Emergence of Competitive Laws in India

The pre–independence period was a period of economic stagnation for the Indian economy.

 The establishment of British Rule in India left the Indian economy crippled. India served as a dumping ground for the machine made cloth and other factory goods from England and was reduced to a mere raw material supplying colony. Consequently, at the time of independence in 1947, India was a typically backward economy. Owing to poor technological and scientific capabilities, industrialization was limited and lopsided. Agricultural sector exhibited features of feudal and semi-feudal institutions, resulting into low productivity. In brief, poverty was rampant and unemployment was widespread, both making for low general standard of living. These were the socio-economic settings in which the founding fathers had to chart out a programme of nation-building. Therefore, to eliminate poverty and raise the level of living of the masses the government undertook the task of promoting economic development through rapid industrialization and adopted the method of economic planning. The Planning Commission was set up in March 1950, and thereby India adopted five year plans for the development of the economy.

The Constitution of India came into force on 26^th January, 1950. The chapter IV of the constitution lays down the directive Principles of State policy which is to be regarded by the state as guiding principles in the governance of the country. Article 38 and Article 39 lay down that the state shall strive to promote the welfare of the people by securing and protecting as effectively as it may a social order in which justice – social, economic and political, shall inform all the institutions of national life, and the state shall in  particular, direct its policy towards securing

1. That the ownership and control of the material resources of the community are so distributed as to best subserve the common good; and
2. That the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment.

 

By the Constitution Amendment Act of 1976, we the people of India have accepted a socialist pattern of society as our goal. One of the principle methods for establishing such a society is preventing concentration of economic power in few hands or institutions. To preserve the laudable ideals of free enterprise and protection of the consumer, the state has to intervene to regulate trade and commerce so that there is no undue concentration of means of production and market dominance, which are inimical to the concept of open society. Therefore, government of India had the complex task of promoting the economic development of the country via a consistently growing GDP keeping the constitutional mandate in mind.

 

Competition and its role in the economic development of a democratic nation

 

A review of cross country literature suggests that there is a positive association between GDP Growth and level or degree of competition. Competition may be defined in the following words:

“Competition can be defined as a process by which cost effective production can be achieved in a structure where entry and exit are easy, a reasonable number of players (producers and consumers) are present and close substitution between products of different players in a given industry exists.”1

In other words, competition is a process of economic rivalry between producers to attract consumers. These producers can be multi-nationals or domestic companies, wholesalers, retailers etc. Competitive market ensures efficiency resulting in best possible choice of quality, lowest prices and adequate supplies to consumers.

The basic tenets of democracy and market competition are ingrained in the same value system – freedom of individual choice, abhorrence of concentration of power, decentralized decision making and adherence to the rule of law. The common goal of both democracy and market competition is the same – to ensure public welfare. Anyhow, firms while competing with one another, often adopt unfair means to restrict competition. This relates to fixing prices with rivals, setting price which is lower than cost in order to throw out competitors from market, taking advantage of a monopoly position and charging unreasonable price, and the like.  This is where competition law assumes a pivotal role in achieving the targets of democracy and economic justice. The constitution of India guarantees certain basic freedoms that include the fundamental right to carry on any occupation, trade or business under Article 19(1)(g). Competition law reinforces this fundamental right by prohibiting unreasonable restraints on the exercise of these rights through anti-competitive practices

The need for a competition law arises from the following factors

1 to take care of anti-competitive practices adopted by firms to restrict the free play of market forces

2 to take care of unfair means adopted by firms against consumers and other market players to extract maximum possible benefits

3 to maintain and promote competitive spirit n the market

 

 

 

 

The history of the Indian competitive legislation

 

Amartya Sen has consistently maintained that a democratic state (like India) makes it much harder for the ruling government to be unresponsive to the needs and values of the population at large, unlike the dictatorships. Joseph Stiglitz believes that there are market failures and a democratic government has to intervene to protect the interest of the society. The present economic thinkers do not blindly believe in the self-correcting virtues of the invisible hand of market mechanism; but a system of institutional regulations guarded interventions to keep the market on the right track for the common good. Keeping this in mind, India adopted the mixed pattern of economy which combines the pros of free interplay of market forces and reasonable state controls all in one package.

 

 

The history of the Indian competitive legislation goes back to the Monopolies Enquiry Commission. In 1964, when the Indian democracy was in its nascent state – barely 17 years old – the Government of India appointed the Monopolies Enquiry Commission to enquire into the effect and extent of concentration of economic power in private hands and prevalence of monopolistic and restrictive trade practices in important economic activity other than agriculture. The commission submitted its report along with the Monopolies and Restrictive Trade Practices (MRTP) Bill, 1965 and on June 1^st, 1970 the MRTP Act came into force as the MRTP Act, 1969.

 

The application and operation of the MRTP Act

The MRTP Act gave new dimensions to the economic legislation of the post – independence era. This enactment imbibed the social and economic philosophy enshrined in the Constitution.

The principle objectives sought to be achieved through the Act, as stated in the Preamble to the Act are as follows:

(i)                  Prevention of concentration of economic power to the common detriment

(ii)                Control of monopolies

(iii)               Prohibition of monopolistic trade practices, and

(iv)               Prohibition of restrictive trade practices

The substantive provisions of the Act were contained in chapters III, IV, V and VI; chapter IIIA was later added by the Amendment Act of 1984. chapter III (which was comprised of  3 parts A,B,C) , interalia sought to regulate concentration of economic power by making it obligatory for undertakings with assets of the total value of Rs. 20 crores  or more (later raised to Rs. 100 crores or more by the Amendment Act of 1985) and dominant undertakings with assets of the value of Rs. 1crore or more, to seek the approval of the Central Government before effecting expansion of the undertaking, adding a new unit or division to the existing MRTP undertaking or setting up a new undertaking which when established would become interconnected with the existing undertaking and for merger/amalgamation or take-over of an undertaking (part A and C of chapter III have been deleted by the Amendment Act of 1991). Chapter  IIIA  regulated the acquisition and transfer of shares of, or by certain bodies corporate.(deleted by the Amendment Act of 1991). Chapter IV dealt with monopolistic trade practices, and Chapter V and VI covered restrictive trade practices. By the Amendment Act of 1984, Ch V was renumbered as Ch V A, and a new Ch VB, containing provisions to regulate unfair trade practices, was inserted. Though unfair trade practices are now also covered by the MRTP Act, the preamble has not been amended to specifically name them. It is felt that unfair trade practices belong to the same genesis as monopolistic and restrictive. Unfair trade practices, as such, are a mere extension of the concept of monopolistic and restrictive trade practices and may be considered as matters connected therewith or incidental thereto for purposes of the preamble to the act.

The model of the act was given by the Monopolies Inquiry Commission set up by the Government of India in 1964 under the Commission of Inquiry Act of 1952. Substantial departure was, however, made at the time of its enactment retaining only the skeleton. The provisions on restrictive trade practices, including the resale maintenance are substantially based on the UK legislations and particularly Restrictive Trade Practices Act, 1956 and the Resale Price Act, 1964. Likewise the provisions on unfair trade practices are influenced by the UK Fair Trading Act, 1973, the anti trust legislations in USA; notably the Shuman Act, the Clayton Act and the Federal Trade Commission Act, as also the Australian and Canadian legislations have also been a guide in framing the provisions relating to monopolistic, restrictive and unfair trade practices.

Failure of the MRTP Act and the Reforms of the Nineties

 

However, the MRTP Act was unable to deliver as expected partly because of the inherent weaknesses in its own structure and the composition of the MRTP Commission, and partly due to the fact that the attributes of competition (entry, price, scale, location etc) were regulated by separate set of policies. Although the country did witness industrial growth and diversification during this period, the complex network of controls and regulations fettered the freedom of enterprises. Administrative delays and rent seeking opportunities spawned an inefficient industrial structure, which was beset with problems of sub-optimal scales of operation, capacity under-utilization, lack of technological upgradation and high levels of industry concentration.

The industrial Policy Statement of 1980 focused attention on the need for promoting competition in the domestic market, technological upgradation and modernization. Far reaching changes were made by the MRTP (Amendment) Act, 1991. The Reforms covered a broad spectrum such as further liberalization of industrial licensing dispensing with the requirement of prior government approval before affecting expansion by undertakings, registered under the MRTP Act, 1969 progressively diluting the monopoly of the public sector industries, except where security and strategic concerns still dominate, abolition of levy and non-levy price system, and reducing purchase preference for public sector enterprises. The Industrial policy statement of 1991 also emphasized the attainment of technological dynamism and international competitiveness. It noted that the Indian industry could scarcely be competitive with the rest of the world if it had to operate within an over-regulated environment. The main thrust, as it stood before the Reforms of 1991, to prevent concentration of economic power to the common detriment, has now shifted to effectively curb monopolistic, restrictive and unfair trade practices.

 

 

The need for a new competition law

However, even the reforms of 1991 were considered inadequate, accentuating the need for a new competition law. This led to the constitution of a High Level Committee on Competition Policy and Law in October, 1999 also known as the “Raghavan Committee”. The terms of reference of the Committee inter alia included recommending a suitable legislative framework relating to competition law, changes relating to legal provisions in respect of restrictive trade practices and suitable administrative measures required to implement the proposed recommendations. This committee went into the modalities of bringing into a law and a law enforcement authority in the form of the Competition Act and the Competition Commission of India respectively. The Raghavan Committee Report states that the essence and spirit of competition should be preserved as it encourages efficiency in the production and allocation of goods and services, and over time, through its effects on innovation and adjustment to technological change, a dynamic process of sustained economic growth. The Parliamentary Standing Committee on Home Affairs to which the Competition Bill, 2001 was referred for examination, concluded that the rigidly structured MRTP Act  necessitated its repeal in view of the Government’s policy of being facilitator rather than regulator. Keeping in view the economic developments that have resulted in opening up of the Indian economy, removal of controls and consequent economic liberalization which required that the Indian market be geared to face competition within the country and outside, the Competition Act, 2002 was enacted pursuant to Raghavan Committee’s Report.

 

The Competition Act of 2002

The Competition Act has been designed as an omnibus code to deal with matters relating to the existence and regulation of competition and monopolies. Its objects are lofty, and include the promotion and sustenance of competition in markets, protection of consumer interests and freedom of trade of other participants in the market, all against the backdrop of the economic development of the country. It is compact, composed of 66 sections. The legislation is procedure-intensive and is structured in an uncomplicated manner. The initial part contains the definition clause. The first part also includes a description of activities prohibited under the Competition Act. This is crucial to our understanding of the letter and spirit of the Competition Act, as all principles enunciated subsequently flow from these provisions. Structurally this is followed by a description of the Competition Commission of India (CCI). Quite logically, a significant portion of the Competition Act has been devoted to the CCI and the executive powers granted to this statutory body since it is ultimately the decision taken by the Commission which would provide both direction to the Act as well as the trends displayed in enforcement of the various provisions of the Act. Similar to most legislations the Competition Act is concluded by a chapter discussing the miscellaneous aspects of the legislation and generally applicable principles.

 

The rubric of the Act has essentially four compartments:

1. Anti- Competition Agreements
2. Abuse of Dominance
3. Combination Regulations
4. Competition Advocacy

 

The Competition Act, 2002 – new wine in a new bottle

There is a significant contrast between the repealed MRTP Act and the Competition Act.  The intent of the Competition Act is not to prevent the existence of a monopoly across the board. There is a realization in policy-making circles that in certain industries, the nature of their operations and economies of scale indeed dictate the creation of a monopoly in order to be able to operate and remain viable and profitable. This is in significant contrast to the philosophy which propelled the operation and application of the MRTP Act. The word monopoly is no longer taboo in corporate and political India. The Act declares that person and enterprise are prohibited from entering into a combination which causes or is likely to cause an “appreciable adverse effect” on competition within the relevant market in India. A system is provided under the Act wherein at the option of the person or enterprise proposing to enter into a combination may give notice to the CCI of such intention providing details of the combination. The Commission after due deliberation, would give its opinion on the proposed combination. However, entities not required to approach the Commission for this purpose are public financial institutions, FIIs, banks or venture capital funds which are contemplating share subscription, financing or acquisition pursuant to any specific stipulation I a loan agreement or investor agreement.

The Act definitely is a new wine in a new bottle. The other differences between the MRTP Act and the Competition Act are displayed in the table given below:

 

	MRTP Act	Competition Act
1	Based on the pre-reforms scenario	Based on the post-reforms scenario
2	Based on size as a factor	Based on structure as a factor
3	Competition offences implicit or not defined	Competition offences explicit and defined
4	Complex in arrangement and language	Simple in arrangement and language and easily comprehensible
5	14 per se offences negating the principles of natural justice	4 per se offences and all the rest subjected to rule of reason
6	Frowns upon dominance	Frowns upon abuse of dominance
7	Registration of agreement compulsory	No requirement of registration of agreements
8	No combinations regulation	Combinations regulated beyond a high threshold limit
9	Competition Commission appointed by the Government	Competition Commission selected by a Collegium (search committee)
10	Very little administrative and financial autonomy for the Competition Commission	Relatively more autonomy for the Competition Commission
11	No competition advocacy role for the Competition Commission	Competition Commission has competition advocacy role
12	No penalties for offences	Penalties for offences
13	Reactive and rigid	Proactive and flexible
14	Unfair trade practices covered	Unfair trade practices omitted (consumer for a will deal with them)
15	Does not vest MRTP Commission to enquire into cartels of foreign origin in a direct manner	Competition law seeks to regulate them
16	Concept of ‘Group Act’ had wider import and was unworkable	Concept has been simplified

 

However for nearly 5 years the Indian government has been unable to bring into force the substantive provisions of the Competition Act passed by the Parliament in December 2002. The implementation of the Act and the appointment of the Chairman and all but one of the 10 members of the proposed CCI, was stalled by a writ petition in the Supreme Court which contended that the constitutional doctrine of separation powers required that the CCI be headed by a Judge chosen by the judiciary and not a beaurocrat chosen by the executive.

 

 

 

 

The Competition (Amendment) Bill, 2006

 

The Competition (Amendment) Bill, 2006, contains provisions designed to address the Supreme Court’s concerns. It also proposes to make several other changes in sections of the Act dealing with anti-competitive practices. Some proposed amendments are quite sensible, while others (notably a modified leniency programme for firms that provide information about their participation in a cartel) have been inadequately thought out. The amendments designed to placate the Supreme Court will also have some negative consequences. Several weaknesses in the original Act remain unaddressed. Finally, the scarcity of the kind of economic expertise required to interpret the Act’s multifarious technical clauses also remains a matter of concern. Intensive capacity building and a re-assessment of the Act itself are urgently required.

 

Conclusion

The quality of governance of the state is being watched very closely by the citizens, investors and the international community. As more freedom is available to businesses to choose from various countries for investment, the competing governments are also conscious about the role of governance in attracting investment. Any perception that the environment is not conducive to competition and the state has been captured by a few big businesses certainly negatively affects the global investment decisions of firms. The same is also true of the situation within different provinces in a country as same considerations are used by the firms in making investment decisions while choosing locations for establishment of an industry. In a market structure where firms face weak competitive pressures and the profits and prices are predictable the firms have little or no incentive to use resources efficiently. Hence competition is accepted worldwide as the life blood of the market economy. It spurs innovation and higher productivity leading to accelerated economic growth; to the consumers it brings the benefit of lower prices, wider choices and better services. The effect of competition on price and accessibility is best illustrated with an example from Indian telecommunications. Tele-density in India has risen from mere 2.32 in 1999 to 11.32 in December 2005-07. Also there has been a dramatic fall in telecom tariffs from Rs.16 per minute to Re.1 per minute with increased competition in this sector. Similarly, consumers have benefited from competition in other sectors such as civil aviation, automobiles, newspapers and consumer electronics.

The enactment of the Competition Act is a commendable step towards achieving the twin mantra of “open market economy” and “liberalization” in a mixed economic system. The need for reform in the legal system with regard to competition law has been rightly recognized by the legislative bodies in the country. However, the reforms have not been smooth or speedy which has resulted in a stagnation of the legal framework guiding the corporate sector. Further reforms need to be undertaken as fast as possible to ensure that the development of the nation does not take a backseat due to the pending legal reforms. Reforms must provide for good corporate governance, less of government controls and interference, protection of consumers and public interest, rewarding the merits and all to be achieved as soon as possible because world has also options available other than India.

 

1. Report of The Working Group on Competition Policy, Planning Commission, Government of India, February 2007