ISSUE II : CCI rules on agreements between government units: A case study

Introduction

The recent decision of the Competition Commission of India (“CCI”) in Jindal Steel & Power Ltd. v. Steel Authority of India Ltd. and Anr.,1 is of immense significance. The judgment brings out the questionable approach of the CCI while deciding cases involving government controlled corporations. The CCI has interpreted various provisions of Competition Act, 2002 (“Act”) in detail and deliberated upon the ambit and scope of section 32 & 43 of the Act with respect to government units. The order enumerates the extent of CCI’s willingness to examine the activities and agreements of various government units vis-a-vis the provisions of the Act. This bulletin examines the main order along with a supplementary and dissenting order as well as the incidental issues which came up before the CCI for adjudication.

1. Brief Facts

Jindal Steel & Power Ltd. (“Informant”) filed a complaint before the CCI alleging that Steel Authority of India Ltd. (“SAIL”) had entered into a memorandum of understanding (“MOU”) for exclusive supply of rails to the Indian Railways (“IR”). Under section 3(4) of the Act, an exclusive supply agreement is anti-competitive if it causes or is likely to cause an appreciable adverse effect on competition (“AAEC”) in India. In the present instance, the other suppliers of rails in the industry did not get a chance to put forth their bids as no tender was floated by IR. This led to the Informant filing a complaint with the CCI for SAIL’s alleged abuse of dominant position4 and the anti-competitive clauses in its agreement with the IR. The CCI, based on the information submitted, held that a prima facie case existed against SAIL and IR and issued directions to the Director General (“DG”) to carry out investigations under of the Act.5

2. Findings of the DG

The DG observed that the relevant product market for SAIL and IR is that of long rails which have to be compliant to Research Design & Standards Organization (“RDSO”)6 specifications. It further held that the relevant geographic market is the entire territory of India. The DG also stated that IR and SAIL, both, are covered by the definition of “enterprise” given in section 2 (h) of the Act, as they are economic ventures of the government and do not perform any sovereign functions.7 After a detailed analysis of the market position of the enterprises, the DG concluded that both IR and SAIL are dominant in their relevant market as per section 4 of the Act. The finding was based on the fact that SAIL has a market share of 96% and therefore enjoys commercial advantages over its competitors. Similarly, IR is the largest provider of railway transport in India consuming 96- 97% of long rails sold.

The DG concluded that SAIL and IR were abusing their dominant position since the MOU signed between them for supply of rails was not open for review and it restricted the production of long rails by any other competitor. IR was also found to limit and restrict technical or scientific development relating to manufacture of long rail by adhering to its own specifications as laid down by RDSO even though the Informant was using a superior technology of better specifications. This was found to be in contravention of section 4(2)(b)(ii) of the Act.8

3. Issues

Pursuant to the DG filing its report with the CCI, the CCI formulated three broad issues:

3.1 Whether IR and SAIL are covered under the definition of the term “enterprise” under section 2 (h) of the Act?

3.2 What is the “relevant market” in the instant case?

3.3 Whether the MOU entered into between IR and SAIL is anti competitive on the ground that it limits the number of suppliers in the “relevant market”?

4. Observations made by the CCI

4.1 The debate on the term “enterprise”

The CCI observed that since 85% of the equity stake in SAIL is held by the Indian government, SAIL will deem to fall within the definition of an “enterprise”. The main dispute was over the status of IR as an “enterprise” under the Act. The CCI drew a distinction between the Ministry of Railways (“MoR”) and IR. IR was considered as a departmental undertaking of MoR engaged in an activity mentioned under section 2(31) of the Railways Act, 1989 i.e transport services. After detailed analysis of the provisions under the Railways Act, 1989 and the structure of IR, the CCI concluded that the MoR is responsible for control over both government and non-government railways, and there is a clear distinction between the overall functions of IR and MoR. It further held that MoR performs a supervisory role vis-à-vis the entire railway operations in India, while on the other hand, IR performs the economic role of an enterprise controlled mostly by the government. Therefore, CCI held that IR is an “enterprise” under section 2(h) of the Act.

4.2 Determination of relevant market

The next critical question which had to be determined was with respect to what the “relevant market” will be. The CCI, in conformity with the findings of the DG, held that the market of long rails complaint to the RDSO specification in India is the “relevant market”. The finding is in conformity with section 2(t) of the Act, where demand side substitution (products whose demand can be substituted with each other) is the determining factor in drawing the contours of the relevant product. CCI referred to various studies on the steel industry which confirmed that in long range products, namely structurals and rails, there is very little switching/substitution in demand. Therefore, structurals and rails cannot be regarded as interchangeable and substitutable products and hence, the relevant market cannot include both rails and structurals, as contended by SAIL.

Further, for determining the relevant geographical market, CCI took into consideration the competition in the Indian market where international trade is a key factor that impacts competition. As the buyer (IR), in the present case, was a single monopolistic buyer in India, the “relevant geographical market” was held to be that of the entire territory of India.

4.3 Anti-competitive element

Once the scope and meaning of “enterprises” and “relevant market” was decided the CCI carefully deliberated upon the submissions of the parties. The CCI held that the MOU between IR and SAIL is not to be anti competitive or does not have any AAEC. The reasons for the finding were as follows:

  1. IR’s action in selecting SAIL for the supply of rails was justified at the time when there was no competition in the market. It provided security for supply of RDSO compliant rails which minimizes the transaction cost and the cost of uncertainty, which is of great importance to a national transport network like IR.
  • SAIL is a more efficient supplier than JSPL because of its welding capability and the fact that it continuously upgraded its quality of rails to provide for longer rails capable of taking heavy loads, whereas JSPL’s rails were still under field test. This was, of course, a technical reasoning.
  • The data on rail market shows that supply of rails to non-IR entities amount to 25% of the rails market and hence, SAIL cannot be said to be hindering competition or creating AAEC in India.
  • The MOU between SAIL and IR is rational on both price and quality and is not anti competitive. SAIL has continuously upgraded to meet the standards which are internationally comparable. Large scale operations of SAIL reflect that its profitability would

not be affected even if the MOU was not signed. Therefore, no intention of anti- competitiveness can be inferred from the MOU.

Accordingly the CCI held that neither SAIL nor IR had contravened any provisions of the Act.

4.4 Supplementary Order

One of the members of the CCI issued a supplementary order containing best practice recommendations. He accepted the fact that SAIL and IR are not in contravention of sections 3 and 4 of the Act. However he held that there is no competition in the market of railway service because of the government policy. He recommended that the MoR and IR should carry out a comprehensive review of the MOU since the market now has other producers who are also capable of supplying rails to IR. Similarly, an examination of the RDSO specifications should be carried out so that it can be broadened to include other technologies. He concluded that such exercises would result in greater efficiencies for IR and would eventually lead to a greater good to the Indian economy.

4.5 Dissenting Order

Interestingly, one of the members of the CCI took a contrary view and passed a dissenting order. He held that the MOU entered into by SAIL and IR foreclosed the market for JSPL and was anti competitive, as it took place after SAIL came to know of JSPL’s activities for establishing a rail mill. It was observed that even if the MOU is an arrangement, it should be analysed as per the definition of an “agreement” under section 3 of the Act. The Constitution of India only gives power to government to create a public sector which can have monopoly in market, but it doesn’t give a monopolist any power for abusing its dominance in market through anti competitive practices. Referring to the Preamble of the Constitution of India, it was held that any exclusive distribution agreements, discriminatory practices, inserting conditions in purchase or sale of goods and denial of market access infringe the economic freedom and equality before law.

Therefore, any public procurement, which has anti competitive elements, is hit by the provisions of the Act. Even though the MOU has ensured regular supply of rails to IR, any prudent buyer would go for a competitive bidding because it would have resulted in low prices for procurement. Also due to the competition in the market, the availability and assurance of supply would be greater. Therefore, as per the dissenting order, the MOU restricts IR to buy rails from any other supplier except SAIL, thereby contravening section 3(4)(b)9 of the Act.

5. Ambiguity in the Act

In the instant matter the CCI has closed the matter on the pretext that there was no violation of section 3 or 4 of the Act in complete disregard of the findings of the DG. The present scheme of the Act does not enshrine any provision which validates the issuance of such an order. As per section 26(8) of the Act, if the DG concludes that there has been a contravention of the Act and the CCI disagrees, it can only order the DG to further inquire into such contraventions. Orders are to be issued in accordance with section 27 of the Act. Surprisingly, no provision is provided under section 27 for the CCI to overturn the finding of the DG in case the DG reports a contravention of the Act. Of course, this ambiguity has to be rectified by way of an amendment so that a statutory right is conferred upon the CCI to overturn any finding of the DG. A similar concern was also raised by the minority order in the case of Pankaj Gas Cylinders Ltd. v. Indian Oil Corporation Ltd.10

Conclusion

The present order raises some key questions with regard to the CCI’s approach to investigate matters pertaining to government undertakings. It appears that the CCI has taken into consideration factors under section 19(4)(g) & (l) of the Act11 and carved out certain exceptions for government companies and public sector undertakings. Some questions that may emerge for the assessment of the present case are:

  1. What are the parameters to measure AAEC in case of an exclusive supply agreement?
  2. Would the CCI have arrived at the same finding that if the aforementioned case involved two private companies?

While each case has to be assessed based on its specific facts and circumstances, the legal principles enumerated in the Act should apply consistently. Nevertheless, India’s competition regime is evolving and the CCI has passed some extremely judicious orders in the past. It is only fair to expect that the ambiguities under the Act will be removed as the law progresses.

Author:
Onkar

1 Order issued on December 20, 2011 in case no. 11/2009.

2 Section 3 of the Act prohibits enterprises from entering into anti competitive agreements.

3 Section 4 of the Act prohibits an enterprise from abusing its dominant position.

4 Section 4(1) of the Act provides that no enterprise or group shall abuse its dominant position.

5 Under section 26(1) of the Act, the CCI can direct the DG to carry out investigations when a prima facie case has been established.

6 RDSO is a unit of the IR and performs various functions in relation to research and development, including development of standards for materials and products specially needed by IR.

7 Enterprise under section 2 (h) of the Act refers to a department of the government which is engaged in any activity either directly or through one or more of its unit or division or subsidiaries but does not include any activity of the government related to the sovereign function of the government.

8 Any restriction imposed by a dominant enterprise on the technical or scientific development relating to goods or services is termed as an abuse of dominant position as per Section 4(2)(b)(ii) of the Act.

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