be argued that the size and domestic market share of large incumbents need not matter so long as there are no significant barriers to entry of new firms and there are no barriers to competition from imports.

In fact, it is the last of the three that is competition from abroad which provides the anchor for the argument that the size of a firm relative to other domestic producers or relative to the size of the domestic market need not matter. There are, however, a number of features of the international and domestic marketplace that this argument ignores. To start with, not all goods and services are tradable, and competition from abroad cannot serve as a check on monopolistic and restrictive trade practices in the case of goods and services that are not traded or only traded to a small extent. Further, the presence of more than one large firm in a particular market is no guarantee of intense oligopolistic competition, so long as the potential for collusion and the sharing of surpluses garnered at the expense of the consumer exists.

Finally, in areas or segments where the international market itself is dominated by one or a few producers, as in the case of drugs and pharmaceuticals, the domestic producer/s can be the same as those which are the dominant players in the international market. Thus, imports from the same firm or from parent firms of subsidiaries cannot be a check on the misuse of market dominance. Inasmuch as the Bill does not distinguish between "domestic" and "foreign" monopolies, the check exerted by international competition on domestic monopoly is substantially diluted. It is only by making such a distinction and making the case that there is need for developing countries to build their own large firms by international standards that the decision to remove restrictions on the growth of large "domestic" firms can be justified. That is, the advocacy of unrestricted size for domestic firms must be couched in a framework wherein the effort is to protect domestic firms from international competition so as to nurture internationally competitive domestic monopolies.

Once this argument is made, a further round of intervention becomes inevitable, especially in areas where one or a few firms control a large share of a market in which they are being nurtured through protection. Such protection can be used to earn superprofits at the expense of the consumer. This could discourage production for the international market, since the domestic market is far more lucrative. And, the lack of competition from imports and the lack of desire to export could result in a situation where innovation is neglected. Consumers and the system would be the losers. Thus, intervention to discipline domestic capital either by fiat or by encouraging competition between domestic producers, especially in areas where one or a few producers control a substantial share of the market, becomes inevitable.

Thus even if the size of domestic firms is not to be restricted, that policy should not necessarily apply to large international firms, whose presence in the domestic market must be regulated. Further, intervention aimed at preventing domestic firms from exploiting their monopolistic position in a fashion that would adversely affect consumer choice and prices and constrain the pace of innovation needs to be formulated.

Unfortunately, the Competition Bill, which treats size as being immaterial avoids all these decisions. The government itself argues that the Bill seeks to (i) counter anti-competitive practices such as cartelisation, collusive bidding and bid-rigging; (ii) check abuse of market dominance; and (iii) lay down the procedures with regard to mergers and acquisitions. To this end the Bill seeks to set up a Competition Commission of India, with powers to adjudicate and the power to impose penalties.

The point to note is that the intent of the Bill is not to deal with dominance per se, but the abuse of dominance. It enjoins the CCI to promote competition and impose penalties on those who are judged to have reduced competition in any market by (a) directly or indirectly determining purchase or sale prices; (b) limiting or controlling production, supply, markets, technical development, investment or provision of services; (c) sharing the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market; or (d) indulging directly or indirectly in bid-rigging or collusive bidding. It considers any agreement (formal or informal) amongst enterprises or persons with regard to production, supply, distribution, storage, sale or pricing of, or trade in goods or provision of services, which involve (a) a tie-in arrangement; (b) an exclusive supply agreement; (c) an exclusive distribution agreement; (d) a refusal to deal; or (e) the maintenance of resale prices, to be anti-competitive in nature.

Thus the intent of the Bill is not to deal with the structures that lead to anti-competitive practices, but to deal with such practices on a case-by-case basis in order to protect the consumer, defined as any purchaser of a good or service. Either on its own or on receipt of a complaint or reference from any individual, agency or the government, the CCI and its various offices can launch an investigation, arrive at a judgment and impose certain penalties. Given the fact that the structures that lead to anti-competitive practices are to be left untouched, it can be expected that the number of cases where anti-competitive activity is likely to occur would be large. How and when the CCI would have the time to deal with all of these or even the more significant ones among them is unclear. There is a strong likelihood that delays would ensure that whatever little anti-trust element remains under the new dispensation would be substantially diluted.

The only instance where the structures that lead to anti-competitive behaviour are sought to be engaged is in the effort to regulate mergers and acquisitions. Even here the threshold limit for mergers and/or acquisitions that are to be monitored by the CCI from the point of view of their impact on competition is set at Rs.1,000 crores in terms of the aggregate assets of the combining entities or Rs.3,000 crores in terms of aggregate sales. We must note that it is asset size alone, and not size together with market share, which is taken to define the threshold for monitoring. That is the potential for abuse of market strength is rather loosely defined. Even in the case of such mergers, the Bill leaves it to the entities concerned to report the merger for consideration by the CCI. Such voluntary reporting is expected to occur if the merging entities want to ensure that their merger does not adversely affect the competitive environment. Since, even now, all mergers and acquisitions have to be reported to the courts and are governed by guidelines issued by the Securities and Exchange Board of India, it is unlikely that firms would voluntarily turn to the CCI for one more scrutiny. This, despite the fact that the Bill specifies that the CCI should complete its task within 90 days, which should fall within the six-month timeframe provided to the courts.

Thus, both in terms of the ability to deal with actual anti-competitive behaviour and in terms of its ability to prevent such behaviour by engaging the structures that lead in that direction, the Bill is clearly inadequate. It is likely, therefore, that the Bill would do little to deal with the anti-competitive tendencies that are being unleashed in a liberalised environment in which large firms, including large transnational firms, have the freedom to expand existing capacities, create new capacities and acquire capacities created by other producers, domestic or foreign.

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