The Big Story. Taking on the goliaths

Flipkart’s recent Big Billion Day sale resulted in the e-retailer facing a volley of predatory pricing allegations from brick-and-mortar retail stores. They alleged that by selling products below cost, Flipkart was killing market competition. But then, there were others who argued that massive discounts benefited consumers and were, in that sense, pro-competition.

So, who’s to decide whether discounted sales by e-retailers are harming competition? The Competition Commission of India, the country’s competition regulator, can, if someone files a complaint. Alternatively, it could also look into the matter on its own.

While there is no question that the CCI is vigilant and active, is it effective enough? With the regulator only five-and-a-half years old, it may be too early to pass judgment. But some landmark orders passed since its inception offer useful insights.

One case that has attracted much attention is that against real estate giant DLF. Following a complaint from a group of apartment allottees of DLF’s Belaire housing project in Gurgaon, the CCI started an investigation into charges of abuse of dominant position against the realtor in 2010.

Holding DLF to be dominant in the market for ‘high-end residential accommodation in Gurgaon’, the CCI found it guilty of abusing its dominance in several ways. Among the factors that it took into account while deciding on DLF’s dominance was that it enjoyed a market share of over 55 per cent — double that of its closest competitor — among the real estate companies in Gurgaon.

And how did DLF abuse its position? This happened in several ways — constructing more floors than originally promised, delay in the completion and possession of flats and having flat buyers’ agreements with conditions biased in favour of the realtor — to name some. Accordingly, the CCI, in August 2011, ordered DLF to pay a penalty of ₹630 crore (7 per cent of the average turnover of the last three financial years) and also modify the unfair conditions in the flat buyers’ agreement.

The CCI decision was then challenged by DLF at the Competition Appellate Tribunal (COMPAT) which upheld the penalty imposed on it but did not agree in totality with the order passed by the CCI. Subsequently, the case went up to the Supreme Court, which is yet to pass the final order but in the meanwhile has asked DLF to deposit the fine amount.

Impact : While the final order has not been passed, it has increased the awareness of flat buyers about the unfair practices being followed by many real estate companies. In fact, following the CCI order against DLF, several other complaints have been filed — against other DLF projects and also other builders — with similar observations being made by the CCI in some of these cases.

As regards the flats buyers of the Belaire project, while the sale deeds are yet to be executed given the ongoing litigation, they have got possession of the flats. Moreover, the Belaire Owners’ Association is all set to file a hefty compensation claim against DLF, as provided for in the Competition Act, says Sanjay Bhasin, President, Belaire Owners’ Association.

While the DLF case revolved around a dominant firm abusing its market position, the case against 11 cement companies, including ACC, Ambuja Cements, India Cements and JK Cement, along with the industry association, was about competitor firms colluding and coordinating their pricing and output decisions at the expense of the consumer. Taking up the case on a complaint filed by the Builders’ Association of India, the CCI found the cement manufacturers guilty of having formed a cartel and the Cement Manufacturers’ Association (CMA) of having facilitated that cartel by providing an information-sharing platform to the companies.

The regulator’s findings were based on data that pointed towards coordination by firms on cement production and supplies, low capacity utilisation and similar price increases by different producers. This was believed to be no mere coincidence but a likely outcome of information-sharing between companies.

In June 2012, the CCI imposed a penalty of around ₹6,300 crore (0.5 per cent of net profit from May 20, 2009 to March 31, 2011) on the companies and the association and asked them to desist from their anti-competitive behaviour. The cement companies then appealed to COMPAT, which asked them to deposit 10 per cent of the penalty till it decides on the matter.

Impact : If we look at cement prices across India post the CCI order, they show no sign of easing. The movement in cement prices, which is cyclical, continues to remain the same. Lack of company-wise price data, however, makes it difficult to draw conclusions on whether or not manufacturers are coordinating prices amongst themselves.

But in another case relating to tyre manufacturers, the CCI refrained from holding the parties guilty of cartelisation for want of sufficient evidence, despite finding some characteristics of a cartel. This brings home the point that proving the existence of a cartel is no mean task.

In a case of David taking on the Goliath of the market, the then newly-born MCX Stock Exchange (MCX-SX) filed a complaint against the National Stock Exchange (NSE) for charging no admission fee for membership in the currency derivatives (CD) segment and also allowing free transactions in this segment which it cross-subsidised through the income from the equity and debt segments, where it enjoyed a virtual monopoly. MCX-SX, which operated only in the CD segment, too was forced to waive off charges even as it sank into losses.

After investigating the facts, the CCI, in an order in June 2011, found the NSE guilty of abusing its dominant position. It ordered the NSE to instead charge an appropriate fee on CD transactions and imposed a fine of ₹55.5 crore on the bourse.

Impact : In August 2011, the NSE announced charges for trades in the CD market apart from a flat admission fee for trading members. The BSE too, which introduced the CD segment in November 2013, will start charging transaction fees beginning December 2014.

While in the short run this has meant higher charges for traders, it will encourage new entrants in this segment, creating competition.

The CCI order was upheld by COMPAT, but a subsequent appeal with the Supreme Court saw the penalty getting stayed. The apex court is set to hear the matter in November.

There have been other cases too where the CCI has tried to protect consumer interest. Early this year, it held the super speciality hospital Dr L.H. Hiranandani Hospital, Mumbai, guilty of anti-competitive behaviour by denying its patients the freedom to choose a stem cell bank. The hospital had an exclusive agreement with Cryobanks International India which alone was allowed to collect stem cells of the admitted patients.

Taking a strong view, the CCI invalidated the hospital’s agreement with Cryobanks (for 2011-12 and 2012-13) and debarred it from entering into such agreements with other service providers. It also imposed a penalty of around ₹3.82 crore (4 per cent of last three years’ average turnover) on the hospital.

Again in March, the CCI held the Bengal Chemist and Druggist Association (comprising 34,000 wholesalers and retail sellers of drugs in West Bengal) guilty of violating the Competition Act. Imposing a penalty of ₹18 crore, it directed the association to stop its anti-competitive conduct of influencing the selling price of drugs as also their supply.

Following an investigation, the CCI held the Association guilty of hampering price competition by directing its members to sell drugs at the MRP and not offer discounts to customers. The Association was also found to be taking action against retailers that were not toeing its line by forcing them to pay fines and shut shop.

More recently, the CCI slapped a fine of ₹2,545 crore (2 per cent of the companies’ turnover) on 14 major automobile companies after holding them guilty of abusing their dominance in the aftermarket for sale of spare parts. With independent repairers not in a position to effectively compete with authorised car dealers, the CCI held that a person had no option but to depend only on the company’s authorised dealers.

The CCI’s power is not restricted to the private sector. Recently it passed two orders against coal behemoth Coal India for imposing unfair conditions — penalty on buyers for not lifting coal but not on itself for failing to supply coal.

The penalised parties in the Hiranandani case and the Bengal Chemist and Druggist Association cases have appealed against the CCI order. Many automakers too are getting ready to appeal.

While the CCI has passed many pro-consumer orders, most of these have been challenged. Does that take away the effectiveness of the CCI? Not really, say experts. Paku Khan, Executive Director of legal firm Khaitan & Co, feels it’s too early to judge. Unlike competition authorities in the US or the EU that have been in existence for many years, the CCI is a relatively new regulator.

According to Ramesh Vaidyanathan of Advaya Legal, the CCI, by imposing hefty penalty against anti-competitive practices, has increased consumer awareness. Also, following the CCI order in the auto components case, it was reported that Ford India would consider selling its spares in the open market.