India - Competition Act, 2002: A Time To Re-invent The Wheel Amidst Covid 19?
Legal News & Analysis - Asia Pacific - India - Competition & Antitrust - Regulatory & Compliance
12 June 2020
India is facing two of its biggest challenges due to the outbreak of the COVID-19 pandemic viz., (a) providing healthcare services to the needy and, (b) providing employment to its huge workforce. While the government has given assurances that essential services shall continue, there are concerns regarding disruptions to the supply chain including issues of transportation and panic buying resulting in hoarding of essential goods.
While the Essential Commodities Act, 1955 (Essential Commodities Act) regulates the prices of essential goods and its inputs, there may be a possibility of exploitation of the situation by certain suppliers of essential goods. In order to prevent entities from exploiting customers during these extraordinary times, the role of an anti-trust regulator becomes even more critical.
For instance, the Italian and Polish Competition Authorities have initiated action against companies such as Amazon and Ebay and wholesalers who terminated the contracts for supplying surgical masks, hand gloves and sanitizers or sold them at excessive price (as reported in Financial Express).
Similarly, UK Competition Markets Authority (CMA), the anti-trust regulator of United Kingdom, has launched a task force to tackle the negative impacts of COVID-19. Similar announcements have been made by the Federal Trade Commission and the U.S. Department of Justice Antitrust Division.
Collaboration between competitors, a solution to the crisis?
A seemingly obvious but unconventional solution to mitigate this crisis is a collaboration between companies that are horizontally related or are competitors. In order to reduce / overcome impact on businesses, competitors may collaborate in respect of production / distribution to provide uninterrupted production and distribution of essential commodities.
The Federal Trade Commission and the U.S. Department of Justice Antitrust Division have issued guidelines for collaborations of businesses working to protect the health and safety of citizens. Similar steps have also been adopted by Australian and South African competition authorities.
The United Kingdom government on 27 March 2020 introduced a new legislation viz., The Competition Act 1998 (Groceries) (Coronavirus) (Public Policy Exclusion) Order 2020. The new legislation has been introduced under the UK Competition Act, 1998 (UK Competition Act). Under the new legislation, agreements between groceries suppliers and logistics service providers are excluded from Chapter I of the UK Competition Act (akin to Section 3 of Indian Competition Act). Further, the new legislation provides for registration and notification of such agreements with the Secretary of State.
In this regard, the UK CMA has issued a guidance note to assist business enterprises. The guidance note provides for temporary relaxation from competition laws to enable supermarket retailers to collaborate. The guidance note provides for self-assessment and factors which need to be considered by the business enterprises viz., public interest, benefit or wellbeing of consumers, etc. The business enterprises may enter into activities viz., sharing of data with each other on stock levels, pooling of staff, cooperating to keep shops open, sharing distribution depots and delivery vans, etc. for the purposes of meeting the rise in food demand.
As per the Joint statement by the European Competition Network (ECN), in order to ensure and avoid a shortage of supply, it has been now ensured that ECN will not intervene on measures adopted by companies. The statement further relaxes the applicability of Article 101 of Treaty of Functioning of the European Union (akin to Section 3 of Indian Competition Act discussed below).
Section 3 of the Competition Act, 2002 (Competition Act) deals with the agreements which are anti-competitive. Agreements which result into tie-in arrangements, that is linking the purchase of one product to another, exclusive supply or distribution arrangements, refusal to deal or resale price maintenance etc. and which causes or is likely to cause an appreciable adverse effect on competition in India is prohibited. The Competition Act, under Section 3(3), prohibits horizontally linked entities (i.e. competitors) engaged in same or similar businesses from entering into an agreement. Further, if a company enters into such an agreement, then there is a presumption that such conduct shall have an appreciable adverse effect.
In order to ensure adequate supply, the business entities may now feel compelled to undertake extraordinary and aggressive pricing measures. However, while doing so, they should consider that their conduct does not violate Section 3(3) of the Competition Act. In India, the Competition Act explicitly prohibits horizontal agreements (i.e. agreements between competitors who are at the same level of production) which are in the nature of price fixing, allocation of customers or territories or markets, limiting of technological innovation or production or supply, and bid rigging. Such arrangements are presumed to be anti-competitive. This restriction continues to apply even during such tough times, unless specifically exempted by CCI or Ministry of Corporate Affairs. The powers to specifically exempt such acts vest with the Central Government under section 54(a) of Competition Act on the grounds of public interest. In view of the peculiar circumstances, CCI in this regard, has issued an advisory dated 19 April 2020 (CCI Advisory) relaxing the restrictions on horizonal agreements.
As a result, the CCI has now permitted companies to coordinate by sharing of stock levels, transport logistics, sharing of distribution network and infrastructure to ensure continuous supply of essential commodities. However, such coordination should not result in price fixing or allocation of markets as prohibited under Section 3(3) of Competition Act. The companies may also enter into a joint venture to undertake the above-mentioned coordination activities. However, such joint ventures should lead to efficacy gains as mentioned under Section 19(3) of Competition Act. The gains may be of several types viz., benefits to consumers, improvement in production / distribution of goods / services, and promotion of technical, scientific and economic development.
The CCI Advisory further allows horizontally linked companies or parties who fall within the vertical chain of business, to now enter into collaborative agreements to curb COVID-19’s economic impact. As supply chains struggle to get back in place, this relaxation is critical for businesses to function with some sense of normalcy. For instance: FMCG companies are now entering into agreements with food delivery aggregators, or competitor companies may enter into collaborative agreements in order to save shipping, freight and transportation costs. Having said that, companies while entering into such agreements, need to ensure that price related information is not shared under the garb of collaborative agreements. Such risks can be mitigated by companies, through measures such as recording the minutes of meetings in order to ensure that no pricing related information is shared among parties. However, the CCI Advisory cannot be used by companies as an indirect means to further anti-competitive activities.
Following the path of its global peers, the CCI has introduced this advisory which may be useful for operating in various sectors viz., FMCG, pharmaceutical, dairy / milk products etc. However, unlike the UK CMA Advisory which released specific guidelines for supermarkets, the CCI Advisory is applicable to critical healthcare products, essential commodities and services. Some of these commodities are medical and healthcare products such as ventilators, face masks, gloves, vaccines etc. and essential commodities) and services (e.g. logistics, testing etc.).
The CCI’s Advisory has provided the much-needed relaxations which will continue to be relevant as supply chains come together in the post-COVID-19 economy. Recently, a number of competitors have tied up together to fulfil last mile delivery for each other in order to survive the impact of COVID-19. For instance, Big Bazzar Stores has tied up with Scootsy. Even though there is some potential for abuse of these relaxations, it is important to note that CCI continues to watch-over anti-competitive activities in these times through e-filings. The move by CCI is an appropriate response to these extraordinary times.
For further information, please contact:
Souvik Ganguly, Partner, Acuity Law