The
Competition Bill, which would alter substantially the nature and thrust
of anti-trust intervention by the government, is among the 43 bills
which passed through parliament in the winter session that ended recently.
With its passage, the Monopolies and Restrictive Trade Practices (MRTP)
Act that governed the Indian government’s anti-trust agenda is to be
scrapped and the MRTP Commission is to be replaced by a Competition
Commission of India.
This event marks the completion of a process in which the earlier practice
of limiting the size and spread of groups involving related or interconnected
units has been given up in favour of ensuring that it is not so much
size that is the issue as the adoption of practices that limit or reduce
the extent of competition. This transition had begun much earlier when
the government had done away with the definition of a dominant group
or undertaking based on asset size, allowing the erstwhile ‘monopolistic’
groups to freely invest in new areas or expand in existing areas, subject
to the industry-wise regulations that were in vogue. Inasmuch as these
industry-wise regulations were being relaxed in any case, the process
of “liberating” Indian monopoly from the constraints set by state policy
in the past had begun. The recently passed competition bill formalises
this process as well as sets out the redefined framework for anti-trust
intervention.
By adopting the legislation the government of India has implicitly accepted
a number of arguments on the nature and role of monopoly. The most crucial
is that the market dominance resulting from size may not in itself be
inimical from the point of view of competition. This position could
possibly be justified on three grounds. First, it could be based on
the view that while concentration and oligopoly could spell the end
of “free competition” it need not negate competition altogether. In
fact, competition between large firms could be even more intense, resulting
in more rapid innovation as well as price competition, both of which
benefit consumers. Second, it could be argued that given the capital-intensive
nature of new technologies in many areas, innovation may require firms
to be large both in terms of capital investment and in terms of output
relative to domestic market size. Third, it could be argued that the
size and domestic market share of large incumbents need not matter,
so long as there are no significant barriers to entry of new firms and
there are no barriers to competition from imports from abroad.
In fact, it is the last of these, i.e., competition from abroad, which
provides the anchor for the argument that the size of a firm relative
to other domestic producers or relative to the size of the domestic
market need not matter. There are, however, a number of features of
the international and domestic marketplace that this argument ignores.
To start with, not all goods and services are tradables, and competition
from abroad cannot serve as a check on monopolistic and restrictive
trade practices in the case of goods and services that are not traded
or only traded to a small extent. Further, the presence of more than
one large firm in a particular market is no guarantee of intense oligopolistic
competition, so long as the potential for collusion and the sharing
of surpluses garnered at the expense of the consumer exist. Finally,
in areas or segments where the international market itself is dominated
by one or a few producers, as for example is true in the case of drugs
and pharmaceuticals, the domestic producer/s can be the same as those
which are the dominant players in the international market. Thus, imports
from the same firm or from parent firms of subsidiaries cannot be a
check on the misuse of market dominance. Inasmuch as the Bill does not
distinguish between “domestic” and “foreign” monopolies, the check exerted
by international competition on domestic monopoly is substantially diluted.
It is only by making such a distinction and making the case that there
is need for developing countries to build their own large firms by international
standards that the decision to remove restrictions on the growth of
large “domestic” firms can be justified. That is, the advocacy of unrestricted
size for domestic firms must be couched in a framework wherein the effort
is to protect domestic firms from international competition so as to
nurture internationally competitive domestic monopolies.
Once this argument is made, a further round of intervention becomes
inevitable, especially in areas where one or few firms control a large
share of a market in which they are being nurtured through protection.
Such protection can be used to earn superprofits at the expense of the
consumer. This could discourage production for the international market,
since the domestic market is far more lucrative. And, the lack of competition
from imports and lack of desire to export could result in a situation
where innovation is neglected. Consumers and the system would be the
losers. Thus, intervention to discipline domestic capital either by
fiat or by encouraging competition between domestic producers, especially
in areas where one or a few producers control a substantial share of
the market becomes inevitable.
Thus even if the size of domestic firms is not to be restricted, that
policy should not necessarily apply to large international firms, whose
presence in the domestic market must be regulated. Further, intervention
aimed at preventing domestic firms from exploiting their monopolistic
position in a fashion that would adversely affect consumer choice and
prices and constrain the pace of innovation needs to be formulated.
Unfortunately, the competition bill, which treats size as being immaterial
avoids all these decisions. The government itself argues that the bill
seeks to (i) counter anti-competitive practices such as cartelisation,
collusive bidding and bid-rigging; (ii) check abuse of market dominance;
and (iii) lay down the procedures with regard to mergers and acquisitions
(M&A). To this end the bill seeks to set up a Competition Commission
of India, with adjudicatory powers and the power to impose penalties.
The point to note is that the intent of the bill is not to deal with
dominance per se, but the abuse of dominance. It enjoins the CCI to
promote competition as well as impose penalties on those who are judged
to have reduced competition in any market by (a) directly or indirectly
determining purchase or sale prices; (b) limiting or controlling production,
supply, markets, technical development, investment or provision of services;
(c) 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 (d) directly or
indirectly indulging in bid rigging or collusive bidding, It considers
any agreement (formal or informal) amongst enterprises or persons with
regard to production, supply, distribution, storage, sale or pricing
of, or trade in goods or provision of services, which involve (a) a
tie-in arrangement; (b) an exclusive supply agreement; (c) an exclusive
distribution agreement; (d) a refusal to deal; or (e) the maintenance
of resale prices, to be anti-competitive in nature.
Thus the intent of the bill is not to deal with the structures that
lead to anti-competitive practices, but to deal with such practices
on a case by case basis so as to protect the consumer, defined as any
purchaser of a good or service. Either on its own or on receipt of a
complaint or reference from any individual, agency or the government,
the Commission and its various offices can launch an investigation,
arrive at a judgement and impose certain penalties. Given the fact that
the structures that lead to anti-competitive practices are to be left
untouched, it can be expected that the number of cases where anti-competitive
activity is likely to occur would be large. How and when the Commission
would have the time to deal with all of these or even the more significant
ones among them is unclear. There is a strong likelihood that delays
would ensure that whatever little anti-trust element remains under the
new dispensation would be substantially diluted.
The only instance where the structures that lead to anticompetitive
behaviour are sought to be engaged is in the effort to regulate mergers
and acquisitions. Even here the threshold limit for mergers and/or acquisitions
that are to be monitored by the CCI from the point of view of their
impact on competition is set at Rs. 1000 crore in terms of the aggregate
assets of the combining entities or Rs. 3000 crore in terms of aggregate
sales. We must note that it is asset size alone, and not size together
with market share, which is taken to define the threshold for monitoring.
That is the potential for abuse of market strength is rather loosely
defined. Even in the case of such mergers, the bill leaves it to the
entities concerned to report the merger for consideration by the Commission.
Such voluntary reporting is expected to occur if the merging entities
want to ensure that their merger does not adversely affect the competitive
environment. Since, even now, all mergers and acquisitions have to be
reported to the courts and are governed by guidelines issued by the
Securities and Exchange Board of India, it is unlikely that firms would
voluntarily turn to the CCI for one more scrutiny. This despite the
fact that the Bill specifies that the CCI should complete its task within
90 days, which should fall within the six month timeframe provided to
the courts.
Thus, both in terms of the ability to deal with actual anti-competitive
behaviour and in terms of its ability to prevent such behaviour by engaging
the structures that lead in that direction, the Bill is clearly inadequate.
It is likely, therefore, that the Bill would do little to deal with
the anti-competitive tendencies that are being unleashed in a liberalised
environment in which large firms, including large transnational firms,
have the freedom to expand existing capacities, create new capacities
and acquire capacities created by other producers, domestic or foreign.