EMERGING COMPETITION LAWS IN INDIA: AN ACADEMICIANS PERSPECTIVES

1
EMERGING COMPETITION LAWS IN INDIA AN
ACADEMICIANS PERSPECTIVES
Dr.(Mrs.) Vijaya Katti Professor Chairperson
(MDPs) Indian Institute of Foreign Trade New
Delhi - 110 016
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Competition

• Is a situation in a market in which firms or
  sellers independently strive for the buyers
  patronage in order to achieve a particular
  business objective for example, profits, sales or
  market share (World Bank, 1999)
• Is an essential hand maiden to efficient trade.
• The ultimate raison d etre of competition is the
  interest of the consumer.

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Contd

• Is the foundation of an efficient working market
  system, which has several advantages over a
  planned economy and constitutes the pre-condition
  which prevents freedom of decision and action of
  self interested individuals or entities from
  leading to anarchy or chaos but rather to
  economically optimal socially fair and desirable
  market results. (Report of High Level Committee
  on Competition Policy, Deptt. of Company Affairs,
  2000).
• Competition leads to greater dynamic efficiency
  in the economy by bringing about innovation,
  technological development, lower price and better
  quality and service for the consumer.

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WHAT IS COMPETITION POLICY?

• Competition in economic parlance signifies a
  market structure involving a large number of
  players such that no single player is in a
  position to significantly influence the market.
• At the other extreme is Monopoly where a single
  firm rules the market and earns super normal
  profit by controlling output and/or supply and by
  charging higher than cost of production from the
  consumers
• At the intermediate level is Oligopoly where a
  few market players are available. Oligopolists
  manage to control the market by colluding among
  themselves since none of them alone may be in a
  position to control the market. Such collusions
  are generally tacit.

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Contd

• It is not necessary that there are a large number
  of producers/suppliers to have competition
  conditions.
• A single producer can exist and provide a
  competitive atmosphere provided entry of new
  firms is easy and not costly.
• Entry barriers can be due to the market position
  of incumbent firms, legal barriers or strategic
  barriers
• Incumbent firms may use their power as first
  Movers to block entry.
• Legal barriers include licensing and other
  Government regulations

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Contd

• Strategic barriers are generally erected by
  incumbent firms in the form of artificial and
  sudden price reduction with a view to thwarting
  new entry.
• Contestability of markets ensure competitive
  conditions in the market.
• Competition is expected to enhance allocated and
  productive efficiency so as to maximize economic
  welfare.
• Monopoly (market) power tends to lead to
  inefficient allocation of sources and discourages
  innovation or introduction of better technology.

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OBJECTIVES OF COMPETITION LAW POLICY

• Promoting economic efficiency in both static and
  dynamic sense
• protecting consumers from the undue exercise of
  market power
• facilitating economic liberalization, including
  privatization. Deregulation and reduction of
  external trade barriers
• Preserving and promoting the sound development of
  a market economy
• ensuring fairness and equity in market place
  transactions
• Protecting the public interest including in
  some cases considerations relating to industrial
  competitiveness and employment
• Protecting opportunities for small and medium
  business

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Competition Law

• It is a tool to implement and enforce competition
  policy and to prevent and punish anti-competitive
  business practices by firms and unnecessary
  Government interference in the market.
• Competition Law generally covers 3 areas
• Anti - Competitive Agreements, e.g., cartels,
• Abuse of Dominant Position by enterprises,
  e.g., predatory pricing, barriers to entry and
• Regulation of Mergers and Acquisitions (MAs).

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Contd

• The need for Competition Law arises because
  market can suffer from failures and distortions,
  and various players can resort to
  anti-competitive activities such as cartels,
  abuse of dominance etc. which adversely impact
  economic efficiency and consumer welfare.
• Thus there is need for Competition Law, and a
  Competition Watchdog with the authority for
  enforcing Competition Law.

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CONFLICT OF OBJECTIVES

• The objectives of competition policy in any
  country may be conflicting among themselves. For
  example, the objective of protecting the
  interests of small and medium industries may
  conflict with the objective of efficiency.
• Therefore, the concept of core values for
  promoting competition policy has evolved.
• The anti-competitive nature of a market behaviour
  is decided based on whether it is in conformity
  with the core values or not.

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Promotion of Competition

• For promotion of competition in the market an
  appropriate competition policy is required.
• Competition policy includes those government
  measures that directly affect behaviour of
  enterprises and structure of industry. (Khemani
  and Mark Dutz 1996)

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Elements of Competition Policy

• Competition policy has two elements -
• Putting in place a set of Policies that enhance
  competition in local and national markets.
• A Law designed to prevent anti competitive
  business practices and unnecessary government
  intervention.

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RESTRICTIVE PRACTICES INVOLVING INTERNATIONAL
TRADE

• Market Access for Imports
• Import cartels
• State trading, exclusive or special privileges
  and monopolies
• Problems of access to downstream market
• Problems of access to upstream market
• Cross subsidization

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Cont

• Export cartels
• International cartels, mergers and abuses of
  dominant positions
• Predatory pricing, price discrimination,
  cross-subsidization and dumping

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Competition Policy

• It includes Reforms in certain Policy areas to
  make these more pro-competition-
• Industrial policy
• Trade policy
• Privatization/disinvestment
• Economic Regulation
• State aids
• Labour policy
• Other such policies

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Industrial Policy

• Industrial Policy has to address and reform
  licensing requirements, restrictions on
  capacities, or on foreign technology tie ups,
  guidelines on location of industries,
  reservations for small scale industry, etc. These
  adversely affect free competition in the market.

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Trade Policy

• Trade policy has important implications for
  development of competition in the markets.
  Measures for liberalisation of trade promote
  greater competition e.g. reducing tariffs,
  removal of
• quotas/physical controls, investment controls,
  conditions relating to local content etc.

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Privatisation/Disinvestment

• Empirical research has found that state- owned
  enterprises generally tend to be less efficient
  than private owned firms, for reasons such as
  manager compensation, low incentives, lack of
  direct accountability, hard budget constraints
  for managers, etc.
• State owned enterprises are generally insulated
  from market forces and receive protection/benefits
  such as government imposed barriers to entry,
  price regulation and subsidies.
• Thus privatization of state owned enterprises is
  important element of competition policy.
• However, in privatization/ disinvestment process,
  care is to be taken that state monopoly is not
  replaced by private monopoly.

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Economic Regulations

• New legislation and regulations to promote
  competition and to bring about restructuring of
  major industrial sectors is essential.
  Legislation to aim at separating natural monopoly
  elements from potentially competitive activities,
  and the regulatory functions from commercial
  functions, and also create several competing
  entities through restructuring of essential
  competition activities and to create a
  competitive environment in following sectors.
• Examples
• Electricity sector
• Telecommunications sector
• Ports

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State Aids

• Several state aids create unequal operating
  conditions for businesses. Examples
• Subsidies
• Tax rebates
• Preferential loans
• Capital injection
• Public procurement
• Experience suggests that such policy measures
  rarely have successful results and destroy
  incentives for firms to become efficient.
• Temporary specific state- aid for well stated
  public purpose can be justified.

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COMPETITION POLICY IN THE WTO CONTEXT

• Havana Charter and the still born International
  Trade Organization (ITO)
• Chapter V of the Havana Charter entitled
  Restrictive Business Practices contained
  Articles on the obligations of member governments
  to address such practices. ITO WAS TO FACILITATE
  COMPLAINTS LODGED BY MEMBERS. However, ITO never
  came into being

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COMPETITION POLICY IN THE WTO CONTEXT

• The Charter defined the purpose of the obligation
  provisions as follows
• . To prevent, on the part of private or
  commercial public enterprises, business practices
  affecting international trade which restrain
  competition, limit access to markets, or foster
  monopolistic control, whenever such practices
  have harmful effects on the expansion of
  production or trade "

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Contd

• Since the Havana Charter did not enter into force
  the GATT contracting parties agreed to a Decision
  on Arrangements for Consultations on Restrictive
  Business Practices, in November 1960.
• The various WTO agreements especially the main
  GATT, GATS and TRIPS agreements provide for
  consultations and cooperation on anti-competitive
  practices

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WORKING GROUP ON TRADE COMPETITION POLICY

• The Singapore Ministerial Conference (December
  1996) brought the issue of trade and competition
  policy more explicitly into the work programme of
  WTO.
• This working group was established to undertake a
  study process related to the interaction between
  trade and competition policy, including
  anti-competitive practices, in order to identify
  any areas that may merit further consideration in
  the WTO framework.
• The Ministerial decision specified that the work
  of the working group will not pre-judge whether
  negotiations will be initiated in the future and
  that future negotiations, if any, will take place
  only after an explicit consensus decision by
  among WTO members.

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Contd

• As mandated by the Singapore Ministerial
  Conference the progress of the Working Group was
  reviewed at the end of 1998 on completion of two
  years of study process.
• Subsequently, the General Council of WTO agreed
  to continued study by the Working Group, but with
  focussed attention on the following three areas

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Contd

• 1.The relevance of fundamental WTO principles of
  national treatment, transparency and most
  favoured nations treatment to competition policy
  and vice versa
• 2.Approaches to promoting cooperation and
  communication among members, including in the
  field of technical cooperation and
• 3.The contribution of competition policy to
  achieving the objectives of WTO, including
  promotion of international trade

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Background to Indias Competition Law

• Earlier Law
• MRTP Act enacted in 1969
• Belongs to the era of controlled economy, as
  against the market based economy
• Objectives were to prevent concentration of
  economic power, to control monopolies, and to
  prohibit monopolistic and restrictive trade
  practices
• Major amendments to MRTP Act undertaken in
• 1984 major addition was relating to Unfair
  Trade Practices,
• 1991 deletion of Chapter relating to Mergers
  and Acquisitions, and
• Addition relating to Award of Compensation.

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Competition Act 2002

• An Act to establish a Commission to prevent
  practices having adverse effect on competition,
  to promote and sustain competition in markets, to
  protect interest of consumers and to ensure
  freedom of trade carried on by other participants
  in markets, in India
• Under the Act the Commission can enquire and
  adjudicate in respect of
• Anti-Competitive Agreements
• Abuse of Dominant Position
• Regulation of Mergers and Acquisitions
• Commission also has responsibility to undertake
  Competition Advocacy

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Anti-Competitive Agreements

• These are agreements which cause or are likely
  to cause an appreciable adverse effect on
  competition within India
• Horizontal Agreements
• These are between and among competitors who are
  at the same stage of production, supply,
  distribution, etc.
• These are presumed to be illegal
• Examples cartels, bid rigging, collusive
  bidding, sharing of markets, etc.

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Contd

• Vertical Agreements
• Vertical Agreements are between parties at
  different stages of production, supply,
  distribution, etc.
• These are not presumed illegal are subject to
  rule of reason.
• Examples tie-in arrangements, exclusive
  supply/distribution agreements, refusal to deal.

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Abuse of Dominant Position

• Includes practices like
• Unfair or discriminatory conditions or prices,
• Limiting or restricting production or
  technical/scientific development,
• Denial of market access, and
• Predatory pricing.

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Relevant Product Market

• Physical characteristics or end-use of goods
• Price of goods or service
• Consumer preferences
• Exclusion of in-house production
• Existence of specialised producers
• Classification of industrial products

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Relevant Geographic Market

• Regulatory trade barriers
• Local specification requirements
• National procurement policies
• Adequate distribution facilities
• Transport costs
• Language
• Consumer Preferences
• Need for secure or regular supplies or rapid
  after-sales services.

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Combinations Regulation

• Combinations, in terms of the meaning given to
  them in the Act, include mergers, amalgamations,
  acquisitions and acquisitions of control.
• Horizontal Mergers
• It must first be established as to what the
  relevant market is.
• To establish whether the higher concentration in
  the market resulting from the merger will
  increase the possibility of collusive or
  unilaterally harmful behaviour.
• Potential contestability
• Even mergers that lead to an uncompetitive
  outcome could result in certain efficiencies
  that more than make up for the welfare loss
  resulting from this.

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Contd

• Vertical Mergers
• Competition law must not normally have any
  objections to vertical mergers.
• Conglomerate Mergers
• A conglomerate merger is a merger that is neither
  horizontal nor vertical.
• Pre-Notification
• The requirements for prior notification.

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Contd

• There are two possibilities
• The first is that approval or disapproval of the
  merger may be obtained (possibly within a
  specified time) before going ahead with the
  merger.
• The second option is that no notification of
  permission is required and that the threat of
  action in case of a violation should generally
  enforce legal behaviour.

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Competition Advocacy

• The Competition Commission of India, in terms of
  advocacy provisions in the Act, is enabled to
  participate in the formulation of the countrys
  economic policies and to participate in the
  reviewing of laws related to competition at the
  instance of the Central Government.
• Commission is required to take measures for
  promotion of Competition Advocacy, creating
  Awareness and imparting Training about
  competition issues Section 49(3)

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Contd

• Advocacy means competition promotion through
  nonenforcement measures
• For promotion of competition advocacy and
  creation of awareness about competition issues,
  the Commission may-
• i) Undertake appropriate programmes / activities
  etc.
• ii) Encourage and interact with the
  organizations of stakeholders, academic community
  etc. to undertake activities, programmes,
  studies, research work, etc. on competition
  issues

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cont

• iii) Encourage the academic / professional
  institutions to include competition policy law
  in the curriculum
• iv) Undertake appropriate capacity building
  programmes and arrange training for its officers
  / staff and stakeholders etc.
• The Commission is required to give opinion to the
  Central Government on matters relating to
  Competition Policies, but such opinion is not
  binding on the Central Government Section
  49(1).

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Academicians Perspective

• Competition should be a factor to be reckoned
  with in the trade and market policies of a
  country.
• There should be a competition policy and of
  course a competition law, which should be
  structured that they subserve by and large the
  consumers, consumer interest and consumer welfare.

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Contd

• There should be a enough flexibility in the
  competition and trade policies to deal with the
  specific needs and requirements of a country.
• Public interest dimension can have primacy over
  the consumer interest dimesion, in exceptional
  circumstances. Care should be taken not to allow
  public interest to be abused to circumvent
  competition.
• Competition policy should inhere the development
  dimension in its approach and implementation.

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THANK YOU
Contact Dr. (Mrs.) Vijaya Katti Professor and
Chairperson (MDPs) IIFT, New Delhi E-mail
vijayakatti_at_iift.ac.in vckatti_at_yahoo.com