Horizontal agreements under

Competition Act 2002

Anticompetitive Agreements under the Competition Act

 The term ‘agreement’, has been defined broadly in the Competition Act. It extends to a mere
‘arrangement’, ‘understanding’ or ‘action in concert’, none of which need be in writing or
enforceable by law.
 In Re Bengal Chemists and Druggists Association, the CCI said that agreement also includes
anticompetitive practice which in this case was the anticompetitive practice of not offering
discounts on the maximum retail price (MRP) of the drugs to the consumers.
 The necessity for a broad definition of the term agreement has been aptly described by Lord
Denning in an old case RRTA v. W. H. Smith and Sons Ltd.,:“People who combine together to
keep up prices do not shout it from the housetops. They keep it quiet. They make their own
arrangements in the cellar where no one can see. They will not put anything into writing nor even
into words. A nod or wink will do.”
 Section 3(1) of the Competition Act lays down that no enterprise or association of enterprises or
person or association of persons shall enter into any agreement in respect of production, supply,
distribution, storage, acquisition or control of goods or provision of services, which causes or is
likely to cause an appreciable adverse effect on competition within India.
 The Act prohibits an anti-competitive agreement and declares that such an agreement shall be void.
Horizontal Agreements under the Competition Act

 Though the Competition Act itself does not explicitly classify agreements into horizontal and
vertical agreements, the language used in clauses (3) & (4) of section 3 of the Act clearly
indicates this classification.
 Section 3(3)vi of the Competition Act deals with the horizontal agreements as it covers the
agreements between entities engaged in identical or similar trade of goods or provision of
services.
 The section covers:
 a. agreement entered into between enterprises or associations of enterprises or persons or
associations of persons or between any person and enterprise
 b. practice carried on by any association of enterprises or association of persons
 c. decision taken by any association of enterprises or association of persons From the above it is
clear that section 3(3) of the Act not only covers agreements entered into between enterprises or
associations of enterprises but also the practice carried on or decision taken by any association
of enterprises engaged in identical or similar trade of goods or provision of services.
Horizontal Agreements under the Competition Act

 In Re Bengal Chemists and Druggists Association(BCDA) case, CCI held that all
actions and practices of BCDA including those relating to issues such as alleged
fixation of trade margins, issuing circulars directing its retailer members not to
give discount on the MRP in the sale of medicines to consumers, conducting raids
in order to ensure strict compliance of its directives, carrying out vigilance
operations to identify the retailers defying the direction issued by it, forcing the
defiant members to shut their shops as a punishment measure etc. would fall
squarely as ‘practice carried on’ or ‘decision taken’ by an ‘association of
enterprises’ under Section 3(3) of the Act.
Types of Horizontal Agreements under the Competition Act

 Section 3(3) of the Competition Act enlists four broad classifications of horizontal
agreements which are presumed to cause an appreciable adverse effect on
competition (AAEC) in India.
 Agreements regarding Prices
 Agreements regarding Quantity / Quality
 Market Allocation
 Bid Rigging
Agreements regarding Prices

 A price fixing agreement occurs when competitors make written, informal or verbal
agreements or understandings on prices for selling or buying goods or services,
minimum prices, a formula for pricing or discounting goods and services, rebates, the
magnitude of profit margins, the level of price increases, and allowances or credit
terms.
 Agreements related to fixing prices are called naked restraints and are given harsh
treatment by the competition authorities worldwide.
 The Competition Act also presumes that price fixing agreements have adverse effect
on competition.
Fixing Trade Margins and other anticompetitive practices in
distribution for Drugs in India

 In M/s Peeveear Medical Agencies, Kerala v. All India Organization of Chemists and Druggist (AIOCD)
and Ors., CCI found All India Organization of Chemists and Druggists (AIOCD) guilty for fixing trade
margins and limiting and controlling the supply of drugs in the market.
 CCI held that AIOCD because of its position as an apex body of chemists and druggists is having full
control over the stockists / retailers of drugs and medicines all over the country and is able to
continuously engage in limiting and controlling the supply and market and influencing the prices of the
drugs and pharmaceutical products through anticompetitive practices like insisting upon NOC for
appointment of stockists, fixation of trade margins etc.
 In Re Bengal Chemists and Druggists Association(BCDA) case,BCDA was alleged of issuing circulars
which directed the retailers not to give any discount to the consumers.
 The CCI observed that the activities of BCDA inter alia to direct its members to sell drugs only at their
MRP is a palpable anti-competitive conduct and activities of the BCDA are in conflict with the objects
of the competition law as they cause restraint of trade, stifle competition and harm the consumers.
 CCI imposed a penalty of Rs 18.38 crores on BCDA and its office bearers and also directed the BCDA
and its office bearers and executive committee members to cease and desist from indulging in such
anticompetitive practices.
Agreements regarding Quantity / Quality

 Output or product restriction can be exercised in various ways including limiting

or controlling production, supply, markets, technical development, investment or
provision of services.
 By controlling the supply or production of goods or services, the cartel is able to,
indirectly, increase prices to maximise their profits.
 In Builders Association of India v. Cement Manufactures case, CCI directed the
cement manufacturers to cease and desist from indulging in activities relating to
agreement, understanding or arrangement on prices, production and supply of
cement in the market.
Cases Related to Films Distribution decided by CCI

 CCI found North Indian Motion Pictures Association (NIMPA) guilty of anti-competitive
conduct of imposing compulsory registration of films before their release and refusing to
register films.
 The CCI held that the conduct of NIMPA in refusing to register the film in the name of
Eros International Ltd., and not allowing it to exhibit the film by instructing its members
was restrictive in nature.
 The Commission also ruled that the compulsory registration of the film with the trade
association was an inbuilt pressure on the distributor to register its film with the
concerned association as the film could not be released without registration.
 In another case the CCI observed that film distribution associations like KFCC, NIMPA,
CCCA, MPA, FDA and Telangana Telugu Film Distributors Association insist for
registration of films before their release in their territories and holds that such act limit
the supplies of films in different territories and contravene the provisions of section 3(3)
(b) of the Act. Such acts are anticompetitive from the aspect that these actions restrict
competition between members and nonmembers.
Market Allocation

 Market sharing, or market allocation, is where competitors agree to divide up

markets between themselves.
 This could be by allocating customers, products or geographic regions to each
other.
 Market allocating agreements are considered as one of the most restrictive
anticompetitive practices, as they do not leave any room for competition in the
relevant market and are considered per se illegal in most jurisdictions.
 Section 3(3)(c) enlist horizontal agreements which are aimed at sharing the
market or source of production or provision of services by way of allocation of
geographical area of market, or type of goods or services, or number of customers
in the market or any other similar way.
Bid Rigging

 The Act provides a definition for bid rigging and it covers agreements having
effect of eliminating or reducing competition for bids or adversely affecting or
manipulating the process for bidding.
 Bid rigging can cause serious economic harm as it increases prices artificially,
lowers quality and leads to loss of taxpayers' money.
 There can be various ways by which bids can be rigged. The bid rigging and
collusive bidding is done to support the cartel member that has been designated to
‘win’ the tender bid. Thus, other cartel members may refrain from
bidding,withdraw their bid, or submit bids with higher prices or unacceptable
terms.
Penalty on Suppliers of Food
Preservatives to FCI
 In Re: Aluminium Phosphide Tablets Manufacturerscase related to the allegations
of anti-competitive acts and conduct in the tender for procurement of Aluminium
Phosphide Tablets (ALP) required for preservation of central pool food grains by
Food Corporation of India.
 In this case,CCI taking suo-motto cognizance from a letter sent by the Chairman
of Food Corporation of India (FCI), imposed a total penalty of317 crores on three
companies supplying aluminium phosphide tablets (used for storing food grains)
to the Food Corporation of India (FCI) for limiting the supply of the said product
in the relevant market under Section 3(3)(b) and for manipulating the bidding
process under Section 3(3)(d) of the Act.
Bid Rigging in Public Procurement in
Railway Tenders
 In a suo moto case taken by CCI, the Indian Railways floated tenders for
procurement of feed valves used in diesel locomotives, it was noticed that all the
three bidders quoted identical rates of Rs. 17,147.54 for feed valves pieces and the
quoted rate was further found to be 33% higher than the last purchase rates.
 CCI found that the bidders had indulged in bid-rigging and collusive-bidding in
contravention of the provisions of section 3(1) read with section 3(3) (a) and 3(3)
(d) of the Act.
Cartels under the Competition Act

 The main ingredients of the definition of the cartel provided under the Act are:
1) an agreement which includes arrangement or understanding;
2) the agreement is amongst producers, sellers, distributors, traders or service providers
i.e. parties engaged in identical or similar trade of goods or provision of services, and
3) the agreement aims to limit, control or attempt to control the production, distribution,
sale or price of, or, trade in goods or provision of services.
 Thus, cartel is one type of horizontal anticompetitive agreement provided under the
Act and is presumed to have an appreciable adverse effect on competition.
 A cartel is said to exist when two or more enterprises enter into an explicit or implicit
agreement to fix prices, to limit production and supply, to allocate market share or
sales quotas, or to engage in collusive bidding or bid-rigging in one or more markets.
Exceptions & Exclusion

 Under the Competition Act, there are certain provisions which provide for the exemptions and carve
out exclusion from the provisions of the horizontal agreements. These provisions are as follow:
 a. Efficiency enhancing joint ventures are not treated as illegal. As per the proviso to section 3(3) of the
Act, the prohibition on horizontal agreements does not apply to joint ventures if such joint ventures
increase efficiencies in production, supply, distribution, storage, acquisition or control of goods or
provision of services.
 b. Section 54 of the Act states that by the Central Government’s notification, certain classes of
enterprises may be exempted from the purview of the Act.
 The government can exempt any class of enterprise in public interest or security of State, any practice
or agreement arising out of international treaty and any enterprise performing sovereign functions.
 For example, under this provision, the liner shipping agreements, which are generally horizontal in
nature and aim at fixing freight rates passenger fares over different shipping routes also amongst other
things, were given exemption for one year in India in 2013.
Exceptions & Exclusion

 c. Export cartels are exempted under the provisions of the Act. Since exports do not impact markets in
India, agreement between exporters, in spite of being horizontal, are exempted. Such exemption to export
cartels is provided in laws of various countries.
 d. Section 3 (5) of the Act states that provisions of section 3 would not restrict the right of any person to
restrain any infringement of, or to impose reasonable conditions, as may be necessary for protecting his
rights conferred upon him under certain Acts.
 These Acts are the Copyright Act, 1957, the Patents Act, 1970, the Trade Marks Act, 1999, the
Geographical Indications of Goods (Registration and Protection) Act, 1999, the Designs Act, 2000 and
the Semiconductor Integrated Circuits Layout Designs Act, 2000.
 Thus, the law recognises the special position of intellectual property rights and in order to facilitate their
protection, it permits reasonable restrictions in the agreements imposed by their owners for the protection
of intellectual property rights under specified Indian IP laws.
 e. The activities of the Government of India relatable to “sovereign functions”, including all activities
carried on by departments of the Central Government dealing with defence, space, atomic energy and
currency, are outside the scope of the Competition Act.
Joint Ventures

 The proviso to section 3(3) states that “Provided that nothing contained in this
sub-section shall apply to any agreement entered into by way of joint ventures if
such agreement increases efficiency in production, supply , distribution, storage,
acquisition or control of goods or provision of services.” This gives an exemption
for joint ventures.
 The term ‘joint venture’ implies a positive arrangement which is aimed at
increasing the synergies and efficiencies of the parties to the joint venture.
 Such exemption to joint ventures is justifiable economically also and it is
important for enterprises to enter into arrangements which enhances their
efficiencies and is beneficial to the enterprises.
 Such efficiencies can lead to joint research & development, innovation,
economies of scale & scope and can ultimately be beneficial to the consumers.
Standard of Analysis

 Horizontal Agreements are presumed to have an appreciable adverse effect on competition

under the Competition Act. The onus of proof is on the person or the enterprise concerned to
prove that the agreement does not fall under the prohibited category.
 The presumption contained in section 3(3) of the Act is rebuttable and the opposite parties
may produce evidence to controvert the presumption contained there in. It is pertinent here to
mention the observations of CCI regarding the burden of proof in a recent case dealing with
fixing of prices of drugs.
 The CCI observed: “Once existence of the prohibited agreement, practice or decision
enumerated under section 3(3) is established, there is no further need to show an appreciable
adverse effect on competition because in such a case, a rebuttable presumption of law is
drawn that such conduct has an appreciable adverse effect on competition and is therefore
anti-competitive. In effect, the onus of proof shifts on to the opposite parties to show that the
impugned conduct does not cause an appreciable adverse effect on competition.”
Standard of Analysis

 Cartels, by their very nature are secretive and thus it is difficult to find the direct evidence of their presence.
 The orders of the CCI clearly point that CCI relies on circumstantial evidence, both economic and conduct-based, to
reach its decision on the existence of a cartel agreement.
 It can be seen with time CCI is adopting a more economics based analysis. In two of the early cases, the tyre cartel case
xiv and Deutsche Bank, the CCI held that the existence of an agreement must be established ‘unequivocally’. In these
cases it appears that CCI was following the standard of ‘beyond reasonable doubt’ for proving the existence of an
agreement.
 Later, in the soda ash cartel and shoe cartel case, the CCI observed that the standard of proof required for establishing
the existence of an agreement is one of ‘balance of probabilities’.
 Circumstantial evidence concerning the market and the conduct of market participants may also establish an anti-
competitive agreement and suggest concerted action.
 From the decided cases till date, it can be seen that CCI examines conduct based as well as economic evidence in cases
related to horizontal agreements.
 Example of conduct based evidence examined by CCI include evidence of meetings between competitors, doubtful
sharing of documents, similar or identical bidding prices, membership and role of trade associations and any history of
cartelisation in India or other jurisdictions.
 Example of economic evidence examined by CCI include the level of market concentration, trends in capacity
utilisation by the enterprises, parallel movement of prices, and variations in cost-structures across firms.
Assessing Appreciable Adverse Effect on
Competition
 Section 19(3) of the Act states that the CCI shall while determining whether an
agreement has an appreciable adverse effect on competition under section 3, have
due regard to all or any of the following factors, namely: -
a) creation of barriers to new entrants in the market;
b) driving existing competitors out of the market;
c) foreclosure of competition by hindering entry into the market;
d) accrual of benefits to consumers;
e) improvements in production or distribution of goods or provision of services;
f) promotion of technical, scientific and economic development by means of
production or distribution of goods or provision of services.
Extraterritorial Jurisdiction

 Section 32 of the Act grants the CCI extra-territorial jurisdiction over anticompetitive conduct
which has an appreciable adverse effect on competition within India.
 Any anticompetitive activity taking place outside India but having an appreciable adverse effect on
competition within India shall be subject to the application of the Competition Act. The CCI in
such cases can pass such orders as it deems fit.
 An enabling provision has been provided whereby the CCI, with the prior approval of the Central
Government, may enter into arrangements and memorandum of understanding with foreign
agencies. CCI can enter into cooperation agreements with competition authorities in other
countries.
 It has entered into agreements with jurisdictions like EU, US and Australia. Such cooperation
arrangements are very helpful as they help in mutual organisational learnings, good collaborations
for detection of anticompetitive practices and greater enforcement of competition laws.
 Such cooperation and extra-territorial jurisdiction is pivotal in taking action against hard core
international cartels and in proper utilisation of cooperation agreements with agencies of other
jurisdictions.
Extraterritorial Jurisdiction: Comparison of
MRTP and new Competition Act in India
 In American Natural Soda Ash Corporation(ANSAC) v. Alkali Manufacturers Association of
India, it was held that MRTPC cannot take action against anticompetitive conduct arising from
outside India.
 In 1996, an association of Indian soda ash manufacturers complained to the MRTPC that
ANSAC was a cartel that was charging low prices for its exports to India.
 MRTPC ordered injunction against the import of ANSAC’s soda ash. On the issue of the
extraterritorial reach, this case was clubbed with another one in the Supreme Court.
 The Supreme Court did not go into the allegation of cartelisation, but instead held that the
wording of the MRTP Act did not give the MRTPC any extraterritorial jurisdiction.
 The MRTPC therefore could not take action against foreign cartels.
 Section 32 of the Competition Act empowers CCI to take action over anticompetitive conduct
taking place outside India, provided the conduct causes AAEC in India. Thus, CCI can take
action against international cartels if there is an AAEC in India.
Remedies

 The Act gives wide discretion to CCI to frame the remedies to overcome the
anticompetitive situation due to horizontal anticompetitive agreements.
 Following orders can be passed by CCI in case of anticompetitive agreements:
 a) As per section 33 of the Act, during the course of inquiry, the CCI can pass interim
order restraining a party from continuing with anti-competitive agreement.
 b) CCI may direct a delinquent enterprise to discontinue and not to re-enter
anticompetitive agreement.
 c) CCI may also direct modification of such anticompetitive agreement so as to
remove the anticompetitive effects.
 d) CCI may impose a penalty up to 10% of the average turnover for the last three
preceding financial years of the enterprise.
Remedies

 e) Section 27 (b) of the Competition Act, 2002 distinguishes between cartel and other
anticompetitive agreements in terms of imposition of penalty.
 In case of a cartel, the CCI can impose on each member of the cartel, a penalty of up to
three times its profit for each year of the continuance of such agreement or up to ten percent
of its turnover for each year of continuance of such agreement, whichever is higher.
 f) Section 48 of the Act incorporates individual liability and provides for liability of
individuals who were actively and/or passively involved in the contravention of the
provisions of the Act by the company that they were in charge of, and were responsible for
the conduct of the business of the company.
 g) CCI can direct the enterprises concerned to abide by such other orders as the
Commission may pass and comply with the directions, including payment of costs, if any;
and
 h) CCI may pass such other order or issue such directions as it may deem fit.
Remedies

 The enforcement of cartels is a civil law process under the Act. The Act does not provide for criminal
liability other than for wilful default in implementing orders of the commission.
 In case of searches and seizures, certain prior procedural permissions are required to be taken from
criminal courts.
 There is an element of personal liability under the Act. Further, it is pertinent here to mention that new
Companies Act provides for a bar on directorship if found guilty under an offence under the Competition
Act.
 In Re Bengal Chemists and Druggists Association case, the office bearers and executive members of the
BCDA were found to be guilty of the contravention of section 3 and penalties were levied on the BCDA
and its those office bearers who were directly responsible for running its affairs and play lead role in
decision making @10% and on the executive committee members @7%, of their respective
turnover/income/receipts.
 From the above, it is clear the CCI has got wide discretion in designing the remedies so that the
anticompetitive effects of the agreements are taken care of. Unlike erstwhile MRTPC, the CCI can impose
penalties and has got the discretion to pass any order as it deems fit in the case.
Leniency Provisions

 The leniency programmes have been proved to be a powerful tool in the hands of competition authorities worldwide
for detecting, investigating and proving the existence of cartels.
 Leniency provisions are based on the premise that successful prosecution of cartels requires evidence which can be
easily supplied by a member of the cartel.
 Such provisions were not under the MRTP law.
 In India, the provisions for lesser penalty are contained in section 46 of the Act and the framed regulation.
 The framed regulation provides for a full and well thought-out leniency programme and procedure.
 It provides for imposition of a lesser penalty, if any producer, seller, distributor, trader or service provider included in
any cartel, which is alleged to have violated the provisions of the Competition Act, with respect to anticompetitive
agreements:
a) has made a full and true disclosure in respect of the alleged violation;
b) such disclosure is vital;
c) such party continues to co-operate with the CCI till the completion of the proceedings before the CCI.
d) the disclosure should be made before the report of the investigation by the Director General, as directed by the CCI,
has been received.
 As per the regulations, “vital disclosure” means full and true disclosure of
information or evidence by the applicant to the Commission, which is sufficient to
enable the Commission to form a prima-facie opinion about the existence of a
cartel or which helps to establish the contravention of the provisions of section 3
of the Act.
 As per the framed regulation, the first applicant might be granted up to 100%
immunity, the second applicant up to 50% and the third applicant up to 30%
immunity, if the prescribed conditions are fulfilled.
 The provisions contain a discretionary immunity even if all other conditions were
fulfilled. This seems to be the main reason for non-acceptability of leniency
programme in India till date.
Cement Cartel Case decided by CCI

 In Builders Association of India v. Cement Manufactures case, CCI relied upon the settled
jurisprudence in other jurisdictions as well as on the guidelines of international agencies such as the
OECD in support of its decision that cartels can be prosecuted without direct evidence of agreement
and on the basis of circumstantial evidence alone.
 CCI directed the cement manufacturers to cease and desist from indulging in activities relating to
agreement, understanding or arrangement on prices, production and supply of cement in the market.
 Further, CCI directed the Cement Manufacturers Association (CMA) to disengage and disassociate
itself from collecting wholesale and retail prices through the member cement companies and also
from circulating the details on production and dispatches of cement companies to its members, as
sharing of prices facilitates cartelisation. Besides these directions, heavy monetary penalties have also
been imposed on all the 11 major cement manufacturers as well as on the CMA.
 The CCI imposed a penalty of over Rs. 6,000 crore on 11 leading cement producers after finding
them guilty of forming cartels to control “prices, production and supply” of cement in the market.