The Invisible Force that Must not Fail

Financial Express, February 02, 2007

It would be advisable to follow the principle of ‘enforcement by compliance’ rather than ‘enforcement by force’, say Pradeep S. Mehta

In the run up to the Union Budget, P Chidambaram, the finance minister, and Indian industry have locked horns over the price rise in manufactured goods. Industry has denied that this rise is artificial, and has sought to attribute the northward movement to an expanding economy. This perhaps ought to mean economies-of-scale, and declining prices as a result. But this is not happening because the manufacturing sector has its own peculiarities.

What the finance minister can do now is ensure that the amendments in the Competition Act, 2002, are adopted in the Budget session, as recommended by CII. It can provide the competition regulator with resources to ensure that there is some check on any attempt at collusion or industrial dominance that could result in artificial price escalation. For this, the government needs to deepen the preparatory work on the Competition Commission of India (CCI).

It took vigorous lobbying by the consumer movement, spearheaded by CUTS, during Yashwant Sinha’s tenure as finance minister in the late 1990s, for India to enact the new Competition Act in 2002. The objective was to free the force of competition in accordance with the changing needs of a globalising and liberalising economy. It would have replaced the archaic Monopolies and Restrictive Trade Practices Act (MRTPA) of 1969. The new law has not yet been implemented in full due to legal wrangles, but we hope it will be done before the year is out.

The legal wrangles were largely about who should head the CCI — whether it should be a retired judge or a retired bureaucrat. This two-way argument failed to address the issue of who is best qualified to examine issues of competition. Would someone younger, perhaps an expert with experience of diverse competitive spheres, not do a better job?

Anyhow, India’s apex court ruled that the government must respect the doctrine of separation of powers between the judiciary and executive. Finally, the government drafted an amendment in 2006, which sought a trade-off between the two, by proposing an appellate tribunal headed by a judge, and a commission, headed by an expert, as a regulatory mechanism.

However, this led to greater confusion. The amendment bill was debated by a parliamentary standing committee, which after many pow-wows with experts and the ministry of company affairs, submitted its recommendations to Parliament recently. The committee is not very happy with a few aspects of the amendment bill, such as the provision that all combinations (M&As essentially) over a certain high threshold of turnover/capital be notified, for the benefit of the competition regulator’s knowledge. It wants all combinations to be mandatorily notified.

That will not be very helpful. Businesses fear that a restructuring exercise, which should be their prerogative, could get tied into legal knots due to overzealous application of the law by retired civil servants with a control-and-command mindset legacy. Mergers are a regular feature of a liberalising economy, as businesses rationalise their operations and seek strategic integrations, and over-regulation would restrict the efficiencies and value accretions that they enable. Also, given the sheer number of M&As taking place in India, and the fact that most of these are inconsequential from a market dominance perspective, it would be inadvisable for the CCI to devote its limited resources to screening each and every merger.

It would be advisable to follow the principle of ‘enforcement by compliance’ rather than ‘enforcement by force’. Voluntary notification leads to lower enforcement costs for the regulator and lower legal costs for the merging parties, which is why it has been adopted by several regimes around the world. Nevertheless, given the possibility of some large combinations raising concerns of weakened competitive forces in the marketplace, we need voluntary notification to work like a Damocles sword. Merging enterprises will, on their own, apply for a regulatory clearance in advance, rather than face the threat of regulatory barriers post-consummation. On the other hand, the law also provides for suo moto action by the CCI, if it feels that a merger needs to be tested under the regulations.

Among the positive recommendations, the standing committee has agreed with CUTS’ submission that the CCI should not be staffed with MRTPC staffers, since this would defeat the purpose of a new law. We have always argued that the new authority should have staff with expertise in economics, law and such other disciplines geared to understanding the complex dynamics of market arenas. Cases of market imperfection, for example, require informed analysis of high calibre. Further, experience in competition law and policy is imperative, given that the new law will be applied on a rule-of-reason principle. The reasoning would have to be clear to all those acquainted with the case. It takes finer judgement to attack the abuse of dominance, for instance, rather than dominance itself—especially in cases of intellectual property rights (which have not been drafted in a clear manner).

A recent recruitment advertisement of the CCI solicits applications only from people working in government and/or government agencies, and that too for a one-year assignment. This severely limits the chances of hiring market talent, while giving good members of the civil services too poor an incentive to apply. For a regulator that requires human resources of extremely high quality, the recruitment policy needs a thorough rethink. And now, before it’s too late.

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