Deep Dive: What do lawyers think of the proposed changes to the Competition Act, 2002?

A mandatory requirement to report mergers and acquisitions above a certain value threshold, a broadened scope of what constitutes an anti-competitive agreement, a decrease in the number of days the CCI can take to review combinations, and a new settlements and commitments framework are some of the many changes proposed in the Competition (Amendment) Bill, 2022, presented to the Lok Sabha on August 5, 2022. The Bill seeks to amend the Competition Act, 2002, which gives the Competition Commission of India (CCI) its powers to prevent practices that have an adverse effect on competition and protect the interests of consumers.

There has been a significant growth of Indian markets and a paradigm shift in the way businesses operate in the last decade. In view of the economic development, emergence of various business models and the experience gained out of the functioning of the Commission, the Government of India constituted Competition Law Review Committee, to examine and suggest the modifications in the said Act. After review of the recommendations proposed by the Committee, public consultations and with a view to provide regulatory certainty and trust-based business environment, it is considered imperative to amend the said Act. — Nirmala Sitharaman, Minister of Finance and Corporate Affairs

The Bill has been referred to the Standing Committee on Finance for examination and report within three months.

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Combinations: Mergers and Acquisitions

Mergers and acquisitions exceeding ₹2000 crores in value must be notified

The Bill seeks to amend section 5 of the Act to state that if the value of any transaction in connection with the acquisition of any control, shares, voting rights, etc., exceeds Rs. 2,000 crores ($250 million), it would require CCI approval, provided that parties to the transaction have “substantial business operations in India,” which will be defined by CCI. Currently, combinations need to be notified to the CCI only if the parties involved have assets or turnover exceeding a certain threshold. The value of the deal is not considered.

Analysis: 

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• “Killer acquisitions” are now covered: “Once tech companies like Facebook, Amazon, and Microsoft started flourishing, they started acquiring startups. If you see the Facebook-WhatsApp or Facebook-Instagram deals, these were ‘killer acquisitions,’ wherein the startup company is not able to do well, they don’t have a revenue, and they don’t have asset size; due to which they were acquired by larger tech giants. And these do not require any Competition Commission approval. In order to curb that, Austria and Germany had come up with the solution of the deal value threshold, which is what India is now proposing,” Yash Vardhan Singh, Principal Associate at Sarvaank Associates,  explained to MediaNama.
• Should we really go after “killer acquisitions”: “In hindsight, looking at examples such as Facebook’s acquisition of Instagram and WhatsApp, regulators may have intervened to ensure that no one enterprise reaches the size and scale of Facebook. Such thinking appears misplaced. What if Facebook’s acquisition of WhatsApp and Instagram were to be notified? At the time of acquisition, both WhatsApp and Instagram were new companies, trying to do new things, in a fast-evolving sector. WhatsApp provides free messaging. Could it have succeeded in providing free messaging at a global scale without the capital that Facebook has injected? Perhaps, no,” Rahul Rai, an independent competition lawyer, remarked.
• Will hinder the growth of the Indian economy: “I think it’s misplaced in the Indian context. Let’s ask ourselves the question: what does India need to do, to at least become a middle-income country in the next 25 years? We need to find the next IT industry that creates well-paying jobs by the millions. And if there is any hope, then it is from the startup world,” Rai remarked. “That world has been raised on the strength of foreign capital. So, what do we need as a country? We need billions and billions to flow into our country. But we are creating a hurdle for these investors to exit by requiring a deal notification to the CCI,” Rai added. “Private capital (for example, venture capital, private equity) seeks to maximize its returns in the shortest period of time. India competes with other countries for private capital. Creation of another roadblock might just deter people from touching India,” Rai explained.
• The deal value is a function of markets: “I think why everyone is a bit upset is because the deal value is typically a function of the market. It’s not something that operates to directly affect the protection that Competition Commission is offering,” Archana Balasubramanian, Partner at Agama Law Associates, said. “2000 crores can mean different things for different sectors,” she added. “I’m not sure if the Bill would get passed in the current form. I also think there would be sufficient pushback from the industry on the deal threshold,” Mehak Khanna, partner at Khaitan and Khaitan, concurred.
• Should worry start-ups: “According to the Bill, if there’s any ‘material influence over strategic affairs’ that will be considered a combination. This should worry startups because it definitely widens the scope of what requires approval from CCI,” Khanna pointed out.

Reduction in the time limit for assessment of combinations

• The Bill requires CCI  to form prima facie opinion on a combination request within 20 days of receipt of a notice. If the Commission does not form a prima facie opinion within this time, the combination will be deemed to have been approved.
• Currently, if the Commission is of the prima facie opinion that a combination is likely to cause, or has caused an appreciable adverse effect on competition, it allows the parties to respond within 30 days as to why an investigation should not be conducted. The Bill seeks to amend section 29 of the Act to reduce this to 15 days.
• The overall time limit of assessment of combinations by CCI will be reduced to a period of 150 days from 210 days.
• CCI will be able to extend the time limit up to a maximum period of 30 days to accommodate the request of parties to file additional information or to remove defects in the notice.
• The Bill also provides to introduce a separate channel for certain combinations which shall be eligible for deemed approval upon the filing of a notice under sub-section (4) of section 6 of the Act.

Objections to combinations by the Commission and proposal of modifications 

The Bill seeks to insert a new section 29A, which deals with what happens after CCI is of the opinion that the combination has, or is likely to have, an appreciable adverse effect on competition. In such a case, CCI shall issue a statement of objections to the parties identifying such appreciable adverse effect on competition and direct the parties to explain within twenty-five days why such a combination should be allowed to take effect. If the parties believe that the competition issues can be eliminated by suitable modification, they may submit an offer of appropriate modification along with their explanation to the statement of objections. If the Competition Commission does not accept the modification submitted by the parties, it will, within seven days, communicate to the parties why the modification is not sufficient and call upon the parties to furnish revised modification, if any, within 12 days.

If the Commission is of the opinion that the modifications proposed by the parties address the concerns, it may approve the combination subject to such modifications. If not, such combination shall not be given effect to, or be declared void, or CCI can frame a scheme to be implemented by the parties to address the concerns.

Anti-Competitive Agreements

Broadening the scope of anti-competitive agreements (Section 3)

1. The Bill includes a provision which states that entities who are not engaged in identical or similar trade shall also be presumed to be part of an anti-competitive agreement under Section 3(3) if they actively participate in the furtherance of such agreement. This covers parties who facilitate anti-competitive horizontal agreements even if they are not part of the agreement.
2. Section 3(4) will apply to “Any other agreement amongst enterprises or persons including but not restricted to agreement amongst enterprises or persons” rather than just “Any agreement amongst enterprises or persons.”
3. The phrase “exclusive supply agreement” will be replaced with “exclusive dealing agreement” and the same has been defined as “any agreement restricting in any manner the purchaser or the seller, as the case may be, in the course of his trade from acquiring or selling or otherwise dealing in any goods or services other than those of the seller or the purchaser or any other person, as the case may be.” The current definition only covered purchasers and not sellers.
4. “Tie-in arrangement,” “refusal to deal,” “resale price maintenance,” and “exclusive distribution agreement” will be redefined to cover goods and services and not just goods.
5. The “resale price maintenance” definition will be redefined to cover “any direct or indirect restriction” not just an agreement.
6. A new provision will be added noting that nothing contained in Section 3(4) will apply to an agreement entered into between an enterprise and an end consumer.

Analysis: 

• Addresses hub-and-spoke cartels: “Agreements between enterprises operating at the same level of trade, in other words—competitors, comprise horizontal agreements. For example, an agreement between two passenger vehicle manufacturers to agree to a floor price of ₹10 lakhs for small segment cars would comprise a horizontal price-fixing agreement. An agreement between a passenger vehicle manufacturer and spare parts supplier, for the supply of parts, would comprise a vertical agreement because the passenger vehicle manufacturer and the spare parts supplier operate at two different levels of the production chain. The Competition Act contains express disciplines on horizontal and vertical agreements. In India though, we have a third category of individuals or organizations that don’t directly participate in the production or supply of goods or services. For example, trade associations, or consultants act as the intermediaries amongst producers or suppliers to facilitate collusion. Such third category of individuals or organizations who play a material role in facilitating collusive arrangements could escape sanctions on the ground that they did not operate at the same level of trade as the other members of the cartel. The Amendment Bill seeks to plug this escape route,” Rai explained. Now, “even if the corporates are not part of the cartel but they are in some way helping the cartel do what the cartel is doing (furthering anti-competitive behaviour), then such entities will be covered,” Balasubramanian said.
• Services are now explicitly covered: “If you see the amendments, everywhere the word ‘services’ has been included in addition to ‘goods.’ So whether it’s a tie-in arrangement or whether it is an exclusive dealing arrangement et cetera. So if you purchase something, are you also required to purchase any services along with it? Are you required to purchase two services together? This is a big change to cover digital markets,” Balasubramanian noted.
• Prohibition on sellers, not just purchasers: “They have added the concept of prohibition on sellers as well. It’s not just if you’re creating hindrances or prohibiting someone from purchasing, but extends to restrictions on sales too. Let’s say that you have Microsoft prohibiting vendors from selling google products—that is now actively within the definition and would constitute an exclusive dealing arrangement,” Balasubramanian explained.

Modification to AAEC factors

Under the factors used by CCI to determine whether an agreement has an appreciable adverse effect on competition, the Bill seeks to modify two factors to widen the scope:

• “foreclosure of competition by hindering entry into the market” to “foreclosure of competition”
• “accrual of benefits” to “accrual of benefits or harm”

Settlements and Appeals

Settlements, and Commitments Framework

The Bill seeks to insert new sections 48A, 48B and 48C to provide for various provisions with regard to settlements and commitments. According to these provisions, entities can propose a settlement for the alleged contraventions at any time after the Director General presents their report and before the Competition Commission passes an order.

Entities can also propose commitments in respect of the alleged contraventions at any time after a prima facie order is passed by the CCI and before the Director General presents their report. CCI can accept or reject the proposed settlement or commitments after taking into consideration the nature, gravity and impact of the alleged contraventions and the effectiveness of the proposed settlement or commitments. CCI can also revoke any acceptance if it finds irregularity, and can impose a fine up to Rs. 1 crore and reinitiate the inquiry.

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Analysis: 

• An incentive for companies to settle with the Commission rather than go to court: “CCI’s final decisions are subject to appeal. If they are suspect, either on substantive grounds or procedural, affected parties invariably contest them in appeal. On appeal, if the operation of the CCI’s decision is stayed, then the huge backlog at NCLAT and Supreme Court level ensures that affected parties do not need to modify their business practices. The settlements and commitments mechanism would provide a more efficient way for the CCI to address anti-competitive behaviour. If the CCI can make a strong case, at the start of the investigation itself, or through a well-conducted investigation by the Director General, then parties may have the incentive to settle or offer commitments. The success of the proposed settlements and commitments mechanism would depend upon the CCI’s ability to make out a strong prima facie case or the DG’s ability to adduce unflinching evidence of anti-competitive conduct. Often, enterprises know if they are on the wrong side of the law and if the CCI’s prima facie case or the DG’s Report makes out a strong case, then enterprises may be more willing to use this mechanism, propose tweaks to their business models and pre-empt the possibility of the CCI unilaterally dictating changes,” Rai explained.
• Should ease the burden on CCI: “This is a very welcome move because it will actually help ease the burden of the Competition Commission as it gives a window to the companies to settle the matter out of the court before going for any judicial process,” Singh remarked. “The biggest problem for India as a country is the lack of state capacity. It’s just not about the number of people, but it’s also about the quality of the people. Settlements and commitments mechanism would allow the regulator to engage in discussions with the party against who an investigation has been initiated and find workable solutions,” Rai added.
• We will have to see how it plays out in the real world: “The settlement framework is a good thing to avoid lengthy litigation, but we would need to see how this of course works. There are going to be a lot of factors on how it practically operates and if the settlement also gets held up for 2, 3, 4, or 5 years then it doesn’t make any sense,” Khanna opined.

Appealing to Appellate Tribunal 

Section 53B of the Act allows entities to appeal any decision to an Appellate Tribunal. The Bill seeks to amend the section to empower the appellate tribunal not to entertain an appeal unless the appellant deposits 25 percent of the amount of penalty imposed by CCI.

Analysis: 

• Will prompt companies to scrutinise their decision to appeal: “Any appealing party will have to give 25% of the penalty to the NCLAT and then go for the appeal. Now, what this will do, in my view, is that whenever there is any appeal to be made, the companies will be scrutinising whether they should go for the appeal or not, since the 25% penalty amount, which they are paying, may be forfeited if the appeal is not allowed,” Singh explained.

Competition Commission of India

Composition of CCI and selection committee to include someone with experience in technology

The Bill seeks to amend section 8 of the Act, which refers to the composition of the CCI, by including additional qualifications for CCI Members in the field of technology. Bill also seeks to amend section 9 of the Act, which refers to the composition of the selection committee for Chairperson and Members of CCI, to introduce knowledge and experience in the field of technology as additional criteria for the members of the selection committee.

Further investigation by Director General

If, after consideration of the investigation report of the Director General, the Commission is of the opinion that further investigation is required, it may direct the Director General to carry out the same and to submit a supplementary report.

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Restriction on employment of Chairperson and other Members in certain cases

The Bill seeks to substitute section 12 of the Act to restrict the acceptance of employment by Chairperson and Members of the Commission within a period of 2 years from the date of ceasing the office with any enterprise which is or has been a party to a proceeding before the Commission.

Arrangements between CCI and other governments bodies

The Bill seeks to substitute section 18 of the Act to enable the Competition Commission to carry out its duties by entering into a memorandum or arrangement with other departments of Government or statutory bodies. Currently, the Act does not have a provision to allow arrangements between CCI and other government bodies.

More grounds on which statutory authorities may request an investigation

The Bill seeks to amend section 21 of the Act in order to broaden the grounds on which the statutory authorities may suo motu make a reference to the Commission “on any issue that involves any provision of this Act or is related to promoting the objectives of this Act.” The Bill also seeks to amend section 21A of the Act to allow CCI to make a reference suo motu to another statutory authority on any issue that involves provisions of an Act whose implementation is entrusted to that statutory authority.

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Director General

CCI powers to appoint Director General

The Bill seeks to amend section 16 of the Act to empower the Commission to appoint the Director General with the prior approval of the Central Government. Currently, the power to appoint a DG lies only with the Central Government.

Analysis: 

• CCI would become the judge, jury and executioner: “The current institutional design of the CCI is constitutionally suspect. The CCI carries out an adjudicatory function while examining cases of anti-competitive agreements and abuse of dominance. It is required to gather and examine facts using laws of evidence and apply legal principles to reach a finding of infringement. Accordingly, for a large part, the CCI functions as an adjudicator. Under the Indian constitutional scheme, it means that the CCI must have a predominance of judicial members. And here we have a Commission which doesn’t have even a single judicial member. No matter how good the officers and Commission members are, they don’t have the requisite judicial training, to sift through facts based on evidentiary rules and apply appropriate legal principles to reach a decision,” Rai explained. “But there was some sort of a safeguard because the Director General, which carries out an investigation, worked at an arm’s length distance. It did not report to the Commission, it reported to the Ministry of Corporate Affairs. This distinction is being sought to be done away with by the amendment Bill. The DG would now be under the administrative control of the CCI. And this is troubling,” Rai opined.

“What this means is that the CCI would become the judge, jury and executioner. I conduct an investigation; I create a report against you and then I decide on the correctness of that report.” — Rahul Rai

More investigative powers to the Director General

The Bill seeks to amend section 41 of the Act to provide more powers to the Director General to carry out an investigation:

• It will be the duty of all officers, employees, and agents of the parties which are under investigation to preserve and produce all information, books, papers, other documents and records of, or relating to, the party which are in their custody and to give all assistance in connection with the investigation to the Director General.
• The Director General may also require any person other than the concerned parties to furnish such information that is relevant or necessary for the purposes of its investigation.
• The Director General may keep in its custody any information, books, papers, other documents or records for a period of 180 days.
• The Director General may examine on oath any of the officers and other employees and agents of the party
  being investigated and with the previous approval of the Commission, any other person.
• Where in the course of an investigation, the Director General has reasonable grounds to believe that information relating to any party or person may be destroyed, altered, falsified, secreted, etc. the Director General may make an application to the Chief Metropolitan Magistrate, Delhi for an order for seizure of such information.
• The Director General may make a requisition of the services of any police officer or any officer of the Central Government to assist him for all or any of the purposes specified in the Act and it shall be the duty of every such officer to comply with such requisition.

Relevant Markets

Change in “relevant product market” definition 

The Bill defines a “relevant product market” as a market comprising all those products or services—

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1. which are regarded as interchangeable or substitutable by the consumer, by reason of characteristics of the products or services, their prices and intended use; or
2. the production or supply of which are regarded as interchangeable or substitutable by the supplier, by reason of the ease of switching production between such products and services and marketing them in the short term without incurring significant additional costs or risks in response to small and permanent changes in relative prices

Additionally, the Bill seeks to add the following two factors to the existing list of six factors that CCI uses to identify “relevant product market”:

• costs associated with switching demand or supply to other goods or services
• categories of customers

Analysis: 

• Looks at supply-side as well: “The earlier definition only spoke of interchangeable products or services. So if something was merely interchangeable, for instance, if I use Gmail today, I could very well use Exchange Mail. But now they have introduced a further layer. It’s not just about the products and services themselves being interchangeable, but about whoever is supplying these products. Are they able to interchangeably or substitutably (sic) supply? Can they give you an alternative?” Balasubramanian explained. “To give you an example, if a fruit seller who sells bananas today because banana is in the season can very easily move to sell mangoes, then mangoes and bananas should be part of the same relevant market,” Rai said. “It’s more of a clarificatory change than a fundamental shift. And it’s a good thing because the definition of a market should look at both the supply side and the demand side,” Rai added

Determining relevant geographic market

Among the factors CCI will use to determine the “relevant geographic market,” the following will be added:

• characteristics of goods or nature of services
• costs associated with switching supply or demand to other areas

Regulatory

Government’s rule-making powers

The Bill seeks to amend section 63 of the Act to provide certain additional rule-making powers to the central government, which will be allowed to issue notifications addressing the following aspects, among others:

• the value of the assets or turnover in case of mergers and acquisitions
• the percentage of voting rights to determine “group” entities
• the criteria of combinations

CCI’s rule-making powers

The Bill seeks to amend section 64 of the Act to provide CCI certain additional powers to frame regulations, including regarding the following aspects:

• the manner of determination of substantial business operations in India, which will be used to determine whether or not the entity has to seek CCI approval for a combination
• the form and fee for notice for combination
• the time and manner for filing the notice of acquisition
• the manner of determining turnover or income
• the amount of any penalty for any contravention of the provisions of this Act

Transparency in the issuing of new regulations and guidelines

The Bill also seeks to insert a new section 64A and 64B that provides a process for issuing regulations and guidelines in a transparent manner. CCI will have to publish draft regulations and seek public comments before issuing any regulations and publish a general statement of its response to the public comments. 64B will allow the CCI to issue guidelines on the provisions of this Act or the rules and regulations made thereunder either on a request made by a person or on its own motion.

Penalties

Penalty based on income

The Bill seeks to amend section 27 to empower CCI to pass orders in relation to anti-competitive agreements and the abuse of dominant position by imposing “such penalty, as it may deem fit, which shall be not more than ten per cent, of the average of the turnover or income, as the case may be, for the last three preceding financial years.” Currently, the penalty is only based on turnover, not income.

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Increase in penalty for combination misrepresentation

The Bill seeks to amend section 44 of the Act to enhance the penalty from ₹1 crore to ₹5 crores in case any party makes a false statement or omits material information when seeking approval for a combination.

Liability of company and people in-charge

The Bill also seeks to amend section 48 of the Act, which deals with contravention of the Act, to introduce liability for both the company and the people in charge, unless the contravention was committed without the person’s knowledge or that the person had exercised all due diligence to prevent the commission of such contravention.

Power to impose a lesser penalty

Section 46 of the Act empowers the Commission to impose a lesser penalty in case a party has disclosed its alleged violation in relation to a cartel. The Bill seeks to modify this section by including more criteria under which a lesser penalty may or may not be imposed. For example, there will be a lesser penalty for parties in an ongoing cartel investigation if they disclose information regarding other cartels.

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Recovery of legal cost

The Bill seeks to amend section 47 of the Act to empower the Commission to recover the legal costs in addition to penalties, which shall be credited to the Consolidated Fund of India.

Other proposed changes

Open offer or stock exchange transactions will not be prevented

The Bill seeks to insert a new section 6A after section 6 of the Act to provide that the Act will not prevent the implementation of an open offer or an acquisition of shares or securities from various sellers through a series of transactions on a regulated stock exchange.

Analysis:

• Provides respite to foreign investors: “I think one very progressive amendment is the clarification in the language making the position of FPIs [foreign portfolio investors] clear. They have actually added provisions that sort of exempt them from making certain notifications for share purchases. This earlier was available [only] to public financial institutions. As per the current amendments foreign portfolio investors who are SEBI-registered, when they apply for a share subscription or financing, or there is a financing facility or any acquisition by any of these people, including alternate investment funds, then there would be no requirement for notification,” Balasubramanian explained.

Limitation date on complaints

The Bill seeks to amend section 19 of the Act to provide that the Commission shall not entertain any information (complaint) beyond the period of three years from the date of cause of action unless it is satisfied with the reasons given by the parties.

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Calling upon experts 

The Bill seeks to amend section 35 of the Act to enable a party to call upon experts from the fields of economics, commerce, international trade or any other discipline for their opinion in relation to a case before the Commission. Currently, only officers of the company or chartered accountants or legal practitioners can appear.

Update (18 August, 9:25 am): The story has been updated to mention that the Bill has been referred to the Standing Committee on Finance.

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