This article is written by Harsh Gupta from the School of law, HILSR, Jamia Hamdard. This is an exhaustive article which deals with various facets of the provisions of horizontal agreements within the purview of Section 3(3) of the Competition Act, 2002, with relevant case laws.
Horizontal agreements are agreements between parties at the same level of the supply chain, which include agreements between competing manufacturers, distributors or retailers. A horizontal agreement which raises a presumption of appreciable adverse effect on competition comes within the ambit of Section 3(3) of the Competition Act, 2002 for which the burden of proof lies on the opposite parties to prove that such an agreement does not cause an appreciable adverse effect on competition. The provision provides that any agreement entered into or agreement implemented by any person or enterprise engaged in similar kinds of trading activities, including cartels, that determines the price of purchases or sales or provides a service; In situations where the contract limits production, supply, stock, markets, investment, allocation or provision of services; results in bid-rigging or collusive bidding, it shall be presumed that the agreement will have a significant effect on the competition. Provision of anti-competitive agreements within the ambit of section 3(3) is not limited to enterprises and persons but equally applies to an association of persons like a trade association.
Appreciable adverse effect on competition in India
Companies with similar products and services compete against each other in every market to gain maximum profits, market control and obtain maximum consumers. Competitive markets are better than monopolies because:
- They ensure better products at cheaper prices.
- They ensure a wide range of products in the market.
- They give customers a choice to choose from the available products.
- They ensure consumer’s rights are not violated and they get the best products.
The previous legislation was the Monopolies and Restrictive Trade Practices Act (MRTP) of 1969. Following liberalization in 1991, we evolved into a competitive and free-play economy, which is when the Competition Act, 2002 took effect.
It is said that the appreciable adverse effect on competition in India (AAEC) occurs when certain practices restrict competition. AAEC can take three forms:
- Anti-competitive agreement
- Abuse of dominance
Specifically, Section 19(3) of the Act states that the Competition Commission of India shall take into consideration all or any of the following factors in determining whether an agreement has an appreciable adverse effect on competition under Section 3:
- New entrants in the market are confronted with barriers;
- Excluding existing competitors from the market;
- The elimination of competition by hindering entry to the market;
- The accrual of consumer benefits;
- Production, distribution, or service improvements;
- Promotion of technical, scientific, and economic development using production or distribution of goods or provision of services.
Horizontal agreements recognised as cartels under Section 3(3)
Section 3(3) of the Competition Act defines particular kinds of agreements that are considered per se anti-competitive. Further, the four kinds of horizontal agreements are recognised as cartels as per Section 3(3)-
- Price Fixing Agreements
- Output Controls/Limiting Production Agreements
- Market Sharing Agreement
- Bid Rigging
Price fixing agreements
An agreement that directly or indirectly determines the prices will be deemed to have elements of an appreciable adverse effect on competition as per Section 3(3)(a) of the Competition Act. This particular sub-section covers the term ‘price’ in a broader way which includes not just the final price, but also includes other instances of terms of trade, and discounts that have an impact on the final price.
Express Industry Council of India v. Jet Airways, Indigo Airways, & Spice Jet Airways (2018) (Airline surcharge cartel case)
The facts of this case were such that all three airlines fixed a fuel surcharge for transporting cargo which is a component of the air cargo price; this surcharge was fixed at a uniform rate of INR 5/kg. It was found that the levy of Fuel Surcharge was introduced as being an extra charge linked to fuel prices whereas fuel prices were reduced but in correspondence to this there was no such decrease in Fuel Surcharge. It was further examined that the Fuel Surcharge was increased again by the airlines at the same rate and on the same date. An investigation by the Director-General in this regard found that there was no admissible evidence of collusion among the airlines but the conduct of the airlines was not in conformity to the condition of fair conduct, thereby CCI found this practice as anti-competitive and penalized the same.
Output Controls/Limiting Production Agreements
Any agreement which limits or controls supply, markets, technical development, production, or provision of services will be deemed to have an appreciable adverse effect on competition as per Section 3(3)b of the Competition Act, 2002. The Competition Commission of India focuses on the demand analysis of the certain product, production capacity, and utilization of the capacity of the market participants to understand the following trend or pattern if enterprises among the same level of trade limit the production. A particular period of three years is to be set for trend or pattern analysis. The demand analysis is also done to check whether participants in the market are involved in processing production. It limits production even when there is a high demand for the product in the market over a while, in return, it can have an impact on price rise. People or enterprises start hoarding the product whenever the market price is low and when demand increases with less available product supply, it results in fluctuations in price which leads to inflation. Subsequently, enterprises release their product from their stock to earn high dividends as the price cannot be kept at elevated levels if market participants do not keep their level of supply low in comparison to demand. Therefore, there is very little addition to the capacity to ensure that production and supply are low.
There have been several cases where enterprises are not participating at the optimal capacity that will lead to demand-supply mismatch, which will eventually lead to an increase in price. Further, the Competition Commission of India has observed in cases of cement industries, entertainment industry, pharmaceuticals industry, among others, that the act of limiting and controlling the supplies has been aimed at creating shortages first, which will lead to built-up demand that causes upward price inflation in wake of more demand of the product in the market.
Builders Association of India v. Cement Manufacturers and Ors. (2016) (Cement cartel case)
There was a cement company that made a product called Asbestos Cement Sheets (ACS). The Competition Commission of India upon receiving a complaint by way of a reference made by the Enforcement Directorate conducted a preliminary enquiry where the Director-General undertook a parallel correlation exercise based on the average sale price per MT for ACS products. Further, the investigation carried by Director General revealed the following aspects-
The first aspect where the Director-General relied upon was to look at other market players if any to check similar trends in the movement of the sale price. During the investigation, it was found that there was a change in average sale price every month in all major enterprises. On checking further whether the price has increased over the years of ACS product, it was revealed that average price sale had not increased regularly on yearly basis by comparing the movement in the quarter-wise average sale price of the major enterprises from one quarter to another.
The Competition Commission of India relied on telephonic and electronic communications between the major ACS manufacturers as well and it was found that they were communicating regularly. However, their communication was purely based on industrial issues but not on the aspect of cartelization. As per the above analysis, the Competition Commission of India held that there was no price-fixing by the ACS enterprises.
Market Sharing Agreement
A market sharing agreement is an agreement among enterprises where they decide the production, supply or provision of services based on the geographical area of the market, as per Section 3(3) of the Competition Act, 2002. The geographical area is not the sole factor; they also consider other factors in some cases, such as the type of goods or services, or the number of customers in the market. These types of agreements will be deemed to presume an appreciable adverse effect on competition. The phrase ‘market sharing’ means the division of the market so that there will be no competition among the competitors in the market and one will enjoy an absolute monopoly over profits in their market division. Such marketing happens generally by allocating the geographical area to each player in the market or based on customer allocation.
The term ‘bid rigging’ has been defined under the explanation under Section 3(3)(d) of the Competition Act, 2002 which means any agreement between market players and enterprises involved in similar production or trading of goods or provision of services, which directly or indirectly reduces the competition for bids. Section 3(3)(d) of the Competition Act, 2002 prohibits such an agreement that results in bid-rigging or collusive bidding. The Competition Commission of India has adopted a presumptive rule approach which means that once the essential ingredients which constitute bid-rigging have been established, it’s enough as there is no further need to find out the impact of such conduct. In such a situation, the burden of proof lies upon the contravening parties to contradict allegations against them and to prove that their conduct has not resulted in an appreciable adverse effect on competition in India.
Re: Aluminium Phosphide Tablets Manufacturers (2012) (Aluminium Phosphide cartel case)
In this case, it was held that bid-rigging is the form of practice where all bidders agree amongst themselves to collaborate the response to the tender and it generally happens during government procurement. Participants in bids do not compete with each other and they secretly collaborate and show their support to one bidder for a particular tender which affects the price and later they can share a specific percentage of commission or profit or they can bid next time as per their secret agreement on different occasions.
An agreement entered by way of the joint venture is considered to increase the efficiency in the production, supply, distribution, acquisition, control of goods, and the provision of services generally, as per provision of Section 3(3) of the Competition Act, 2002. Therefore, the presumption of adverse effect on competition in the market does not arise, and again the burden of proof to show an appreciable adverse effect on competition (AAEC) lies on the person who alleges that a particular joint venture in or likely to result in an AAEC.
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