Competition in Times of Pandemic and Its Aftermath

The Monopolies and Restrictive Trade Practices Act, 1969, (MRTP Act) was introduced in order to restraint the adverse effects of the Industrial licensing policy i.e. concentration of economic power in the hands of few large industrial houses. The MRTP Act contained provisions pertaining to prohibition and control of monopolistic practices and prohibition of restrictive and unfair trade practices.

Large scale reforms, post 1991, such as liberalization of the Industrial policy and accelerated globalization paved the way for forming a legislative and regulatory framework which would harmonize the conflict between the competition policy and other government policies including safeguards to consumer interest. The Government felt that the MRTP Act had become obsolete in certain areas in light of the international economic developments relating to competition laws. Further, the focus needed to shift from curbing monopolies to promoting competition¹.

Accordingly, a high-level committee on Competition Policy and Law (Raghavan Committee) was formed in October, 1999, which provided recommendations on a suitable legislative and administrative framework relating to competition law. Pursuant to its recommendations, the MRTP Act was abolished and the Competition Act of India, 2002 (Act) was introduced which covered provisions pertaining to bid rigging, forming of cartels, price fixing and predatory pricing which were missing in the MRTP Act. The four pillars of the Act are (i) anti-competitive agreements, (ii) abuse of dominance, (iii) regulation of combinations and (iv) competition advocacy. Also, an expert body, the Competition Commission of India (CCI) was established as an independent regulator for enforcing the Act. The CCI is vested with investigative, regulatory, adjudicatory and advisory powers as per the scheme of the Act².

Considering the critical role of the CCI in the economic framework, the policymakers must ensure that the Act does not in itself become anti-competitive. Hence, the law is required to be precise and dynamic. In such unprecedented times, most of the businesses are stuck between a rock and a hard place. Hence, the probability of collaboration with competitors, discriminatory pricing may be some extreme measures resorted to by businesses. This Paper outlines certain suggestions to cope with the current economic crisis and its aftermath within the realm of the Act.

Suggestions to cope with current pandemic and its aftermath

Price control and effective penalty mechanism

Price gouging is the practice of increasing prices of certain goods or services to an unfair level, especially during an emergency. Globally, regulators are under pressure to act against such unreasonable price increase. For instance, Canadian regulators are condemning alleged ‘price discrimination’ and vowing to crack down on price gouging during the pandemic. The Competition and Markets Authority, United Kingdom (CMA, UK) has set up a taskforce to tackle negative impacts of businesses charging excessive prices or making misleading claims about their products³. The Turkish Competition Authority (TCA) as well gave its heads up to undertakings that it was closely following the price increases, which it referred to as opportunistic during the pandemic⁴. The TCA, besides levy of highest fines allowed by the Turkish Competition Law on all the undertakings, also initiated a full-fledged investigation against twenty-nine undertakings, including major supermarket chains, operating in the food and cleaning/ hygiene products market⁵. The Italian competition authority is investigating Amazon and eBay for unjustified price increases of hand sanitizers and protective masks⁶. Due to fear of anti-trust violations in USA, Amazon suspended four thousand seller accounts over complaints of price gouging⁷.

Amidst the global anti-trust measures, the Indian regulators were quick to exercise the power under the Essential Commodities Act, 1955, to include hand sanitizers and masks as essential commodities. Thereby, a restriction was imposed on the stocking of such products to prevent its shortage and avoid artificial demand resulting in artificial price rise. As India already has a dedicated legislation to prevent price gouging, a separate action by the CCI was not undertaken. However, issues such as coordination between players on distributors’ margin, control on supplies, etc. are under the purview of the CCI.

In order to keep anti-competitive measures in check the Act imposes a maximum penalty of ten percent of the average turnover or three times the profits in certain cases. However, the current penalty framework lacks transparency and effectiveness. As of March 2018, the CCI had levied a total penalty of Rs.13,523 crores in 135 cases, however, the recovery rate is only 0.4%⁸. Currently, in the absence of guidelines there is lack of clarity in penalty estimation methodology which leads to high litigation and low recovery levels.

A robust and effective penalty regime with suitable guidelines that imposes an optimal level of fine to enforce the provisions of the Act must be adopted on a fast track basis to deter businesses from taking advantage of the current crisis and indulging in anti-competitive measures.

Support of CCI to other regulatory bodies in revival of economy

The stimulus package provided by the Government does not act as a fillip to the economy during the pandemic as it mainly contains government loan / guarantees, credit extensions by banks and regulatory amendments. The new spending under the stimulus package is only 1.8% of India’s Gross Domestic Product (GDP) which is meagre in comparison to other countries⁹. A substantial stimulus to facilitate economic growth has been provided by other countries, for instance, Japan - 21% of GDP, USA - 11% of GDP, China- 11% of GDP and Brazil - 8% of GDP¹⁰. Hence, regulatory bodies of ailing sectors are pushing for selective aid to facilitate rebound in the absence a bigger and wider stimulus package which covers the demand and supply side of economy.

Support to capital-intensive sectors

The CCI must support other regulatory initiatives which can help businesses revive in these times of crisis. A boost for survival is required in case of capital-intensive sectors. One such sector requiring immediate attention is the telecom sector. This sector was under pressure before Covid -19 and the current situation has made matters worse. In response to the consultation paper issued by Telecom Regulatory Authority of India (TRAI) in December 2019, all the telecom operators of India have favored a floor price for data tariffs for at least two years till the financial stress in the sector eases. The think tank of the Indian Government, NITI Aayog, considering the added burden on the sector caused by pandemic reversed its initial opposition and supported the floor price. However, the CCI is entirely against a floor price in order to keep competition alive in the sector. The TRAI has recently stated it shall continue open discussion on this subject after the lockdown has completely lifted and normalcy returns.

Fixing a floor price can be a red flag for a healthy and competitive market as it may disincentivize innovation and improvements in services. However, extreme situations call for extreme measures, hence a short-term closely monitored relief with periodic review for such capital-intensive sectors is the need of the hour. This will also enable continuation of firms which is equally critical to maintain competition in the sector.

Support in privatization of sectors

Another initiative by the Government which needs support of the CCI is the public private partnership in railways. The Raghavan Committee’s report(supra), which laid the groundwork for enacting the competition law in India had recommended privatization of state owned monopolies like railways in order to bring in economic efficiency and market discipline through competition. A blueprint for privatization of railways to implement in the medium term is required in order to ease the added strain on government finances caused due to pandemic and an economy which is on a standstill. The Competition authorities must pro-actively support the plan of Niti Aayog and Ministry of railways, to establish a well-functioning, profitable, competitive and customer-oriented privatization of railways.

Dynamic approach towards combinations in the time of Covid – 19

Globally there has been a spike in collaborations, for instance, USA drug maker Pfizer and Germany’s BioNTech are working together on a potential vaccine for Covid-19. Such collaborations, otherwise, may have been subject to scrutiny by anti-trust regulators of both jurisdictions. On 8 April 2020, the European Commission published a temporary framework communication to provide antitrust guidance to companies in the critical medical goods space. It also issued a comfort letter to assure ‘Medicines for Europe’ against levy of heavy cartel fines.¹¹

The Indian economy is seeing a variety of collaborations, most of which have been triggered solely due to the pandemic. A tie-up for delivery of essential commodities by consumer goods majors, for instance, ITC Ltd has tied-up with Jubilant FoodWorks (franchisee of Domino’s Pizza)¹², Marico Limited has tied-up with food technology platforms (Zomato and Swiggy)¹³. Similarly, cab-aggregator Uber is offering its fleet to Flipkart and Big Basket for delivering essential items. Also, Uber has tied up with Medlife for delivering medicines¹⁴. However, as per the provisions of section 3(3) of the Act, coordination amongst vertical players is also presumed to cause Appreciable Adverse Effect on Competition (AAEC). Accordingly, the CCI in its advisory issued on 19 April 2020¹⁵ to businesses, stated that at the time of competition assessment amongst other factors, it shall consider pro-competitive effects. The CCI in its advisory has stated that it will not consider such businesses which are necessary and proportionate to address concerns arising from Covid-19 to cause AAEC. With the advisory, the CCI has showcased flexibility for collaboration during these difficult times, however, it has not provided any relaxation with respect to the approval mechanism.

Relaxation in approval mechanism

Two ways in which the CCI may consider providing relief to businesses collaborating in order to accelerate economic recovery i) providing speedy automatic approvals under its ‘green channel route’ or ii) Central Government exercising its power under the Act and providing exemption in public interest due to the pandemic.

As per the current provisions, parties having horizontal overlap, vertical overlap or complementary business are not eligible for such automatic approvals under green channel route. In such trying times, an exception maybe made by the CCI for providing ‘green channel approvals’ to firms in research and development sector, health care sector and pharmaceutical sector to create a resilient and sustainable environment in such sectors.

As per the provisions of section 54 of the Act, the Central Government has power to exempt any class of enterprise or any enterprise from the applicability of the provisions of the Act in the ‘interest of security of the state’ or ‘public interest’. The Ministry of Corporate Affairs (MCA) has utilized its power under the aforesaid section to exempt nationalized banks and regional rural banks in the banking sector¹⁶ from merger control regulation. Such exemption has also been provided in case of vessel sharing agreements between shipping companies for a specific period of time¹⁷. Such exemption may be excercised by the Central Government in public interest in order to the overcome the crises caused by pandemic.

Relaxation of competition principles to the extent of compete exemption may lead to exploitation by businesses and have adverse effects on the economy in the long run. Therefore, widening the scope of the green channel route may be provided as a temporary measure to hasten economic recovery.

Regulating cartels

It is important that businesses do not take advantage of the market volatility and disruptions caused by the lockdown to enter into ‘crisis cartels’ i.e. agreements among most or all competitors to restrict output and/ or reduce capacity to increase profitability and prevent market exit in times of crisis. Such acts are prohibited under section 3 and section 4 of the Act. One such sector bearing the brunt of cartelization of raw materials like cement and steel is the real estate sector. Additionally, this sector is facing liquidity crunch and stagnation of demand. The CCI’s immediate intervention and penal action against such cartels in cement and steel industry could help the sector kick start and set an example for other opportunistic cartels. While the Confederation of Real Estate Developers’ Associations of India (CREDAI) is seeking assistance from the Government for their revival¹⁸, the Competition authorities must proactively champion competition principles to safeguard a level playing field and avoid market distortions.

Radical approach towards digital markets

This economic crises requires a dynamic and forthcoming approach by the Competition Authorities to ensure that the economy is out of the clutches of recession. The growth of the digital market is turning out to be the mantra for economic growth. With most firms switching from offline to online mode of business, the transactions in the digital space are likely to increase. The CCI needs to adopt a framework which effectively assess mergers in the digital market. Previously, transactions in the digital market which were notified, like the merger between Flipkart and eBay¹⁹ or Walmart and Flipkart²⁰, a standard approach was adopted by the CCI by measuring market shares, barriers to entry, extent of vertical integration, extent of competition likely to remain after the combination etc. The CCI, however, did not assess the transactions with respect to the dynamic nature of the digital markets or the potential anticompetitive conduct arising from combinations of data held by the parties.

In 2018, Apple acquired Shazam, a developer and distributor of music recognition applications for USD 400 million²¹. The European Commission and Federal Trade Commission approved the merger without any inquiry. They based their approval by eliminating data concentration concerns on the basis of legal and contractual limits for the acquirer to use the information about the customers of its competitors and documentary evidence reflecting no clear incentive to undertake any possible anticompetitive conduct using the combined data. Also, information similar to that collected could be gathered by the competitors of the parties to the merger.

The CCI may adopt a similar approach and place more importance to factors like collaborations in digital market promoting efficiency, innovation, competition and consumer protection. The CCI published a report on the “Market Study on E-commerce in India” on 8 January 2020²², with an objective to understand the functioning of digital markets in India and their implications for competition, akin to other antitrust regulators globally. Also, the Competition Law Review Committee (CLRC) which was set up to review and recalibrate the Act has provided key recommendations in this sector²³. The need for rapid implementation of such forward-looking approach in the digital markets shall provide confidence among firms and pave the way for economic growth in India.

Certain flexibility in case of critical mergers

‘Rescue mergers’ also known as the ‘failing firm defense’ is used by parties to the merger seeking approval, irrespective of potential competitive issues, by claiming that the target firm would exit the market but for the merger and that would be more harmful to competition than the proposed merger. The document produced in Organisation for Economic Co-operation and Development (OECD) Competition Committee’s Roundtable Discussion on the Failing Firm Defense, 2009²⁴ highlights that during the times of financial distress and economic crisis, it is likely that there are increased numbers of claims for the application of failing firm defense.

The European Commission in its guidelines on the assessments of horizontal mergers²⁵, points out than an otherwise problematic merger may be authorized if one of the companies is a failing firm, however, evidentiary thresholds must be high. Three cumulative conditions are required to be met: (i) absent the merger, the failing firm would exit the market in the near future as a result of its financial difficulties; (ii) there is no feasible alternative transaction or reorganization that is less anti-competitive than the proposed merger; and (iii) absent the merger, the assets of the failing firm would inevitably exit the market.

Also, the UK CMA, has issued a general ‘refresher’ on how it is likely to approach ‘failing firm’ claims²⁶. Recently, the UK CMA, approved the acquisition by Amazon of a fellow delivery service company Deliveroo. The UK CMA stated that significant deterioration in failing firm’s financial position as result of Covid-19, the exit of Deliveroo is inevitable and would have a more adverse impact on the competition in comparison to allowing the investment of Amazon. In USA, a similar merger is on the cards, wherein Uber is proposed to acquire food delivery company Grubhub Inc²⁷. thereby leading to substantial consolidation of the food delivery market in USA.

In India, the current economic scenario will lead to an increased level of consolidation of firms irrespective of their size or sector. The acquisition of insolvent firms is within the ambit of the Insolvency and Bankruptcy Code, 2016, along with the necessary approval of the resolutions by CCI. However, with the mandated ad-hoc suspension of provisions of IBC for one year, which gives powers to financial creditors, operational creditors and promoters to trigger the insolvency and bankruptcy proceedings, the entire burden of review of acquisition of firms facing insolvency shall fall on the Competition authorities.

As per the Act, provisions of section 20(4) provide the criteria for the purpose of determining whether a combination would have the effect of or is likely to have an adverse impact on competition in the relevant market. Sub clause (k) of the aforesaid section provides that ‘possibility of a failing business’ is one such criteria. Accordingly, the business of the firm need not be a total failure at the time of notifying the CCI, but a mere possibility that it is likely to fail in future is sufficient to entitle the parties to claim the failing firm defense in India.

In such crises, two types of mergers and acquisitions are likely. One being the strategic type, wherein big firms make acquisitions as prices are attractive. Second being investor driven mergers between high cash burn companies that are not doing well. The CCI shall face a challenge in reviewing such mergers as in many cases the rationale for such mergers maybe short-term benefits to the acquirer, such as absorption of the failing firm’s carry forward losses subject to requisite conditions being satisfied or appreciation in the earning per share of the acquirer. This places a huge responsibility on the Competition authorities as they run the risk of approving anti-competitive mergers which could have a long-lasting negative impact on the market.

A number of critical mergers requiring urgent evaluation of CCI will be those of Indian start-ups which have hit a roadblock due to cash flow crunch as they are unable to raise money from investors during the pandemic. Funding for start-ups has dried up, with the Foreign Direct Investment (FDI) restrictions on neighboring countries including China and low risk appetite of various funds such as SoftBank Group, Sovereign Funds, etc. According to a report by Tracxn Technologies Private Limited, over the past few months, more than 250 startups have shut shop.

The CCI has clarified that coordinated conduct/ activities of businesses may be granted protection from sanctions provided such conduct is necessary and proportionate to address the specific concerns/ requirements arising due to Covid-19. The CCI has vide its notification dated 20 April 2020²⁸, that parties to the combination may avail pre-filing consultation through video conferencing. However, recognizing that the position of firms in distress may rapidly deteriorate during consultations, which in turn may cause inefficient liquidations, the CCI should adopt procedural changes to ensure a speedier review of mergers involving failing firms. It is important that CCI eliminates the traditional one-sided logic and treats such submissions in fair and transparent manner by scrutinizing sufficient evidence.