The Regulator Changes Gear..

The Economic Times, July 03, 2012

When he took over the competition regulator, Ashok Chawla sent out a message within: focus on quick decision-making and big cases. In his eight-month tenure, both have happened.

It took India’s competition regulator 23 months to decide on a complaint that cement companies were colluding to fix product prices.

Of this, the Competition Commission of India’s (CCI) investigation wing took about eight months to submit its report. The remaining 15 months were taken by the commission to analyse if there was a case, study the investigation report, hear arguments from all parties and reach a decision
If the innate associations of the old CCI were acceptance and length, the new CCI is positioning itself to be about selectivity and speed, says Ashok Chawla, who took charge as CCI chairman eight months ago and has signed orders that make a statement.

Last month, it gave its most important verdict yet: pronouncing 11 cement companies guilty of operating like a cartel and fining them about Rs 6,300 crore. Chawla asserts CCI will not accept weak cases. And the cases it admits, it will pursue them with vigour.

“We have made a conscious decision to take cases and start investigation only when there is a very high degree of prima facie evidence,” he says. “No point in focusing on something in a casual manner. What needs to be closed should be closed, and what needs to be investigated should start immediately.”

Closure has been a hallmark of Chawla’s brief tenure, partly because of his own construct and partly because of the timing of his entry.

According to the annual report of the ministry of corporate affairs (MCA), CCI had 58 cases pending in December 2011.

This has dropped to around 20 today, says a senior CCI official, speaking on the condition of anonymity.

At least five senior CCI officials we spoke to pointed to Chawla’s appointment for the change in speed and approach.

“The new chairman has made a difference. Efforts are being made to dispose off cases at the earliest,” says SN Dhingra, member (legal) of CCI.

Dhingra is a former Delhi High Court judge who was appointed along with Chawla in October 2011.

Riding Momentum

When a complaint is filed with CCI, its six members and chairman take a call if it is worth looking into. If they think so, the case is sent to CCI’s investigation wing, which usually files its report within six months.

Based on this report and representations from the parties to the case, the members and chairman take a decision.

“Previously, CCI used to take a lot of time to decide once we submitted the (investigation) report, but now it’s faster,” says an investigation official, not wanting to be identified.

“That should be and has to be,” says Chawla, when asked about the push to clear cases.

“There is an urgent need to move towards clearing the backlog in a reasonable period of time and give a verdict, one way or the other. Otherwise, the relevance of the order, howsoever meritorious it maybe, will be lost in the socio-economic environment.”

Fewer pending cases is not all Chawla’s doing. The unidentified CCI official quoted earlier adds that Chawla inherited a robust pipeline of cases where the investigation and hearings were complete, and only needed a verdict from the seven-member CCI panel

“So, we were able to give the orders in the last eight months,” he says. Dhanendra Kumar, the first CCI chairman, between February 2009 to June 2011, adds the initial years were spent building the institution’s capabilities. “In its teething years, CCI had its role cut out,” he says.

“It is because of the efficient system it could put in place that we today see a faster rollout of cases.” Still, having Chawla at the helm has helped, say current CCI officials, who see his calm style of functioning as a positive influence.

Four of the six members are career-bureaucrats, with two even being senior to Chawla in terms of joining civil services. There were reports of few members opposing Chawla’s appointment as chairman, citing seniority.

A post-graduate in economics, Chawla has had two stints in the finance ministry and been the aviation secretary. The 1973-batch Gujarat cadre IAS officer also headed Sardar Sarovar Narmada Nigam and IPCL when it was divested to Reliance Industries.

“He (Chawla) can put across a completely different point of view in a pleasant manner without any signs of confrontation,” says Shakikanta Das, additional secretary, finance ministry. “At the same time, he takes a stand whenever required.”

Das worked under Chawla during the latter’s stint as finance secretary between 2009 and 2011. Chawla’s final stint in North Block came in the aftermath of the collapse of Lehman Brothers, which triggered the global financial crisis in September 2008.

As finance secretary, Das adds, Chawla developed good coordination among the five departments within the finance ministry and focus on the macroeconomic picture.

Overcoming Limitations

At CCI, where he has a five-year term, Chawla wants to apply a tight filter on what kind of cases it takes up. And he wants to combine it with high-profile orders.

A higher number of orders raises the profile of CCI, which is struggling to attract talent from outside the government.

Pradeep Mehta, secretary general of CUTS International, a consumer rights organisation, says more orders from CCI is good. “It helps build its image. This, in turn, will act as a disincentive to other businesses involved in anticompetitive practices,” says Mehta, who is a member of the committee drafting the National Competition Policy.

“Creating a competition culture, especially by curbing anti-competitive practices, is a marathon, not a sprint.” Samir Gandhi, partner at AZB & Partners, broadly agrees with that thought, even as he expresses reservations about the strength and legal validity of some of the CCI orders.

“The greater the number of cases decided, the larger the number of precedents created,” says Gandhi, who represented one of the cement companies before CCI in that particular case. Quality of orders, though, remains a concern, and there’s a feeling that some orders will be overturned in the appeals process.

In that context, the question mark is over the pool of people the CCI has. Chawla—who does not have specialised training in competition matters, like heads of anti-trust bodies in Europe and the US do—faces significant challenges to build CCI.

The first is improving its investigating capabilities. More than half the positions in the CCI’s investigating arm are vacant. Government officials from arms like the revenue services, who are trained to deal with business, are unwilling to join the CCI as the postings are not permanent and service conditions don’t match existing standards.

“Every time there is a deputed officer, he/she has to be trained,” says Mehta of CUTS. “At the end of the tenure of deputation, the officer is fully equipped with all the techniques and skills, but he/she cannot serve anymore. Due to this unskilled entry and skilled exit, the quality is bound to suffer. Alas, the government does not permit them to engage young professionals from the market.”

According to Chawla, the CCI has asked the government to change the rules to allow for allow for permanent staffing in the investigating arm. “I believe they have agreed to that,” he adds.

These are still early days for the CCI, in what is only its third year with powers, and each decisive move—more orders, faster decisions, better people and smoother processes— goes a long way in building an institution.

In its short history of three years, CCI has given two verdicts that have made an impression on India Inc: fining real estate major DLF Rs 630 crore for abusing its dominant position to impose onerous conditions on buyers of a high-end residential building in Gurgaon, and fining 11 cement companies Rs 6,300 crore for fixing cement prices.

But whether they leave a lasting impact on the way India Inc does business will depend on what is the last word on them.

The last word will be said either in the CCI appeals forum or, if it goes further in appeal, in the country’s highest court. The hearing in the DLF case is currently on in the Competition Appellate Tribunal (COMPAT). And, all indications are the 11 cement manufacturers charged will also land up there.
In both cases, the defence revolves around a central concept, and the verdict would set a precedent for similar cases. In the DLF case, the concept is that of a ‘relevant market’: how should a market be defined to see if a player abused its dominant position?

DLF argues CCI has defined the relevant market too narrowly. CCI defined it as the high-end residential segment in Gurgaon: if buyers did not opt for the DLF flat, they would have opted for similar flats in the same suburb.

DLF argues they could have gone anywhere in the entire National Capital Region (NCR), and so that should be the relevant market.

Legal Test

In the more recent cement order, the issue is whether a written agreement is needed to establish the presence of a cartel. According to cement companies, CCI rules mandate the need for a written agreement. CCI doesn’t think so and has based its order on circumstantial evidence: it alleges companies were synchronising production cuts and price hikes.

“The CCI order is based on very thin evidence to prove price parallelism and meeting of minds,” says Urmik Chhaya, a cement analyst with Mumbai-based brokerage Fortune Equity Shareholders.

Adds Samir Gandhi, partner with AZB & Partner: “CCI appears to have accepted that it will not have direct proof of cartel behaviour and has taken to relying on purely circumstantial evidence to prosecute cases.” Gandhi represented one of the cement firms before the CCI, and his comments do not relate to the cement order.

A senior official of CCI, who did not want to be identified, says there are different views on the issue. “Some countries say behavioural evidence is enough to prove cartel cases, but in others, physical evidence of an agreement is required,” he says.

“The COMPAT and higher courts have to take a call on this.” CCI officials have increasingly relied on behavioural factors instead of hard evidence as they have limited powers of search and seizure, as well as to wiretap. At present, to search and seize, CCI officials should have specific information of evidence and the permission of the district metropolitan magistrate.

“We are yet to use this provision,” admits another senior official at CCI, not wanting to be named. A proposal is currently with the government to vest approval powers for search and seizure with the CCI chairman. “This will be operationally easier to handle,” says CCI chairman Ashok Chawla.

“A full-fledged, autonomous regulator should have all the powers to investigate, enquire, probe, search, seize, survey,” says Pradeep Mehta, secretary general of CUTS, a consumer rights body. “It is not correct that they are not given such powers in the first place.”

The other key concept that is likely to be tested in the cement case is whether price and production parallelism—companies changing prices or output in tandem—can be taken as behavioural evidence in a market dominated by few market players.

Thus, the judgments in the appeals process will have a huge bearing on how India Inc does business and whether the CCI can give orders that can withstand the toughest legal scrutiny.

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