A Rs 200-crore penalty and the telling effect of India's antitrust laws

On August 23, the Competition Commission of India (CCI) passed a significant judgement and imposed a penalty of Rs 200 crore on Maruti Suzuki India Limited (MSIL) for antitrust violations viz., implementation of a discount control policy vis-à-vis its dealers.

The Competition Act attempts to regulate the conduct of enterprises in India under two classes, horizontal agreements and vertical agreements. The Act prohibits horizontal agreements (agreements between competing entities) which affect purchase and sale prices, limit or controls production, supply, markets, technical development, investment, and provision of services. Additionally, agreements that allocate operational markets to eliminate competition, and agreements that pertain to collusive bidding are also prohibited. Horizontal agreements are presumed to be illegal, and the burden to prove the legality of any such agreement lies on the enterprise facing investigation.

Vertical agreements (agreements between entities that form part of the same production chain of manufacture, transport, and distribution) between enterprises that pertain to tie-in agreements, exclusive supply and distribution agreements, refusal to deal and finally resale price maintenance is also prohibited in India. However, such vertical agreements are not presumed to be illegal unless the CCI demonstrates that such agreements have an appreciable adverse effect on competition.

The CCI’s MSIL judgement was focused on violations of the law pertaining to vertical agreements between MSIL and its dealers for resale price maintenance.

In 2015, MSIL commenced a new retail strategy to launch and sell their premium vehicles through a distinct dealer network under the brand name ‘Nexa’. New showrooms were unveiled with an exclusive premium presentation of MSIL’s Nexa branded vehicles such as the S-Cross. Thereafter, other vehicles such as the Baleno, Ignis, Ciaz and XL6 also joined the Nexa lineup. The Nexa presentation was met with success considering MSIL’s historically reliable vehicles, comfortable service, and support. However, the build quality, fit and finish of all Maruti cars, including the Nexa range, continued to remain a complaint. Lack of refinement and unremarkable build quality of the Maruti cars were a significant sore point for motoring enthusiasts and automotive journalists. These niggles did not shake the idea that Maruti cars were ‘commonplace’ and did not cater to status-conscious consumers.

It appears that MSIL had also come up with another mechanism to control the perception of MSIL vehicles prior to the implementation of the Nexa strategy. MSIL implemented a discount control policy and routinely held meetings across the country with its dealers to enforce such a discount control policy. The policy, in essence, mandated that all discounts offered by all Maruti and Nexa dealers would have to be in line with the discount control policy and the limits fixed therein, failing which MSIL would impose penalties in the form of fines and withholding of fresh stock to errant dealers. Additionally, the policy also required dealers to seek approvals for discounts sought above certain thresholds. This discount control policy drew the attention of the CCI which took suo motu cognisance of this policy consequent to an anonymous email it received in 2017.

The CCI ordered an investigation into MSIL’s discount policy and sought to ascertain if MSIL was involved in resale price maintenance viz., discounts offered by its dealers and if MSIL’s conduct was afoul of the Competition Act, 2002. The first charge levelled against MSIL was that it framed guidelines and gave instructions to its dealers to not offer discounts without its permission over certain pre-restricted levels. The second charge against MSIL was that it appointed Mystery Shopping Agencies (‘MSA’) to keep a track of the discounts offered by the dealers and imposed penalties on them and even threatened to withhold the sale of premium vehicles to errant dealers. The conduct of MSIL, therefore, resulted in the best price not being offered to the end consumers and was hence violative of the Competition Act.

MSIL, in response, set out a defence that the discount policy was not imposed by it, and was a self-policing initiative between the Maruti dealers. MSIL contended that it only acted as a mediator on account of its stature as a ‘father figure’ to the dealers. MSIL further contended that due to the enormity and diversity of its dealer network, enforcing or implementing a discount policy was not practically possible. Finally, it contended that there was no formal agreement between the dealers regarding any discount control and therefore, the Competition Act had no application. On the other hand, MSIL’s agreement with the dealers specifically permitted the dealers to sell at lower prices and contained no penalty clauses for such sales.

Considering the aspects mentioned above, the CCI reproduced and analysed damning emails from the managers of MSIL to various dealers specifically warning the dealers about discounts offered, approval for discounts offered and imposition of penalties, both monetary and refusal to supply premium vehicles, for such violations. The CCI also analysed the position enjoyed by MSIL in the market as against other car manufacturers. Further, the CCI also took into account the emails, considering the broad definition of agreements under the Competition Act which included any ‘mutual understanding’, and held that the emails themselves constituted an agreement under the Act.

The CCI also laid threadbare the mechanism under which MSIL imposed and recovered penalties from the dealers who were in violation of the discount control policy. It was revealed that the penalty amounts were deposited into a third-party non-MSIL account and such amounts were thereafter paid to other vendors for advertisements sanctioned by MSIL, directly by third parties.

In conclusion, the CCI observed that the minimum retail price maintenance by MSIL had the effect of reducing inter-brand price competition in addition to reducing intra-brand competition. Additionally, the arrangement with the dealers did not result in accrual of any consumer benefits; rather, the same resulted in denial of benefits to consumers as they were made to pay high prices. Considering all these aspects, the CCI imposed a penalty of Rs 200 crore payable by MSIL.

The CCI judgement reflects the significant evolution and maturity of antitrust laws in India that has been steadily developing since 2009. The CCI is also presently investigating Amazon and Flipkart for anti-competitive practices pursuant to the judgement of the Supreme Court declining to interfere in the validity of ordering such an investigation.

These developments reflect India’s growth as a mature and stable market with the capacity to enforce fair competition amongst its players in the interest of consumers. Entities operating in India routinely invest in measures to ensure compliance with tax and revenue laws, it is probably the right time for all companies and participants in the market to invest in similar measures to ensure that all their businesses are compliant with competition laws.

(The writer is a practising advocate. He was one of the advocates who represented CAIT and DVM against Amazon and Flipkart in the High Court of Karnataka and the Supreme Court of India in the recent proceedings related to the investigation by CCI against the said entities)

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