Section 3 of the Competition Act, 2002, prohibits and declares void an agreement which causes or is likely to cause an appreciable adverse effect on competition in India (i.e. an anti-competitive agreement). The sine qua non for a violation under section 3 is the existence of an “agreement” between two or more enterprises.
In terms of the internationally accepted doctrine of single economic entity, entities in the common control of an ultimate parent, i.e. group companies, are regarded as a single enterprise; and an agreement or understanding among group entities is not prohibited under competition law. The Competition Commission of India (CCI) and the Competition Appellate Tribunal (COMPAT) have recognized the doctrine of single economic entity in their precedents, however in a recent case the CCI appears to have departed from its earlier position.
In Case No. 52/2012 (decided in November 2012), the CCI dealt with the issue of whether an indirect subsidiary (based on shareholding) was part of the same group and could be classified as a single economic entity.
In that case, the CCI stated that, firstly, to establish a contravention under section 3, an agreement between two or more enterprises must be proved. Secondly, enterprises forming part of the same “group” will be considered as a single economic entity for the purpose of the Competition Act (i.e. not two enterprises but one). “Group” under the Competition Act means two or more enterprises which, directly or indirectly, are in a position to: (i) exercise 26% or more of the voting rights in the other enterprise (increased to 50% from 4 March 2011 for five years); or (ii) appoint more than 50% of the members of the board of directors in the other enterprise; or (iii) control the management or affairs of the other enterprise. Thirdly, an (internal) agreement between two group enterprises will not be considered as an “agreement” for the purpose of section 3 of the Competition Act.
Based on the above, the CCI held that an indirect subsidiary (by virtue of shareholding) was part of the same group, and an agreement between enterprises within the same group to either determine prices or exclusive supply could not be considered as an anti-competitive agreement under section 3 of the Competition Act.
In Appeal No. 01/2013 (decided in February 2014), the COMPAT agreed with the findings of the CCI and in particular stated that: “companies run on the basis of share holdings. The directors of the company, who manage the company, are dependent upon the control through the share holdings of either the individuals or the companies. In both the cases, almost 99% of the share holding is directly or indirectly controlled by the mother company and therefore, we have no hesitation in endorsing the finding of the CCI that these two companies amount to a single economic entity.”
In addition, the COMPAT examined and affirmed the international precedents relating to single economic entity which hold that the prohibited conduct (such as under section 3) must be from an agreement, decision or concerted practice between separate and autonomous economic entities and not the result of a single undertaking (as is the case with group companies). This is on the basis that the prohibited conduct of two group companies does not deprive the marketplace of independent centres of decision making and as a result an agreement between them does not constitute a contract or conspiracy.
In Suo Moto Case No. 02/2014 (decided in July 2015), the CCI examined whether four public insurance companies had rigged the tender floated by the government of Kerala for selecting an insurance provider for the Rashtriya Swasthaya Bima kunal a, a central government scheme to provide health insurance for the poor. The insurance companies sought to be considered as a single economic entity as: (i) the central government held 100% of the shares of all four companies; and (ii) management of the companies was controlled by the central government through the Department of Financial Services (Insurance Division), Ministry of Finance.
The CCI rejected the above submissions on the basis that: (i) regulatory reforms in the insurance sector were intended to allow public insurance companies to act independently and compete with private players; and (ii) each insurance company had submitted a separate bid, which was decided at the company level without any previous approval of or direction from the Ministry of Finance. The CCI concluded that the Ministry of Finance did not exercise any control over the companies’ business decisions in submitting their bids for the tender.
The three tests for “group” under the Competition Act are mutually exclusive and the finding of the CCI appears to be contrary to its previous position on common shareholding – which existed in this case – and focused on de facto control over business decisions without any further explanation.
Kunal Chandra is a partner at Trilegal and Gautam Chawla is a senior associate. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad.
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