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The author is Chirag Motwani, a second year student at Hidayatullah National Law University.
Introduction
The Ministry of corporate affairs through the competition amendment bill 2023 (Bill) seeks reforms in the competition realm and seeks changes in the Competition Act, 2002 (Act).
The bill seeks, among other modifications, to modify the current position of relevant turnover to global turnover for calculating penalties. This is unexpected, as this amendment was neither included in the original bill nor recommended by the standing committee. The Penalty as provided under Section 27 of the act, that provides for, Orders by commission after inquiry into agreements or abuse of dominant position are to be based upon turnover. Section 27 (b) provides that, “impose such penalty, as it may deem fit which shall be not more than ten percent of the average of the turnover for the last three preceding financial years, upon each of such person or enterprises which are parties to such agreements or abuse.”
Section 2(y) of the act provides the definition of “turnover”. The provision provides, “turnover means value of goods or services. Turnover therein refers to the value of goods or services. This failed to provide a basis to determine the actual amount to be calculated for the penalties. The Position was settled in, Excel Crop Care vs. Competition Commission of India and another (Excel). The Supreme Court (SC) referred to the European Union’s Guidelines and provided for the turnover to be relevant turnover. The proposed change for total turnover has seemed to come into existence due to a consultative process. The proposal to penalize violators based on their total global revenue likely originates from the worry that the SC’s decision in the ExcelExcel case has weakened the Competition Act's effectiveness. A question remains for consideration that whether such change would be helpful in the long-run in the Indian market or would it act as a hindrance in the development of the market.
Penalties upon Global Turnover: A helping hand or a hindrance?
Recently the Competition Commission of India (CCI) has imposed penalties upon MAKE MY TRIP-GO IBIBO and OYO. (MMT-GO and OYO) The platforms engaged in imposing the penalty were digital. CCI imposed penalties upon the mentioned companies as one whole unit. This effectively made the relevant turnover as global turnover due to the clubbing of the companies of the said platforms. This does not count as a one-off incident wherein the relevant turnover metric was set aside and a need for another metric was discussed. In Matrimony.com v Google, CCI observed that the application of relevant turnover is not sufficient for such technology based platforms and indicated the need of another metric in order to impose the penalties in the concerned situations.
In the Excel case, the court did not consider the difference between violations in case of anti-competitive agreements under section 3 and the abuse of the dominant position under section 4. This should be a concern as the penalties upon the anti-competitive agreement upon the application of relevant turnover is identifiable due to the relative ease in marking the product as the very subject of the agreement in contrast to the abuse of the dominant position wherein there are certain hindrances in exactly identifying the product or delineation. Such hindrances in the application of relevant turnover as a metric in such cases and the increasing precedents that identify relevant turnover as a metric that has its own challenges coupled with the global turnover metric’s comparative ease in solving the situation of delineation of a product makes global turnover a suitable metric in the competition realm. In 2019, the Competition Law Review Committee (CLRC) released a report that served as the foundation for the 2020 Competition Amendment Bill proposal. CLRC determined that the "relevant turnover" formula was insufficient for dealing with all possible cartel situations. It provided a demonstration for a hub-and-spoke arrangement and stressed that, according to the current penalty formula, a hub that engages in a distinct business than its spokes would be exempt. CLRC admired the two-step methodology after examining the penalty provisions and rules of jurisdictions such as the European Union. This is due to the European Union Commission first examines the basic amount for levying such penalties and then assesses the deterrence that the penalty would serve. This helps in the determination of social as well as the economic impact upon the offending firm and serves the main purpose of levying punishments.
The recent recommendation upon imposing penalties is in contrast with the Excel case wherein the SC had concerns regarding the imposition of penalty on a global turnover basis. The rationale behind the decision was the application of economic logic. The very purpose of imposition of penalty should be deterrence. Imposition of global turnover as a metric for the penalties upon violations would lead to the breaching effect and serve the opposite purpose. It might lead to over-deterrence and an overall high costs of the products due to high compliance and maintenance costs of the products due to the fear of being imposed a penalty upon the global turnover basis. The concern of high costs in the market is an apprehensive one as due to the fear of being imposed a fine upon global turnover basis the companies will employ compliance measures that would help them in preventing such penalties. These compliance costs if high, will be reflected upon the output, i.e. the price of the products. This reflection of high costs would not be a welcome change.
Attaining the optimum degree of monetary sanctions on culpable enterprises and individual office bearers accountable for corporate decision-making is necessary for achieving the optimal level of deterrence. Moreover, the risk of being imposed such a high penalty may hamper the foreign companies from entering into the Indian market as the fear of being fined 10% of the global turnover will act as an over deterrent to the company as well as the economy. India has taken inspiration from the European Commission Rules in order to arrive at the levying of 10% of fines but India needs to consider that the European Commission first considers the matter and reaches to the levying of “basic amount”. The starting point for the European Commission is that, the fine is a percentage of the company’s annual sales of the product concerned by the infringement. The relevant sales are usually the sales of the products covered by the infringement during the last full year of the infringement. The percentage which is applied to the value of the company's relevant sales can be up to 30%, depending on the seriousness of the infringement. Then the commission fixes the penalty upon the violating firm and seeks to achieve a basic amount. If the basic amount serves the purpose of deterrence then the punishment decided would be levied, if it does not then the alterations in the fine would be done to serve the purpose of deterrence.
Conclusion and Way Forward
The purpose of a penalty is optimal deterrence. The Act by virtue of Section 27 aims to achieve the same. The Act provides for a 10% cap in the application of the penalties in violation of anti-competitive agreements and abuse of dominant position. The position of consideration of the nature of the turnover was in question as there was no settled position for the same.
In, Belaire Owners' Association vs Dlf Limited, Huda & Ors. (2011) the CCI levied a penalty upon the total turnover. The nature of the turnover finally settled in the Excel case since then has had major concerns. The concern is that there needs to be an apt punishment in order to deter the violaters. This has been a concern as relevant turnover was based on the application of sound economic logic. Google was posed a basic fine and then the fine was adjusted accordingly to serve the purpose of deterrence in 2017.
The current amendment focuses on shifting the approach of the method of the calculation of the penalty. This change in the approach could be concerning as it may hamper the smaller companies who might get imposed with a penalty upon their global turnover. This would defeat the very purpose of imposing penalties and can negatively affect the trade in India. The MMT-GO decision is significant because the CCI appears to have considered the factors that the European Commission takes into account when calculating penalties. CCI considered the dual objectives of penalty, which are to reflect the gravity of the infraction and to assure a deterrent threat. CCI also considered entity-specific factors, such as MMT's status as a dominant platform that serves as a gateway for online hotel reservations. India as a developing nation needs to consider striking a balance between deterrence and the ease of trade. The CCI can look upon the two step imposition of penalties, it can consider the “basic amount” of penalty and if it does not serve the purpose of deterrence then it may adjust the penalty. The application of penalties has to be done in consonance with the ease and freedom of businesses to operate in the Indian realm rather than being afraid of the fears that a penalty might impose. The total turnover should not become a drop in the ocean that initially creates ripples and settles down easily; rather, if implemented it should provide the inclusive overhaul of the penalty system to meet the interests of all market players.