An effective competition regime is still a distant dream

Published: The Financial Express, April 05, 2005

By Pradeep S Mehta

The Competition Act, 2002, of India, was adopted as another piece of the jigsaw puzzle, in our economic reforms, by replacing the extant Monopolies and Restrictive Trade Practices (MRTP) Act, 1969, which had become obsolete. The MRTPA’s focus was on curbing monopolies and concentration of economic power. That was the usual approach of a command and control economy.

Things have changed now, with the government being very serious about promoting competition. Like some of the laws in the more advanced economies, the Act has adopted a structural (size) approach to defining monopolies rather than tackle conduct. Under the MRTPA, a firm only had to be of a particular size to qualify to be a monopoly and this was good enough reason to curb its expansion, notwithstanding the potential for scale economies or its market power.

Most typically, a competition law has three main operational concerns: (i) curbing restrictive trade practices (RTPs), (ii) keeping in check abuse of dominant position, and (iii) regulating mergers and acquisitions (M&As). The effectiveness or otherwise of a competition law ought to be examined against the backdrop of its record of effectively performing these major functions. Under the MRTPA, RTPs per se are not considered bad, but deemed objectionable only when they are injurious to public interest. Getting sufficient evidence for a RTP, like cartelisation, itself is a big task.

Under the new law, the burden of proof has been shifted to the party indulging in that practice. The new law covers mergers, which were diluted in the 1991 amendment to MRTPA, but the financial thresholds have been kept rather high. A significant lacuna in the MRTPA is that the Commission could only ask the offending party to stop its restrictive practice, which never acted as a sufficient deterrent. Under the new law, the CA would be able to impose heavy penalties on the erring companies. Besides, there are also provisions for a leniency programme, which has been instrumental in busting cartels elsewhere. This means that one of conspirators can spill the beans, and get protected from prosecution.

The MRTPA, as interpreted by the Supreme Court of India, does not have extra-territorial jurisdiction, thus rendering it incapable of tackling anti-competitive practices that originate abroad. The new law has explicit provisions for extra-territorial jurisdiction.

An important factor that determines effectiveness of a competition regime is the level of public awareness. The new law provides for competition advocacy. It thus, becomes an important instrument, which did not exist in the MRTPA. This is a significant improvement. On the issue of policy advice, the new authority can only render advice when it is asked. That is not very wise.

Despite the improvements, the Competition Act, 2002, did not have a smooth takeoff and needs to be amended even before it became effective due to Supreme Court’s objections to some of its provisions. The major ones being that the role of the CA involves adjudicatory functions as well and hence it should not be headed by a non-judicial person; and that the CA cannot ask the high courts to implement its decisions.

The government now proposes to create a competition tribunal, headed by a judge, which will hear appeals against the Competition Commission. The latter body should be headed by experts, persons with a good understanding of law and economics. That is what the government averred before the apex court, but the trend is to appoint retirees. This opportunity should also be used to resolve other problems, which are retrogressive.

The sweeping power of the central government to: decide on policy issues; make appointments in the CA; and supersede or even dismiss the CA are not good things and need to be reversed. Another weakness is the provisions to deal with IPR-related anti-competitive practices, which need to be strengthened. Obviously, India needs to go a long way in effecting a healthy competition and regulatory regime that promotes growth with equity.