Need for a realistic penalty regime

Financial Express, March 29, 2013

By Pradeep S Mehta

The varied nature of penalties imposed by the Competition Commission of India underlines the lack of clarity and systemisation in competition law

On February 8, the Competition Commission of India levied a penalty of R52.24 crore on the Board of Cricket Control of India (BCCI) for abusing its dominance. The penalty was assessed at 6% of the BCCI’s last three years turnover, and CCI felt that the order was commensurate in view of BCCI’s contribution to cricket in the country. The complaint involved the popular IPL league, and the fact that the Indian Cricket League, promoted by the Essel Group, was killed by BCCI, thus snuffing out competition. Many have criticised this decision not only on the question of the quantum of penalties, but also that the revenues gained from the IPL tournament should have been the basis rather than BCCI’s turnover. Most importantly, they have questioned the lack of guidelines for penalties.

On the other hand, in June 2012, 11 cement companies were penalised for collusion with a total fine of R6,300 crore based on three times their profits since the cartel functioned. The association was also penalised, which is good. If the sympathy factor for the BCCI is to be considered as a yardstick, then cement companies too should have received a smaller penalty for their contributions to infrastructure building, their CSR work, etc. But that would be as silly as Rajat Gupta getting away from being jailed for insider trading and without mercy for his track record as a great philanthropist, and certified by Bill Gates and Kofi Annan among others.

On the other hand, the cement cartel should have been hammered with higher penalties because they or their associated firms have been indulging in collusive activities all over the world, and have faced the wrath of every possible competition authority. CCI should have gone into their antecedents to establish the fact that cement companies have been pathologically colluding and will continue to do so, and never learn lessons from being punished again and again, all over the world. Not only that, but the penalties will be recovered from their customers over time by way of pricing strategies.

There have been a spate of penalty orders, but one wonders what the basis of the assessment is. The jury is still out on their finality as all such orders are pending in appeal at the Competition Appellate Tribunal and can also go to the Supreme Court as the final arbiter. I am pretty sure that the issue of both the quantum and the methodology will be questioned, which would put CCI in a bad light and impact the good image it has built up.

Alas, there is no logical pattern followed in the levy of penalties, and these are quite arbitrary and in some cases quixotic. Globally, competition agencies have laid out transparent guidelines for fining, but the CCI is yet to develop one. This has been criticised by the competition community in India and elsewhere. Not only that, but the defendants do not even have a right to be heard on the quantum of penalties, except in appeal. It goes against the principles of natural justice.

In terms of a quixotic order, the Chemists and Druggists Association of Baroda was fined just R53,837 as 10% of its income over the last three years for spawning a chemists cartel in the city, by fixing distribution margins, creating entry barriers and practicing discriminatory practices against pharma companies by boycott if they did not follow their diktats. The association is not an enterprise and does not trade in pharmaceuticals, but is a collective of enterprises who decide on all these practices. In a similar case, a silly order was also passed against the Chemists and Druggists Association of Goa, when it was fined R2 lakh.

Such practices have been in vogue for many years in India, including those taken under the MRTP Act (which could only order cease and desist). And the Baroda or the Goa case are not the only ones, but one of several such practices all over the country.

The CCI should instead have charged all their members for benefiting from such anti-competitive practices, and also rapped the association for enabling the collusion. They did so somewhat in the case of Multiplex Association of India and United Producers/Distributors Forum by fining all the 27 members of the film producers and distributors R1 lakh each for stopping distribution of films. But that did not harm the public as much as the pharma case. A sound economic and financial analysis of the pharma case would have uncovered the extent of unjust enrichment of all members, and gouging of manufacturers and consumers. In fact, the CCI needs to conduct a national campaign to clean up the pharma sector, than just taking on the few cases that come up before them. Only then would the common man benefit, whose mention has been made in the order, rather than quote the poor man as mere tokenism.

When questioned in a TV interview on February 18, Ashok Chawla, the chairman of CCI, had this to say: “We have taken a conscious decision to build on some more cases before establishing an architecture that will ensure transparency in the broad principles or guidelines for imposition of penalty”. I find this very odd, because speaking at an international conference organised by the American Bar Association at Delhi on November 30, he said that the CCI has the ‘last mover advantage’. It is no rocket science to know what this means, i.e. one can learn and adapt from experiences and practices followed in other jurisdictions, rather than create them from our own experience.

Knowing Mr Chawla well, I feel he would have done the task, but he is hamstrung by knowledge-proof egotistical colleagues (retired babus) on the CCI’s board. The law does not allow the chairman to work without getting a consensus on everything, including buying a pencil, and if so, which colour it should be. An effort to prepare the guidelines was made by the young professional staff at CCI. They produced an excellent draft, but that was thrown into the dustbin without even a discussion. One boorish CCI member even remarked: “We have long experience in administration and you are going to teach us about guidelines”. One can imagine the dampening effect on the morale of the staff by such actions, and its wider impact on the critical work of CCI.

Most competition agencies have developed transparent guidelines for fining/penalties. Indeed, many of them did so after being questioned by courts, such as US, EU, France and so on. Most such guidelines follow a three step approach for defining the penalty amounts. It is thus recommended that for less serious contravention, the minimum amount should be 3% of the overall turnover; 5% for serious contravention, and 7% for very serious contravention. Recidivists (repeat offenders) would come under the third category even though their violation did not come under the same, if it was done the first time. Indeed, the gravity of the violation can differ due to subjectivity, but will need to be defended by the CCI.

The author is Secretary General of CUTS International.

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