Competition Watchdog held Discount Control Policy Anti-Competitive in Nature

INTRODUCTION

The Indian antitrust regulator, the Competition Commission of India (hereinafter ‘CCI’), has passed a cease and desist order against Maruti Suzuki India Limited (hereinafter ‘MSIL’) for the formation of anti-competitive agreements with its dealers around India which deflects Appreciable Adverse Effect on Competition (hereinafter ‘AAEC’). MSIL has certainly followed the practice of Resale Price Maintenance (hereinafter ‘RPM’) by implementing its Discount Control Policy (hereinafter ‘DCP’) on its dealers and appointing Mystery Shopping Agencies (hereinafter ‘MSA’) to monitor the discounts offered and to threaten them in case of any contravention to the DCP. The paramount outcome settled by this verdict is based on CCI’s consideration towards the nature of conduct and the post-pandemic phase of recovery of the automobile sector, on the basis of which the commission imposed a monetary penalty of 200 crores upon MSIL.

Significantly, this case marks its relevance as an instance where CCI charged an entity for entering into an anti-competitive agreement in a vertical arrangement without diving into the dominance of the market player and thus, setting a road map for different entities to play fairly and with equitableness. In addition, it acts as a triggering point to players in the vertical chain as well as the industries running on the same mechanism like the automobile sector and their network.

FACTUAL CIRCUMSTANCES OF THE CASE

All goes back to an anonymous email delivered by a purported MSIL dealer. After consideration, CCI took suo moto action against MSIL’s DCP which stands in direct contradiction to Section 3(4)(e) of the Competition Act, 2002 (hereinafter ‘Act’). One should understand that vertical restraints articulate on the rule of reason therein, the court assumes that the agreement holds no prima facie evidence of causing AAEC and because of these it is measured as not so anti-competitive. But, MSIL left footprints of resale price maintenance and entered into the radar of CCI. The circumstances allowed CCI to pass a prima facie order which pointed the way towards the Director General (hereinafter ‘DG’) to open an investigation on the alleged matter and evaluate the influence on the relevant market.

The DG’s report disclosed that MSIL has been practising the DCP which formulated the RPM, causing AAEC in the delineated markets. This factor not only impacted the fellow competitors but the consumers as well for not getting the best deals. The MSIL integrated report promises that the brand acts on a code of business conduct and ethics, compliance management, good corporate governance and customer’s satisfaction but the other side deficits this kind of anti-competitive behaviour. The CCI witnessed that the implementation of RPM mobilise the intra-brand and inter-brand competition in a preventive way which causes reduction of competition at large. If conditionally there’s no such restriction on discounts, the dealer can deliver more operational discounts which amount to consumers’ attachment. This constitutes prominent price being offered to the consumers by dealers and formulates a win-win situation on both ends.

Furthermore, the MSIL submitted its stands as a third party in this scenario and no DCP is placed by it. According to the dealership agreement, the dealer is free to put forward any discounts they please to their customers. In addition, it mentioned that there’s no such agreement between the parties in stand and no trace of the proper agreement produced by the DG. This condition portrays an absence of agreement and mere dependence on oral allegations.

THE CCI’S VERDICT

The CCI determined that the ‘agreement’, as invested under Section 2(b) of the Act, includes a mutual understanding or action in concert. The count for a formal agreement is not necessary to establish the DCP. This particular consideration allowed CCI to reject the contention delivered by the MSIL. The complication of agreement stands differently in comparison to the public contract law. Based on the email trail the CCI connoted the existence of an agreement between them to control the DCP. The competition watchdog in hand rejected the contention that the MSIL stands as an independent third party. Not only that but every inclination of discount offered by the dealers has to pass the approval of MSIL coupled with MSAs to monitor them and impose penalties by threatening the supply of models.

The argument presented on the behalf of MSIL delivered the pro-competitive effect of eliminating the free-riding of RPM.  However, the CCI did not give any weightage to the objection because the conduct of dealers towards the services and other pre-sale services by this time were controlled by MSIL to solve the free-riding problem. The CCI concluded the existence of an RPM followed by the MSIL.

The procedural step followed by the CCI was calculating the AAEC under the perusal of Section 19(3) of the Act to prevail that the DCP precludes effective competition both at the intra-brand as well as at the inter-brand levels by controlling the discount counters. The CCI took into account the market share of MSIL which is 50% but did not dive into the fine testing of the market share while determining vertical restraints. It is important to note that this practice significantly reduces the price competition among car manufactures in general. These days it’s possible to predict the stock price of an enterprise. The competing entities can figure out the price strategy by predicting the similar prices valued in MSIL models, causing higher rates and softening inter-brand competition. In this regards the CCI marked the validation of the agreement, DCP causing AAEC and implanted the aforesaid penalty.

COMMENTS

The Competition regulator in the Bajaj-RPM case held that to deliver a vertical agreement to be anti-competitive an enterprise should be a significant market player taken into consideration the nature of the sector to cause AAEC. In this case, the CCI stated the degrading effects on the competition by MSIL’s market share without prominently marking the relevant product and geographic size of the player before disclosing the market share of it.

Importantly, in the case of lnfotech Private Limited (Snapdeal) v. KAFF Appliances (India) Pvt. Ltd.  the CCI inspected the RPM allegations by following the relevant markets and discovered that the dealers were not asked to follow a minimum price. The verdict also mentioned that the manufacturer has a right to choose the efficient distribution root and RPM may not always be anti-competitive but may be efficiency-enhancing with economic justifications. However, the CCI persistently followed the nature of the RPM because every case is to be judged based on its effects. Usually, branded goods are subjected to RPM as opposed to non-branded goods. Hence, the damage caused by RPM does not overshadow the benefits that it may have in the market.

This particular instance adds a new chapter in the book of the automobile sector of CCI where the regulator has fined an automobile manufacturer for indulgence in RPM causing AAEC. The present case gives us a taste of CCI’s Hyundai Motor judgment, where the CCI fined Hyundai for discount control mechanism monitored by MSA’s like the MSIL’s DCP. But in this case, the CCI assumed the anti-competitive effects of RPM without sufficient evidence in hand to render any harm at the intra-brand or inter-brand level competition. After which, the appeal delivered before the National Company Law Appellate Tribunal (hereinafter ‘NCLAT’), arose out of this order and settled the matter aside by the penalty on procedural grounds. Having said that, the CCI in the present case has passed the penalty by prominent consideration of nature of the RPM, market share of MSIL and kept in hand the pro-competitive and anti-competitive effect of the DCP. Another key thing to remember is that the CCI followed the leniency approach while imposing the penalty in the assessment of the impact of the pandemic on the automobile sector. The learning from the Hyundai case establishes the procedural development in the working of the CCI to sustain competition in the market, not to eliminate a competitor and to deliver the order in the case of RPM. One should understand that mere increase or decrease of prices does not constitute an anti-competitiveness but the nature of offence, i.e., RPM DCP and potential evidence in hand.

CONCLUSION

The order has settled a road map for determining and levying penalties where RPM is involved. In other words, the rule of reason invested under the Act and followed by the CCI acts as a rational key of classification to analyse the RPM with procedural aspects and evidence. Even if this decision has been put forward before the NCLAT, it would be a regulatory tussle to watch unlikely the Hyundai case due to heavy compliance of checks and balances by CCI in this case.

There’s no denying that the decision has been placed correctly but disclosure of prices in the open market and disregards for the functioning of the business model in the sector can lead to higher prices to the customers to keep up with the CCI demands in general. In addition, it’s largely adopted that the prices of the models are determined by the dominant entities in the sector, now this would result in a higher price value of passenger vehicles.

Therefore, the decision emphasised the preamble of the Act and price over non-price competition metrics. The CCI has also given priority to the interests of smaller market participants in the downstream market by addressing the non-negotiable terms imposed by upstream market participants.


(Akshat is a law undergraduate at ILS Law College, Pune. The author may be contacted via mail at akshatdahate79@gmail.com)

Cite as: Akshat Dahate, ‘Competition Watchdog held Discount Control Policy Anti-Competitive in Nature’ (The RMLNLU Law Review Blog, 03 October 2021) <https://rmlnlulawreview.com/2021/10/03/competition-watchdog-held-discount-control-policy-anti-competitive-in-nature/>   date of access

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