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Regulating Anticompetitive Conduct in India - A Growing Trend

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Regulating Anticompetitive Conduct in India - A Growing Trend

  1. 1. INFORMER | ISSUE 25 39 REGULATING ANTICOMPETITIVE CONDUCT IN INDIA: A GROWING TREND By Namrata Khemchandani Doing business in India has become increasingly challenging over the years. This is evident from the 2013-14 Global Competitiveness Report of the World Economic Forum, which shows that India has fallen 15 places in the rankings of 148 economies since 2006. It now holds the 60th position, behind all the BRICS nations, except for Russia1 . REUTERS/Denis Datta
  2. 2. 40 INFORMER | ISSUE 25 With the new “business-friendly” Bharatiya Janata Party-led National Democratic Alliance government that came into power in May 2014, there are promises of more efficiency. As a result, hopes are high for an improved business environment in the country, with lower levels of bureaucracy and graft. This in turn has led to greater interest in the country’s market structure and its competition culture. Fair competition in a market enhances innovation and reduces waste, which is essential for reduced costs, a wider choice and better quality of products. In Asia, countries like Korea and Japan have been quite successful in achieving this by having strong antimonopoly systems in place. The Korea Fair Trade Commission’s investigated cases (in which a fine was imposed) increased from 24% in 2011 to 54% in 20122 . Now it is the turn of the second generation of the Asian emerging markets to start following suit. India’s competition law is governed by its Competition Act that came into effect in 2002 and has been amended twice since then, in 2007 and 2009. A delay in replacing its erstwhile Monopoly and Restrictive Trade Practices Act also delayed the formation of the Competition Commission of India (CCI). Though it was established in October 2003, it only became fully operational in May 2009. This, together with the country’s slow move towards a market economy, had thus far kept the culture of competition weak and its compliance poor. However, analysis of the recent trend of actions taken by the CCI shows that its actions against anticompetitive trade practices have involved entities ranging from chemist and pharmacy associations to cement manufacturers to sporting bodies such as the Boards for Control of Cricket and Hockey India. In August the CCI imposed a fine of INR 25.5 billion (USD 420 million) on 14 automakers for restricting availability of spare parts, eventually leading to high retail prices3 . Earlier in July, it was Adani Gas Limited that got penalized close to INR 257 million for imposing unfair conditions on buyers through Gas Sales Agreements4 . With its merger control regime coming into effect only in June 2011, India has recently started actively enforcing its competition law in this area as well. As a result, it has become more important for companies in auto, cement and pharmaceutical manufacturing and distribution industries to gain an in-depth understanding of the enhanced regulatory requirements expected of them. The Indian pharmaceutical sector has continuously experienced double-digit growth, is considered the world’s third largest in terms of volume and will likely have the highest focus in the years to come. Multinational corporations (MNCs) and domestic companies have started working together not just in research and manufacturing but also on wide-ranging marketing and distribution networks. Furthermore, introduction of product patents and removal of certain restrictions, more so on the brownfield foreign investments5 than the greenfield6 ones, has led to the higher possibility of mergers and acquisitions (M&As). These M&As come with their own set of negative effects on competition in this sector, as smaller players face the additional risk of getting overpowered by the large industry players. A look into one of the ongoing cases with the CCI suggests challenges that will need to be faced by the larger corporations in order to maintain a competitive market for both the small entities and consumers. MERGERS & ACQUISITIONS The proposed merger of Sun Pharmaceutical Industries Limited and Ranbaxy Laboratories Limited is one of the most notable cases in this regard. Although Sun Pharmaceutical agreed to buy Ranbaxy for USD 3.2 billion in April 2014, it has still not received approval from the antitrust regulator, and on September 4th, the latter invited public feedback on the proposed merger7 . In spite of an initial investigation and a show cause notice in July, a second-level inquiry has been initiated. This has never been done before by the regulator and clearly indicates enhanced vigilance. The reason for such high scrutiny is the 8.5% market share and 46 drug formulations that the merged entity will hold8 . Since only the prices of five essential formulations out of those 46 are regulated by the government, the possibility of market domination in the rest is the main concern for the CCI. This deal is also being scrutinized by the U.S. Federal Trade Commission, as it will make Sun Pharmaceutical the world’s fifth-largest generic drug manufacturer. Scenarios such as these bring an international perspective to the antitrust regulatory environment faced by companies in this industry, and those unable to comply will pose a reputation risk for their associates. A COMPLICATED APPROACH TO BUREAUCRACY AND PENALTIES Apart from keeping a check on possible anticompetitive mergers, the CCI plays another important role of penalizing the entities and organizations that abuse their dominant position in the market. This has proven to be costly, as fines have ranged from 1% to 10% of a company’s average turnover of up to three years, and the ones penalized include not only domestic and multinational companies but also state-owned entities. Those unable to stay abreast of the country’s competition laws and its amendments have been heavily penalized. The Indian Trade Promotion Organization, Coal India Limited and even the National Stock Exchange of India have not been spared. Another example from the pharmaceutical sector is the case of All India Organization of Chemists and Druggists (AIOCD), who have faced heavy penalties for limiting and restricting the supply of medicines in India. In this example, one of the organization’s own members, a clearing and forwarding agent (CFA) in the state of Odisha, filed a complaint against the AIOCD for pressuring a company to terminate its agreement with the CFA in order to sell its products in India. The AIOCD allegedly stopped the company’s medicine sales, worth INR 35 million per month in the city of Mumbai, with the warning to block it pan- Maharashtra9 as well. This was done so as to prevent business with those stockists who did not have a No Objections Certificate from the AIOCD or its affiliated bodies. Even though the erstwhile Monopolistic and Restrictive Trade Practice (MRTP) Commission directed the pharmaceutical companies in 2005 not to cease business with dealers just because they were unable to get a consent letter from the relevant association, the AIOCD continued imposing its regulations. Finally, the CCI imposed a cease-and-desist order against the AIOCD in December 2013, stopping short of imposing another penalty for abusing its dominant position and restricting the supply of essential medicines to the market. Such conflicting rulings and restrictions by different bodies create confusion for existing and new companies in the industry. This increased bureaucracy has been seen by many as an impediment to business growth in the country, and hence the possibility of a company’s decisions getting altered by a political juggernaut is high. Furthermore, the increase in red tape can lead to bribery and corruption in order to
  3. 3. INFORMER | ISSUE 25 41 ease the way to get bureaucratic approvals. Thus, with these automatic barriers to trade, the high risk involved in entering and doing business in the Indian pharmaceutical sector needs to be understood. Trends in the rest of Asia also suggest a possibility of foreign firms being at greater risk than domestic ones, as competition in many of its economies gets more and more regulated. In January last year, the National Development and Reform Commission – the Chinese price regulator – imposed a USD 56.8 million fine on two South Korean and four Taiwanese LCD screen manufac- turers for forming a price cartel10 . In August this year, the same agency imposed a USD 201 million fine on 12 Japanese auto parts makers for manipulating prices11 . Although some of those companies have also been fined in the U.S., Europe and Japan, indicating a legitimate purpose behind these regulations, heavy penalties on multinationals have heightened the risk for foreign firms. This also raises concerns of enhanced protectionism by the governments, especially in the backdrop of the World Trade Organization (WTO) trade facilitation agreement. CONCLUSION The expanding Indian consumer base that has the potential of becoming possibly the world’s largest middle-class market is attracting businesses throughout the spectrum. The cases mentioned above clearly indicate a strong shift toward enforcement of the competition law and also emphasize the complexity of regulations and lack of clarity in India’s compliance culture. Other than those cases mentioned above, segments such as e-commerce, mobile and telecommunica- tion, and FMCG are also at risk, should they do business with individuals and entities that have been charged in connection with breaches of the competition legislation. The result of this is that they could face both financial damage from heavy fines imposed on them by the regulator or being barred from conducting business in particular regions for a length of time, as well as the associated damage to their reputation. In order to take advantage of the Indian expanding consumer base, an important focus for manufacturers, distributors, importers, exporters and retailers in these sectors should be on the competition and antitrust aspects of their businesses. 1 2 3 4 5 A foreign direct investment strategy where a company or government entity purchases or leases existing production facilities to launch a new production activity (source: 6 A form of foreign direct investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up. This is opposite to a brownfield investment (source: 7 8 9 10 11 The Indian pharmaceutical sector has continuously experienced double-digit growth, is considered the world’s third largest in terms of volume and will likely have the highest focus in the years to come.