ANTI-COMPETITIVE AGREEMENTS IN INDIA: WHY CCI SLAPPED MARUTI SUZUKI WITH A 200 CR. PENALTY
Updated: Sep 18, 2021
Author: Parth Gondia, II year of B.A.,LL.B.(Hons.) from The Rajiv Gandhi National University of Law, Patiala, Punjab.
Competition Commission of India slapped Maruti Suzuki India Ltd, the country’s largest carmaker with a 200 Cr penalty for indulging in anti-competitive practice through its discount control policy. It also asked Suzuki Motor Corp to ‘cease and desist’ from its discount control policy which was found to be anti-competitive practice under the law[[i]]
Why was Maruti Suzuki fined?
Maruti entered into a vertical anti-competitive agreement with its dealers to impose its discount control policy. It used mystery shopping agencies (MSA’s) that visited its dealerships randomly to find how much additional discounts were they offering to the customer. If any of them were found to be offering discounts more than the prescribed amount by Maruti, the company imposed fines on the Manager, team leader, sales executive, and those who were involved in the deal. It emailed its dealers the schedule of penalties starting from Rs 50,000 for the first violation which increased after every subsequent offense. Such practice was found to be causing an appreciable adverse effect on competition amounting to Resail Price Management (RSP).
For instance, Maruti fined one Thiruvananthapuram-based dealer Rs 1 lac for offering an additional discount of Rs 4,500 on a basic kit. Further, it was found in the investigation led by a Directorate-General (DG) that the amount collected from these penalties was used to pay advertisement bills of the company.
Proceedings of the Case
The present matter was taken up Suo Motu by the Competition Commission of India after receiving an anonymous email from a Maruti Suzuki dealer dated 17.11.2017 alleging that the sales policy of the MSIL is in contravention of the provision of Competition Act 2002 as well as the interests of the consumers. It was stated in the email that a penalty was levied on the dealer if they were found to be giving a discount more than the amount prescribed by the MSIL to the customers. Upon consideration of the complaint, the Commission directed Directorate-General (DG) to investigate the matter.
Report of the DG
It was found that the MSIL is the largest carmaker of India in the passenger vehicle segment i.e., 51.22% in FY 2018–19, and its market share had shown a consistently growing trend for the last 9-10 years[[ii]].
It was found that MSIL indeed framed instructions for its dealers to not give a discount to the customers beyond a limit prescribed by Maruti. It appointed MSA or Mystery Shopping Agencies that visited its dealerships randomly to find how much additional discounts were they offering to the customer.
If any of them were found to be offering discounts more than the prescribed amount by Maruti, the company imposed a fine on the dealership
It was also found that the company used this money to pay the advertisement bills
Submission of MSIL
MSIL argued that to hold the company liable for the alleged discount control policy there has to be an agreement between the company and its dealers. However, the DG couldn’t produce such an agreement except for oral or verbal allegations. Regarding the Mystery shopping agencies, the company accepted that they appointed senior inspectors who did mystery shopping audits, however, they were appointed solely to check adherence to standard operating procedures (SOP), services, and efficiency of its dealers. Regarding the penalty that it imposed the company said that it is not a part of any such agreement and it only acts as a third party. It stated that its role is limited to that of an adjudicator. If any fault is found in any audit report then MSIL sends the report to the dealer merely to seek its comments in the interest of fair play and natural justice.
Order of the CCI
The CCI stated that the term ‘agreement’ as stated in Sec 2(b) of the Competition Act is not the same as it is stated in contract law. The term agreement in the Competition act means any kind of mutual agreement or understanding between the parties. The term agreement in competition act has a wide scope and covers not only written but also informal agreements. Thus, the argument of MSIL that they had not entered into any written agreement with the dealer was discarded. The DG found many emails which prove that MSIL had a discount control policy and it penalized those dealers who gave additional discounts to customers beyond the permissible limit. This practice of Resail price maintenance was found to be causing an appreciable adverse effect on competition. It lowered intra brand and inter-brand competition and led to products not being offered at the best possible price to the consumers.
Based on the above findings, the Commission empowered under Sec 27(b) of Competition act 2002 imposed a penalty of amount Rs 200 crore on MSIL.
What does the Law Say?
Section 3 of the Competition Act deals with anti-competitive agreements. Sec 3 (4) reads –
‘‘Any agreement amongst enterprises or persons at different stages or levels of the production chain in different markets, in respect of production, supply, distribution, storage, sale or price of, or trade-in goods or provision of services, including—
(a) tie-in arrangement;
(b) exclusive supply agreement;
(c) exclusive distribution agreement;
(d) refusal to deal;
(e) resale price maintenance.
shall be an agreement in contravention of sub-section (1) if such agreement causes or is likely to cause an appreciable adverse effect on competition in India’’.
All of these are essentially vertical agreements i.e., the agreements which take place between enterprises that are at a different level of manufacturing and distribution process, unlike horizontal agreements which take place between enterprises who are at the same level of the manufacturing process. In vertical agreements, the manufacturer has the dominant position and tries to restrict or limit the procurement, supply, or output of the products.
Once it is determined that such type of vertical agreement exists, the primary requirement for it to fall under the ambit of sec 3(4) is whether such agreement caused an appreciable adverse effect on competition.
To determine this, the sec 19 (3) is looked at where certain factors are laid –
1. Creation of entry barrier for a new competitor
2. Driving existing competitors out of the market
3. Foreclosure of competition by hindering entry into the market
4. Accrual of benefit to the consumer
5. Improvement in production/distribution of goods
6. Promotion of technical, scientific, economic development using production or distribution of goods or provisions of services.
The first three are negative factors, while the last three are positive factors. The CCI considers these factors and if the good caused by the agreement is more than the bad then it concludes that no AAEC has been caused however if the bad is more than the good then CCI finds AAEC to be caused. Apart from these factors, the CCI looks after whether the party is the dominant power in the relevant market, the relevance of the market, etc.[[iii]].
Free competition is the essence of a free market. It allows equal opportunity and a level playing field for every player who wants to compete in the market. This ensures tight competition, due to which each company tries to improve their product quality. In this way, the consumers get the best quality product at the best deal and the flow of the economy remains active. To ensure this free competition a statutory body like the Competition Commission of India is crucial which keeps a check on anti-competitive practices.
[i]NewIndianXpress. “CCI Imposes Rs 200-CRORE Fine on Maruti Suzuki for Restricting Dealers' Discounts.” The New Indian Express. The New Indian Express, August 24, 2021. https://www.newindianexpress.com/business/2021/aug/24/cci-imposes-rs-200-crore-fine-on-maruti-suzuki-for-restricting-dealers-discounts-2348927.html. [ii] “Vertical Agreements in Indian Competition Law – SHARDUL Amarchand Mangaldas & Co.” Shardul Amarchand Mangaldas Co. Accessed September 7, 2021. https://www.amsshardul.com/insight/vertical-agreements-in-indian-competition-law/#:~:text=Vertical%20Agreements%2C%20i.e.%2C%20agreements%20between,competition%20(AAEC)%20in%20India. [iii]NewIndianXpress. “CCI Imposes Rs 200-CRORE Fine on Maruti Suzuki for Restricting Dealers' Discounts.” The New Indian Express. The New Indian Express, August 24, 2021. https://www.newindianexpress.com/business/2021/aug/24/cci-imposes-rs-200-crore-fine-on-maruti-suzuki-for-restricting-dealers-discounts-2348927.html.