India Trust Buster Turns Up Heat

The Wall Street Journal, May 10, 2012

India’s antitrust regulator is flexing its muscles with new investigations and a request for greater powers, presenting more challenges for companies that want to do business in the world’s largest democracy.

The Competition Commission of India has begun an investigation of Apple Inc. AAPL +0.24%for marketing the iPhone 4 in India through select mobile-phone operators, an approach that could allegedly harm other companies in the industry, a government official said late Wednesday. It was also revealed this week that the agency is investigating Google Inc. for alleged abusive behavior in online advertising in India. And the commission is targeting a wide range of industries, including cement and tire manufacturing, for alleged price fixing.

A salesman arranged boxes of the iPhone 4 after its introduction by Aircel in Hyderabad, India, last May.

The Competition Commission also is seeking sweeping new powers to conduct surprise search-and-seizure operations, known as “dawn raids” in Indian bureaucratic circles, the official said. It also wants to scrutinize a wider range of mergers and joint ventures, especially in the pharmaceutical industry, where foreign companies have been active in takeovers.

The Competition Commission started accepting cases in 2009, replacing an essentially toothless antitrust body that had been in place since 1970. The new agency is charged with cracking down on anticompetitive agreements and abusive market behavior by dominant companies. It can order companies to dissolve such agreements and can levy hefty fines, in some cases up to 10% of a company’s annual revenue.

The regulator quickly has become a force to reckon with in corporate India—adding a risk for domestic and international companies while they also assess potential new tax liabilities for investments in India and cross-border mergers involving Indian assets.

“They’re trying to make up for the last 20 years, when there wasn’t any real antitrust law in India,” said Karthik Kumar, a corporate lawyer at Jones Day who specializes in Asia deals. “They are a significant force. Any company in India or overseas that is looking at making an investment in India or at its existing operations there views this very seriously.”

The Competition Commission has issued 10 orders totaling more than $250 million in penalties since it was established and is working through a slate of cases that could push that figure up substantially. The agency has targeted a number of companies for forming cartels, from explosives manufacturers, to film distributors, to pesticide makers, issuing fines large enough to wipe out a large chunk of several companies’ earnings.

A salesperson at a mobile-phone shop in New Delhi helped a customer with an iPhone 4 last year.

The Apple case centers on the smartphone maker’s agreements to market the iPhone 4 in India through agreements with two mobile-phone operators, Bharti Airtel Ltd. and Aircel Ltd. The agency will determine whether that arrangement has had an adverse impact on the overall industry, the government official said.

An Apple spokesman declined to comment.

The Google case, which initially will focus on its dominant position in India’s nascent online-advertising market, could take months to investigate and could extend into “every aspect of the company’s business,” the official said.

Google said it is confident that its products are compliant with Indian competition law. “Though competition is always a click away, we understand that with success comes scrutiny,” the company said.

Beyond antitrust, the commission also has begun providing consumers with an administrative route to punish companies the consumers believe defrauded them, rather than having to file lawsuits that could take years to decide.

The agency’s biggest penalty was a $118 million fine last year for prominent Indian real-estate developer DLF Ltd. for “highly arbitrary, unfair, and unreasonable” conduct toward buyers of apartments at a housing complex in the outskirts of New Delhi. DLF built smaller units than it promised when it made sales and delayed construction, resulting in significant losses for buyers, the agency said.

DLF has appealed the fine to India’s Competition Appellate Tribunal. A DLF spokesman declined to comment.

In one of the most closely watched cases, the Competition Commission recently completed an investigation of cement companies for allegedly colluding to set prices and is weighing what penalties to impose, the government official said. He declined to say what companies were investigated.

Macquarie Securities in a March research report said it was probable that penalties would be imposed on the top 10 or 12 cement companies. Based on the revenue of such companies, that could result in total fines of hundreds of millions of dollars.

Meanwhile, the Competition Commission is seeking expanded powers, which Parliament is expected to consider in coming weeks. One change would allow the agency to raid company offices to gather evidence without a warrant from a magistrate, as currently required. Another change would expand the agency’s ability to target companies that are dominant and abusive collectively.

Pradeep Mehta, secretary-general of consumer-advocacy group CUTS International, who advised the government on beefing up the competition law, said the changes will bolster the agency. But he said it still suffers from a shortage of skilled manpower capable of carrying out complex economic analyses to probe antitrust issues.

Commission member Harish Gupta said the young agency is still working to assemble the staff it needs.

“The sheer size of the country, diversity of people and cultures, diversity of sectors and business practices” combined to make enforcement difficult, he said in a September speech. “The decades of government controls have resulted in a very weak competition culture.”

Separately, the commission is expected to get authority soon over small mergers—a move intended to bring more scrutiny to foreign investments in the pharmaceutical sector. Though the country allows foreign companies to own 100% of Indian pharmaceutical ventures, some government officials became concerned after a spate of foreign takeovers of Indian companies in recent years, such as Daiichi Sankyo Co.’s 4568.TO -2.73%purchase of a majority interest in Ranbaxy Laboratories Ltd. and Abbott Laboratories’ ABT +1.62%acquisition of a unit from Piramal Healthcare Ltd. 500302.BY -0.68%
Some officials worried that such takeovers would lead to increases in drug prices. Under guidelines expected to take effect soon, the Competition Commission would be able to put conditions on pharmaceutical deals, such as requiring that foreign companies which make Indian acquisitions maintain production of low-cost generic drugs, the government official said.

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