Untangling regulatory overlaps

Financial Express, June 19, 2012

By Pradeep S Mehta

Nowhere in the world are banking mergers outside the remit of competition laws. The only exception is Turkey, where the central bank oversees banking mergers, but it is empowered to do so under their competition law and not banking laws. But exemptions do not prove the rule. Because competition enforcement and sector regulation are complementary instruments, and aim at ensuring that markets functions well.

But ambiguities and overlapping jurisdiction often create confusion, as is happening in India currently. There are two proposals before the government to boost the competition culture in the country. First, to amend the Competition Act to ensure coherence and efficiency. Second, to address a huge number of policy-induced competition distortions through a National Competition Policy. Enabling coherence among sector regulators and the competition authority to address overlaps is just one of many forward-looking prescriptions. Alas, while some business newspapers are on the dot, others are just adding confusion to the melee.

Competition and sector regulation are dynamic, intertwined concepts. For them to work, one needs well-defined laws and policy in both cases. This is precisely why when jurisdiction over certain areas is not clear-cut, confusion arises. Legislative ambiguity and lack of clarity about powers vested in the competition authorities as well as the sector regulatory bodies aggravates the problem and leads to conflicts. World over, in many cases, sector regulators were brought in before competition regimes so they view the work of the competition agency as an encroachment on their turfs.

The competition agency in India, the Competition Commission of India (CCI), started functioning in 2009 under the Competition Act of 2002 (CA, 02). As of 2011, it has 117 cases pending before it. It is facing jurisdictional challenges from sector regulators. A recent example is from the banking and financial sector. The proposed Banking Regulations Amendment Bill wants RBI to be the only regulator for banking mergers and the Competition Act amended to disallow meddling by the CCI. Simultaneously, the Department of Telecommunication too wants an ab initio exemption for merger review of telecom companies in the CA, 02. As in all competition laws, this Act also has provision for exemptions and exceptions. Therefore, one need not amend the law structurally but seek exemption and/or exception as and when warranted.

The CA, 02 also provides for an in-built appeals procedure through a Competition Appellate Tribunal, but the proposals by the finance ministry and the communications ministry don’t include any appeals procedure, if their agencies were to be the arbiters of merger review in their own jurisdiction. Aggrieved parties cannot run to the normal, over-burdened courts all the time and waste the taxpayers money.

In a recent order, the Delhi High Court stopped the CCI from proceeding with investigations into alleged anti-competitive practices in aviation fuel supply at the behest of oil marketing companies. The argument was that the oil market is regulated by the Petroleum and Natural Gas Regulatory Board. The case is yet to be decided, but only points out to the legal muddle that exists because of poor understanding.

All regulatory laws are required to promote competition in the sector that they regulate. This cannot be interpreted to mean that the sector regulators are also empowered to check anticompetitive practices, unless specifically empowered to do so.

The Electricity Act is the only that mentions the competence of the sector regulator to check anticompetitive practices abut this reflects an inherent discrepancy in the drafting of the legislation. It provides overriding effect to the Consumer Protection Act (COPRA) insofar as consumer interest is concerned, in spite of the fact that the Object clauses of all regulatory laws also provide protection of consumer interest. Yet, it fails to offer the same treatment to the Competition Act, which is also mandated in law and spirit to inter alia protect the interest of consumers.

In all other sector regulatory laws, the application of the COPRA is similarly treated. Furthermore, some sector regulatory laws have precisely denoted the role of the competition authority to check anti-competitive practices. A more sound understanding of this principle is reflected in the Telecom Regulatory Authority of India (TRAI) Act, which specifically recognises that all anti-competitive practices will be dealt with by the Monopolies and Restrictive Trade Practices Commission (now replaced by the CCI). Similarly, the Airport Economic Regulatory Authority (AERA) Act has kept matters pertaining to consumer complaints under the Consumer Protection Act and competition matters within the Competition Act outside the purview of the AERA Act.

One wonders when the legislators have acknowledged the need for a specialised competition agency to deal with anti-competitive practices in the TRAI Act, which is older than the Electricity Act, why was the electricity regulator empowered to deal with anti-competitive practices subsequently? This indicates a problem of incoherence in law-making.

The problem of conflicts resulting from regulatory overlap is not specific to India. A majority of countries have adopted an institutional approach to this problem. There are three main approaches: (i) primacy to the competition agency, (ii) primacy to the sector regulator, (iii) concurrent jurisdiction to be shared by both. Of these, the Planning Commission in 2006 has recommended that the best approach for India is a type of a concurrent framework, which involves continuous mutual mandatory cooperation/consultations between sector regulators and competition authorities.

While the current framework rightly provides for consultations between the two regulatory authorities it is not adequate. Section 21 of the Competition Act provides that any statutory authority may make a reference to the CCI, whose opinion shall be rendered in 60 days which shall be considered by the statuary authority. The problem envisaged is that it is optional for the regulator to consult the CCI, and not mandatory. One proposal pending before the government is that the consultation process should be made mandatory.

Sector regulators should have the leading role in regulating technical issues. For competition matters, which are largely behavioural and ex post, the competition authority should take a leading role. In cases of mergers, which requires an ex ante review by the competition authority, it should also confer with the sector regulator to achieve harmony. Finally, both the sector regulator and the competition authority shall mandatorily consult and cooperate with each other on matters that are overlapping and thereby avoid conflicts. If the two regulatory bodies fail to resolve issues amicably, the same should then be resolved by a referral body carefully constituted to comprise of a diverse group of members experienced in the relevant fields.

Finally, to address another point of confusion in the current policy debate, the National Competition Policy is proposed to be adopted and administered through a Cabinet Committee on Competition, to be serviced by the corporate affairs ministry. Its remit will be to address the thousands of competition distortions that are created by ill-informed policies of other ministries and state governments, and not just regulatory overlaps. Only then can we expect a healthy competition culture and higher growth in our country.

The author is secretary general, CUTS International. Natasha Nayak of CUTS contributed to this article

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