Not exempt from trouble

The Financial Express, India, April 01, 2011

By Pradeep S Mehta

In spite of strong business opposition, the government has notified the merger regulations under the Competition Act, 2002, to be effective from June 1, 2011. In its wake, many have started clamouring for exemptions from this cover. For instance, the finance ministry believes that RBI is the competent regulator to deal with competition issues in the banking sector and not the Competition Commission of India, issues that will be tackled through the Banking Amendment Bill, 2011 as and when it is brought forward before the Parliament. Should exemptions be granted to any sectors? This article lays out the pros and cons.

Since the banking sector is likely to succeed in getting an exemption, coupled with the fact that the corporate affairs ministry has indicated that it is open to considering applications for exemptions in sectors that deserve special treatment, we are likely to witness many requests to block exemptions in the near future. It is thus critical that the ministry be discerning in selecting the determining factors before giving in to such applications. It is not yet clear whether banks will be exempt from the merger regulation alone or the whole law. But, even if mergers are regulated only by RBI, it will not make sense to exempt the banking sector from the ambit of the whole law vis-à-vis anticompetitive practices.

In fact, it is likely that others like the associations of professionals (lawyers, architects, doctors, accountants, etc) may also start lobbying for exemptions, seeking exemption from the whole ambit of the law. Although the competition law should ideally apply to all sectors engaged in commercial activity to allow its benefits to cascade down to all players, there are always some exemptions granted on political, social and economic grounds. This, however, should not weaken the enforcement of the competition law.

Another likely candidate for exemption is the shipping industry. If one looks at the agreements that ship liners enter into, they are illegal under section 3 of the Act. The agreements, which include fixing freight rates and other charges like terminal handling charges, bunker adjustment factors and currency adjustment factors, actually fall under price fixing cartels, which are per se illegal under the Act. They are normally agreed upon under the auspices of shipping conferences: a group of carriers coming together to discuss route-specific cooperation. The India Pakistan Bangladesh Ceylon Conference (IPBCC) is a good example. Granting such an exemption would be disastrous in terms of competition in the industry.

In 2007, the CCI is reported to have written to the shipping ministry expressing concern about the IPBCC coordinated cartel. This is particularly so since IPBCC controls 75% of the traffic between India and Europe, and the rates they fix end up being the standard that non-members follow. With 95% of India’s international trade by volume and 70% by value being through the sea route, the high prices that the cartel fixes have a negative impact on the economy as a whole.

Furthermore, although some countries such as Singapore have extended the block exemption to the shipping industry (to December 2015) despite concerns raised by the Singapore National Shippers’ Council, the general practice is that most countries are no longer shielding the shipping industry from competition. The European Commission took the lead by repealing block exemptions in 2006. However, agreements relating to international shipping are exempted from New Zealand’s Commerce Act, 1986.

It is important that India avoids granting exemptions simply on the basis that they have been granted elsewhere, given that there could be other platforms through which the anticompetitive harm would be diluted. While an exemption exists in the US for the shipping industry, there is an independent regulatory body, the Federal Maritime Commission, which is well versed with the potential harm exemptions might cause and can stop the agreements under the Shipping Act, 1984, if it feels that they result in an unreasonable increase in transport costs.

In Australia, to qualify for an exemption in the shipping industry under its competition rules, the agreement should be registered with the Registrar of Liner Shipping, which also analyses and monitors it to ensure that the rates are not excessive. Thus regulations and bodies balancing the anticompetitive conduct exist in these countries, which might not necessarily exist in India.

Recently, the Competition Commission of South Africa rejected an application for exemption from the Law Society of South Africa, which sought to exempt lawyers. It is well known that lawyers would like to continue with the current practice of engaging in price fixing by prohibiting their members from accepting payment below prescribed rates, which would inhibit price competition.

Another possible quarter from where an exemption application is likely to come from is the association of doctors. Like lawyers, the association of doctors in every country also has a tendency to prescribe minimum charges that doctors have to charge patients, which would be binding to such an extent that penalties would be levied for a breach. Doctors have often seen themselves as immune to competition law. In 2007, the Australia Competition and Consumer Commission was forced into making a statement to that effect, after noticing a series of breaches to competition law by doctors aimed at exploiting patients.

It is, however, important to note that it is not abnormal for some exemptions to be granted depending on the merits of such exemption vis-à-vis the objectives of the Act. In Canada, associations of fishermen have a special exemption to allow them to negotiate terms regarding buying and processing of fish. Exceptions can also be granted in special cases, as happened in the UK following the financial crisis in 2009, when Halifax Bank of Scotland was merged with Lloyds TSB and the merger was cleared by the government without undergoing a competition panel review. The banking sector is covered under the competition laws and by the office of fair trading and the competition commission.

The guiding factors in giving block exemptions are the unique characteristics that would make the sector or the category to benefit from exemptions different from other industries that are subjected to normal competition rules. Once an exemption is given to one sector, there is nothing that can stop every industry from seeking the same exemption, which defeats the whole purpose behind the enactment of the Competition Act. In any event, appeals for exemptions should undergo a public scrutiny and debate, rather than be accepted by someone’s fiat. The corporate affairs minister should thus exercise restraint in giving exemptions and assert due process in assessing claims made by those who would like to seek an exemption.

—The author is the Secretary General of CUTS International. Cornelius Dube of CUTS contributed to this article

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