CCI's Painful Penalties: RIP?

Published on Sat, Nov 09,2013 | 17:32, Updated at Sat, Nov 09 at 17:32Source : CNBC-TV18 | Watch Video :

Rs 6300 crore penalty on 11 cement companies. Rs 630 crore penalty on DLF. Rs 55 crores on NSE! But the days of headline grabbing penalty orders by the Competition Commission of India are nearing an end. Last week, in the case of 3 Aluminum Phosphide manufactures, the Competition Appellate Tribunal laid out principals that CCI needs to consider when deciding penalty amounts. It also cut down the CCI penalty on the 3 manufacturers from Rs 317 cr to Rs 10 crores! Payaswini Upadhyay asks experts how COMPAT's penalty principles will impact pending and future cases.

In June 2011, the NSE was found guilty of abusing its dominant position in the currency derivatives segment. The Competition Commission of India or CCI imposed a penalty of Rs 55 crore- 5% of NSE's average annual turnover of last three years

A month later, DLF was asked to cough up Rs 630 crore for abusing its dominant position in the high-end residential market in Gurgaon. CCI justified the penalty – 7% of DLF's average annual turnover for the last 3 years- citing the company's conduct and duration of abuse.

Last year, CCI penalized 11 cement companies for cartelization. The Rs 6300 crore penalty worked out to half their net profit for 2009 and 2010. It was also the second highest penalty imposed by any competition regulator globally.

- NSE, DLF and the 11 cement companies- are all contesting the CCI verdicts at the Competition Appellate Tribunal.

Suhail Nathani
Partner, ELP
"The Act is clear - the CCI has a upper limit which they can impose by way of penalty. How these penalties were calculated was always in the realm of ambiguity to say the least. And yes; on the facts of many cases- identical cases - there have been different penalties. There has been no visibility as to what was the reasoning behind fining one group for a cartel 3% and another group 10% and the fact that the fines were humongous is in the public domain- DLF, cement- it's there for everyone to see."

But an order by COMPAT last week offers hope!

Last year, CCI had found 3 aluminium phosphide tablet manufacturers guilty of manipulating bids and of cartelization. The regulator had concluded that Excel Corp, United Phosphorus and Sandhya Organic Chemicals had colluded to quote identical prices in bids called by the Food Corporation of India (FCI) for ALP tablets. CCI imposed a collective penalty of Rs 317 crores - 9% of the average turnover of the preceding three years.

The 3 manufacturers appealed in COMPAT and argued against the CCI order on merits as well as penalty amounts. The tribunal upheld CCI's order on bid rigging, but slashed the penalty to Rs 10 crores.

But the precedent value of COMPAT's order lies in its observation on the way CCI determines penalties.

The Tribunal has ruled that while deciding the penalty, CCI should consider relevant turnover for multi-product companies… meaning CCI should include the turnover only from businesses connected to the violation. In addition, CCI should also look at aspects such as the financial health of the company, the necessity of the product, the likelihood of the company being closed down due to harsh penalty and the general reputation of the company.

Avaantika Kakkar
Partner, Khaitan & Co.
"The cases that are currently pending before the COMPAT would be the DLF case, the case involving cement companies. I would think that these parties can look forward to a reduction in the penalty amount for the simple reason that even in these cases, the CCI had not held a separate hearing for the imposition of penalty, had not allowed these parties to argue mitigation, and had not considered factors that it ought to have as the COMPAT has insisted now. And not only for these reasons but for instance, DLF where the relevant market was high end residential real estate – did the CCI while it imposed penalty- add either profits or turnover from its commercial real estate business- I am sure these arguments will come up before COMPAT."

Naval Chopra
Partner, Amarchand Mangaldas
"If you recall, in the National Stock Exchange case, all these arguments that were raised in the aluminium phosphide case that one must look at European jurisprudence; that one must look at US jurisprudence; that one must look at turnover in the relevant market as opposed to just turnover- all were raised before the CCI in the NSE hearings. And the CCI came out with an order that summarily dismissed all these points and said Sec 27(b) states that while levying penalty, you can levy up to 10% of the turnover of the enterprise. And therefore they have no levy to interpret it as turnover in the relevant market; so I suspect that the CCI may appeal this order up to the Supreme Court."

Naval also points out that while the Tribunal rightfully borrowed from global principles on penalty, it may have erred in its application.

Naval Chopra
Partner, Amarchand Mangaldas
"One also has to look at whether the COMPAT applied the European jurisprudence correctly in this case. In my view, the COMPAT should've had a little nuanced approach- what they should have done and this is outlines in the EU guidance papers and by Office of Fair Trading- they should've looked at 10% of the turnover of the enterprise being the upper circuit. So the cap on the total mount of penalty that could be levied- for eg in the case of United Phosphates- the cap would have been Rs 280 crores. Then look at what is the turnover in the relevant market; in the case of United Phosphorus it would have been Rs 77 crores. And not simply apply the 9% which the CCI applied and COMPAT affirmed. But like in the EU, say, at the base level we will look at up to 30% of the turnover in the relevant market and then based on mitigating factors or aggravating factors increase that. So what I am suggesting is that the penatly would've been much higher."

PENALTY GUIDELINES
Office of Fair Trading: Upper limit capped at 10% of total turnover & 30% of relevant turnover

Besides the penalty principles, COMPAT's order has also dwelled on the powers of the Director General of investigation.

Among other reasons, CCI had found the 3 manufacturers guilty of cartelisation as they collectively boycotted a 2011 tender floated by FCI. The manufacturers had argued that at the time CCI ordered the DG investigation, 2011 tender did not exist and so the DG had extended his jurisdiction. The COMPAT dismissed this argument saying CCI's brief to the DG was not to investigate a specific tender but the general anti-competitive behavior. In doing so, the Tribunal noted that the scope of DG's investigation will depend on CCI's prima facie order.

Avaantika Kakkar
Partner, Khaitan & Co.
"My takeaway from that would be that now the CCI has to word its prima facie orders liberally enough and it is great that the COMPAT has said that when the CCI makes it prima facie orders directing the Director General to start an investigation, it has limited information and it working on limited information. And should the Director General come across reasons to expand the scope for an industry-wide inquiry or find more parties worth including in his investigation, then he should take it to the CCI and the CCI should consider that application."

This order would not only offer relief to companies before COMPAT but would also give leverage to parties currently arguing their case before the CCI. As Naval points out, CCI may very well appeal this in the Supreme Court. But until then, the competition regulator may have to curb its enthusiasm in imposing headline grabbing penalties!