Curtailing cartelisation through single economic entity doctrine

The concept of cartelisation is not new in the market. Cartel includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services.[1] The cartel was however not defined under the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act). It is pertinent to note that the cartelisation per se is not illegal in India. The agreement entered into by the virtue of the members of cartel is deemed illegal under the present Competition Act, 2002 as well as its predecessor i.e. MRTP Act. Apart from the statute, Competition Commission of India (CCI), Competition Appellate Tribunal (COMPAT) and courts in plethora of cases affirmed the definition of cartel given under the Act.[2]

The illegal agreement entered into by the cartels, body corporate of any enterprise comes under the radar of the competition law of India. Enterprise means a person or a department of the Government, who or which is, or has been, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services, of any kind, or in investment, or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, either directly or through one or more of its units or divisions or subsidiaries, whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or at different places, but does not include any activity of the Government relatable to the sovereign functions of the Government including all activities carried on by the departments of the Central Government dealing with atomic energy, currency, defence and space.[3] The definition given to enterprise is wide enough to cover every bit of the player in market and not let any player in the market to evade the applicability of Competition Act. Functional approach has been adopted while determining whether an entity in respect of a particular activity was an enterprise for the purpose of Competition Act or not. Various activities of the enterprise are to be considered individually and if some of the activities of the enterprise are in the nature of sovereign functions that does not mean that all other activities of the enterprise have to be considered non-economic.[4]

Agreement includes any arrangement or understanding or action in concert (i) whether or not, such arrangement, understanding or action is formal or in writing; or (ii) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings.[5] Hence, the competition is not restricted to the written agreement for the enforceability and the monitoring of market players by the authorities. There has to be some meeting of mind and conscious common practice adopted by that “association”, however loosely or informally knit. Hence, the similarity of conduct, without any meeting of minds, could not come within the ambit of the term “agreement” as defined in Section 2(b) of the Act.[6]

Anti-competitive agreements

Chapter 2 of the Competition Act, 2002 prohibits the illegal agreements among other things. Section 3 of the Act, prohibits the anti-competitive agreements among the enterprise or association of enterprise determining the purchase or sale prices, agreement to limit supply or production, sharing market or source of production, collusive bidding or bid rigging. This section further prohibits tie-in agreement, exclusive supply agreement, and exclusive distribution agreement, agreement on refusal to deal and agreement on resale price maintenance.

This section however contains savings provision to the Copyright Act, 1957; Patents Act, 1970; Trade Marks Act, 1999; Geographical Indications of Goods (Registration and Protection) Act, 1999; and Semiconductor Integrated Circuits Layout-Design Act, 2000.

In Film & Television Producers Guild of India v. Multiplex Assn. of India[7], it was held that that the collective decision taken by OPs not to exhibit the films of the members of the informant in order to determine the price of their services is an anti-competitive agreement under Section 3 of the Act. The collective decision was the key to hold the defaulter responsible for the contravention of the provision of this Act.

The practices of anti-competitive agreements disturb the market situation and tend to create monopoly and abuse of the new players in the market. The question that comes before us is what happens in the case of anti-competitive agreements in a single economic entity and single legal entity. This will be answered in the next part of this article.

Single economic entity (SEE)

This concept was first formulated in the European Commission Guidelines on horizontal cooperation which notes that companies that form part of the same “undertaking” within the meaning of Article 101(1)[8] are not considered to be competitors for the purposes of these guidelines. Article 101 only applies to agreements between independent undertakings. When a company exercises decisive influence over another company they form a single economic entity and, hence, are part of the same undertaking. The same is true for sister companies, that is to say, companies over which decisive influence is exercised by the same parent company. They are consequently not considered to be competitors even if they are both active on the same relevant product and geographic markets.[9] According to the existing jurisprudence, SEE does not have individual functioning capacity. The SEE works on the pleasure of the owner company and have no separate decision-making capabilities. It is however evolved from the concept of holding company and subsidiaries as given in Companies Act, 2013. Subsidiary companies are those in which holding company can exercise control in the composition of Board of Directors and exercises or controls more than one-half of the total share capital.[10] It is a well-settled principle that every company i.e. even subsidiary is a separate legal entity.[11] However, holding companies and subsidiaries can be considered as single economic entity and consolidated balance sheet is the accounting relationship between the holding company and subsidiary company, which shows the status of the entire business enterprises.[12] The subsidiary may be treated as a separate legal entity, yet it is seen that the affairs are totally controlled only by holding company, in other words, if subsidiary has no independent authority to take any decision on its own and they are out and out guided only by holding company, would be in a position to hold that subsidiary and holding company constitute a single economic unit.[13] The concept of subsidiary and holding company is a concept of company law however; the SEE doctrine is exclusive concept of antitrust law.

Exclusion of SEE from the scope of Section 3 of Competition Act, 2002

According to Chapter 2 of the Competition Act, 2002 the scope and ambit of Section 3 extends only over the agreements entered into among two or more enterprise, association of enterprise, persons, group of persons or person and enterprise. The prerequisite of the anti-competitive agreement according to the plain reading of the Act is that, such agreements must be entered between two or more enterprises.[14] However, the member of SEE does not form a separate enterprise to be covered under the definition of enterprise as discussed earlier. They form a part of single enterprise.

In Exclusive Motors (P) Ltd. v. Automobili Lamborghini SpA[15], the COMPAT held that:

… so far as the contravention under Section 3 was concerned, there had to be a proved agreement between two or more enterprises. It held that the agreement between M/s. Lamborghini, the opposite party and its group company Volkswagen India could not be considered to be an agreement between the two enterprises as envisaged under Section 2(h) of the Act. … the agreements between entities constituting one enterprise, could not be assessed under the Act. In that the Commission relied on the internationally accepted doctrine of “single economic entity”.

Further, apart from SEE, there are certain agreements that are exempted from the scope of the Competition Act. For instance, joint ventures agreements that are per se exempted from the scope of anti-competitive agreements under Section 3 of Competition Act. The R&D agreements are also not covered by Section 3 of the Act. In modern economies, innovation is an important feature of productivity and competitiveness. Innovation requires research, experimentation, and the implementation of new ideas into marketable products, services, or technology. Thus, the ability of firms to engage in such research without fear of antitrust attack is essential to economic growth.[16] However, R&D agreements are not per se exempted from the scope of the Act as the R&D agreement has increased the product efficiency and for the consumer welfare. The investment in research and development and to innovate, leading to survival and growth of such companies which keep consumer preference at the top of agenda. While considering impact of an agreement on competition, the potential of damaging competition is also to be seen from the angle of consumer welfare.[17]

Conclusion

The objective of the Competition Act is to provide economic development of a country, to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets, in India, and for matters connected therewith or incidental thereto.[18] The main objective behind the enactment of Section 3 is to prevent collusion among the players of market that causes disturbance to new entrants or the pre-existence players. The single economic entity doctrine provides for vast exploitation of the basic objective of the Act. Many foreign investors purchase the shares of multiple companies indulged in a particular field to enter the Indian market but would not exercise any substantial control over those companies. This would be sufficient for Indian players to enter into anti-competitive agreement and evade themselves from the purview of Competition Act and defraud the administration by invoking the doctrine of single economic entity. Thus, this doctrine is paving a way for a very dangerous jurisprudence, which gives a legal yet morally wrong way to use the vacuum present in the antitrust litigation. The Indian law framers did not anticipate the danger of the doctrine of single economic entity while the drafting of antitrust market laws. The need of the hour is to make a more stringent law to prevent the abuse of the single economic entity doctrine to achieve the true objective of the antitrust law.

 

*  5th year student, BBA LLB (Hons.), Sastra University.

[1]  S. 2(c), Competition Act, 2002.

[2]  Builders Assn. of India v. Cement Manufacturers’ Assn., 2016 SCC OnLine CCI 46; All India Tyre Dealers’ Federation v. Tyre Manufacturers, 2012 SCC OnLine CCI 66.

[3]  S. 2(h), Competition Act, 2002.

[4]  Arshiya Rail Infrastructure Ltd. v. Ministry of Railways, 2012 SCC OnLine CCI 54.

[5]  S. 2(b), Competition Act, 2002.

[6]  Jyoti Swaroop Arora v. Tulip Infratech Ltd., 2015 SCC OnLine CCI 26.

[7]  2013 SCC OnLine CCI 89.

[8]  Treaty on the Functioning of the European Union (TFEU).

[9]  Guidelines on the applicability of Art. 101 of the Treaty on the functioning of the European Union to horizontal cooperation agreements (2011).

[10]  S. 2(87), Companies Act, 2013.

[11]  Balwant Rai Saluja v. Air India Ltd., (2014) 9 SCC 407 : AIR 2015 SC 375.

[12]  Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 757 : (2012) 107 CLA 63.

[13]  Samayanallur Power Investment (P) Ltd. v. Covanta Energy India (Balaji) Ltd., 2005 SCC OnLine Mad 619.

[14]  Yashoda Hospital and Research Centre Ltd. v. Indiabulls Financial Services Ltd., 2011 SCC OnLine CCI 9.

[15]  2014 SCC OnLine Comp AT 1, para 4 : 2014 Comp LR 110

[16]  Ginsburg, Antitrust, Uncertainty, and Technological Innovation, 24 Antitrust Bull. 635 (1979).

[17]  Ramakant Kini v. Dr. L.H. Hiranandani Hospital, 2014 SCC OnLine CCI 15.

[18]  Preamble, Competition Act, 2002 (12 of 2003).

Join the discussion

Your email address will not be published. Required fields are marked *