COMPETITION LAW OBSERVER

A blog by Centre for Competition law & Policy, NLU Jodhpur

CRISIS CARTELS IN INDIA: A REAL POSSIBILITY?

CRISIS CARTELS IN INDIA: A REAL POSSIBILITY?

Disha Tulsyan and Dhruvi Shah

Crisis Cartels are temporary arrangements, usually entered into by competitors during and as a result of economic crisis. These cartels, caused by exogenous factors, are exempted from any statutory action due to the factor of necessity. The outbreak of the Covid-19 pandemic this year has put governments worldwide in a turmoil as global markets are endangered. Steep fall in the demand of products and services has left companies in a momentary stand-still position. Smaller companies could hardly survive and have indefinitely terminated their operations. The imposition of lockdowns globally has disrupted the markets and economies of even the highly developed countries. Countries are now looking to replenish their economies and rejuvenate their markets.

Survival for industries in this COVID-19 hit market is foremost and this survival is related to their finances. Additionally, the consumers at the receiving end are worst beaten. The market is characterised by high prices and less freedom to choose. Naturally, this may not always be desirable for the market. With the consumers being disabled to purchase at full capacity, the supply is likely to exceed the actual consumption. The companies are at a risk of being ‘over-capacitated’.

Countries around the world have accepted the fact that State support might not be sufficient to rejuvenate the market. Increasingly, companies are ‘voluntarily’ coordinating with other companies to rationalize their operations and benefit the consumers. This coordination is necessary to counter overcapacity and bring a balance in the market. The continued full-scale production will worsen the position of companies in the market. However, such voluntary coordination does not bode well with the competition authorities and hence, what will be noteworthy here is how in times of crisis, such combinations are perceived.

International Scenario

The European Competition Network [“ECN”], on the 23rd March, 2020, made a joint-statement, expressing their understanding of the need for the companies to coordinate with their competitors in this pandemic. The statement clarifies that such a combination would not be violative of Article 101 of the Treaty on the Functioning of the European Union.This Article provides for an exhaustive list of practices that are likely to prevent, restrict or distort the competition within the internal market. Further, Article 53 of the Agreement on the European Economic Area, will also not stand violated by such agreements. The ECN did not completely relinquish control, however, they gave up active intervention in necessary matters.

The Norwegian government has announced a similar relaxation to the transport industry. Through a press release, the government  granted exemption to air, land, and sea transport, to enable them to perform their social duties towards the passengers in times of crisis. The regulation was adopted on 18th March, 2020 and was to apply for 3 months. Such decisions have also been taken by the American, Icelandic, and Finnish Competition authorities.

Cartelisation in India

The Competition Act, 2002 (“Act”), prohibits anti-competitive agreements which cause or are likely to result in an appreciable adverse effect on healthy competition in the country. However, an exception to such a prohibition has been provided to agreements like joint-ventures, if the purpose of such an agreement is to increase the efficiency of business. This presumption of anti-competitiveness of cartels, under the Act, fails to take into account the effectiveness of crisis cartels at a time of overburdening of the economy.

The economic disability and chaos caused by the current pandemic is severe, resulting in an impending recession and structural overcapacity in several sectors of the economy. In sectors such as aviation and automobile industry, low consumer demand coupled with no certainty as to full-blown resumption of business lead to a situation wherein only companies with heavy pockets can hope to flourish, while the rest await their impending doom. If seen from a bird’s eye view, this is in the interest of free flow of competition and in line with an antitrust regime. However, the main purpose of criminalisation of cartel appears to be its negative impact on competition which is to be positively correlated to productivity and Gross Domestic Product [“GDP”] growth of the economy, something which cannot be achieved in the ongoing pandemic situation without some sort of cooperation between market players.

CCI’s approach towards cartelisation during the current Pandemic

The Competition Commission of India (“CCI”) appears to have adopted a lenient approach towards cartelisation, owing to the mitigating factors caused by the pandemic. One of the first cases where such an attitude by the CCI could be seen was in the order dated June 6, 2020, wherein, even though the companies had engaged in cartelisation from 2009 to 2014, the CCI did not impose any penalty and merely issued acease and desist order. In another order, dated July 10, 2020, ten different suppliers of Composite Brake Blocks to the Indian Railways admitted to having been involved in cartelisation for bid-rigging for about a decade from 2009-2017. However, they just received a slap on the wrist in the form of a penalty, instead of heavy financial sanctions as would have normally been the case.

While in both of the above cases, the CCI held that the statutory presumption of appreciable adverse effect of cartelisation on competition is imbibed under section 3 of the Act and the same cannot be rebutted by claiming that such an agreement had not actually resulted in such an adverse effect, the CCI made a leeway keeping in mind the wilful disclosure and cooperation of the parties involved and the situation of economic crisis caused by the pandemic.

Advisory Issued by the CCI

The CCI issued an advisory to the businesses in April, in lieu of the pandemic. By this advisory, CCI permitted businesses to coordinate certain activities by sharing data like distribution networks, infrastructure, Research & Development, production, etc., to cope with market forces. While the advisory emphasised upon section 3 of the Act and anti-cartelisation, it also laid emphasis on section 19(3) of the Act. This section enables the CCI to consider the accrual of benefits to consumers, an improvement in production and distribution, and promotion of economic development, amongst others, while conducting an enquiry into any agreement entered into by an enterprise. While stating this, the advisory explicitly stated that the Act safeguards businesses from sanctions, even for coordinated activities when such activities are meant for increasing efficiency. However, the same cannot be used to contravene provisions of the Act and take advantage of the pandemic.

By this advisory, the CCI has taken into account the externalities caused by the pandemic and has allowed activities that are necessary and proportionate to combat the resultant difficulties. While the advisory acts as a step in the right direction by imbibing certain elements of a crisis cartel, it still appears to be incomplete, failing to incorporate the ramifications of crisis cartels in a post COVID-19 world. It attempts to address the bigger picture, without addressing the intricacies of such a cooperation and providing a clear guideline to be followed by CCI for distinction between cartelisation and cooperation to meet the challenges posed by the pandemic.

Conclusion

The crisis due to the pandemic resulted in a peculiar situation that created a need for the competition authorities to relegate their authority over matters of necessity. Internationally, countries have taken a positive outlook towards allowing combinations through cartels by exempting necessary industries from anti-cartelisation. The European Commission has been expeditious in providing state aid by critical support. The French Government has secured every French business against bankruptcy. Since the pandemic already puts the governments in precarious positions, the extent of such measures will depend accordingly. Japan allowed for coordination amongst industries for the input of resources and information exchange. Information exchange proves to be a vital step as it ensures better coordination in terms of resource pooling and allocation. This will also ease the manufacturing burdens of the companies. 

In India, the Act is still at a nascent stage and not well-equipped to deal with all the peculiarities of the situation. CCI’s previous judgments raised several concerns, and were criticised for taking a lenient stance towards inherently anti-trust activities. While CCI’s approach is appreciable as the ultimate goal of every antitrust authority is the speedy correction of market anomaly, and not the imposition of crippling punishments, it sets an incorrect precedent that even for cartelisation that took place prior to the pandemic, the pandemic can be cited as a reason to avoid punishments and sanctions. There needs to be a clear demarcation of timeline from when the pandemic can be cited as a mitigating factor, and even then, sector specific exemptions are the need of the hour.

Crisis cartels cannot be blindly allowed to operate, as a blanket rule because it might act counterproductive to the intent of the government. They can be allowed in those sectors that have been severely impacted by the impending economic crisis, wherein if not allowed to cooperate, these sectors could suffer irrecoverable losses in the days to come. Regular notifications from the authorities should keep the industries under proper checks. Aviation sector and the Pharmaceutical sector are two of the sectors that require such cooperation. Aviation, because it has suffered due to the ban on travel during lockdown, and pharmaceutical, because the exchange of information is extremely crucial during a biohazard pandemic.

Disha Tulsyan and Dhruvi Shah are fourth year students at Symbiosis Law School, Pune.

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