Competition Commission decision on Bank Prepayment charges: The Meaning of ‘Agreement’

The Competition Commission of India has issued its order in Case No. 5/2009 (decision dated 2^nd December 2010), Neeraj Malhotra v. Deutsche Post Bank Home Finance Ltd. and others. A copy of the majority (4-2) decision is available here. Two dissenting orders are available here and here. The decision and the dissents demonstrate divergent approaches over the meaning of the term ‘agreement’ for purposes of Section 3 of the Competition Act; the majority seemed to prefer some form of ‘meeting of minds’ or concerted approach; the dissenting members seem satisfied with the factual existence of a common (though not ‘concerted’) approach. The majority, in other words, seems to have preferred for there to be some form of acting in concert, as opposed to a factually common approach without a precise ‘meeting of the minds’.

The case was concerned with the levying of pre-payment charges by banks. Such actions were alleged to violate Sections 3 and 4 of the Competition Act (the first, because there allegedly was some agreement between the Respondents regarding levying of prepayment charges; and the second on grounds of consumer interest and dominance). The Commission began its analysis by placing the issue in the macro-economic context of the banking sector. The Director General’s investigation found that there were violations of Sections 3 and 4. The DG report had noted:

“The advent of prepayment penalty/charges in India on mass scale is traced to the meetings of banks on 28.07.2003 and 28.08.2003 convened by the IBA with regard to prepayment charges. However, it is noted for LIC Housing Finance that prepayment penalty is mentioned in their loan agreement since 1995. It was deliberated in the meeting of IBA by member banks to have a common approach in fixing prepayment charges on loan. Accordingly, a circular dated 10.09.2003 was issued which specifically spelt out levying of 0.5%-1% prepayment charges as reasonable and the decision in this regard was left to banks to decide. It is noted that for banks augmenting fee based income through prepayment charges was seen as significant consideration in competitive market with pressure on interest spreads. It is noted from the meeting of IBA that the group of banks have come together and taken a collective decision to limit market competition and to generate fee based income.”

The principal issues before the Commission included the interesting point of whether some discussions between members of the IBA were sufficient to constitute an ‘agreement’ for the purposes of competition law.

“For an agreement to exist there has to be an act in the nature of an arrangement, understanding or action in concert including existence of an identifiable practice or decision taken by an association of enterprises or persons. In this case, the allegation by the informant is that the act of charging prepayment interest/penalty is such an act. Furthermore, for an agreement, it is essential to have more than one party… An agreement is a conscious and congruous act that has to be associated to a point in time. It is apparent from a plain reading of the contents reproduced above that the meeting of the IBA was actually to discuss the  growing practices of corporate borrowers who would avail of committed lines of credit by banks for working capital but would first look at other market options such as CPs, bonds etc. for funding and use line of credit only as a fallback. This put adverse pressure on asset-liability management by banks. It was only in the context of those discussions that some banks raised the issue of prepayment on housing loans also. The discussion on the subject was consequential and not initial. Even then, it merely resulted in a clear decision that it “should be left to the banks to decide. The lack of imperative voice and intent is evident from the language and content of the said circular of IBA. It would be patently unjust to use it as an evidence of either action in concert or process of combined decision making by banks. This rules out any element of contravention of sub section (1) of section 3.”

Further, in relation to Section 3(3), the Commission accepted that the IBA was an ‘association’ for the purposes of the Act; but found that there was no decision taken by such association on prepayment. (Arguments that there was an appreciable adverse effect on competition were in any case considered, and rejected. We will discuss those issues in a separate post.)

The dissenting order by Shri P.N. Parashar began by noting that competition law involves protection of consumer interests. The dissenting member then quoted from the minutes of IBA meetings, and extracts from IBA communication to its members:

“On the whole, members were of the view that levy of commitment charges and pre-payment charges would help not only in terms of asset-liability management, but also in augmenting fee based income of the banks. The latter was seen as significant consideration in today’s competitive market with pressures on interest spread. While members felt that charges in the range of .5%-1% would be reasonable, the view was that a decision in this regard should be left to the banks to decide.”

This, the dissenting member found, was sufficient to indicate a common approach; and in turn, such common approach was found to be enough to constitute an agreement for the purposes of competition law (given that the Act has a wide definition of ‘agreement’). The dissenting member held:

“…it transpires that members of IBA felt a need for a common approach in fixing pre-payment charges on loans and the issue was discussed and deliberated in the IBA meeting on 28.08.2003 which culminated in the circular dated 10.09.2003 issued by IBA to all chief executives of its member banks. It was noted therein that pre-payment charges in the range of 0.5% to 1% would be reasonable. However, decision in this regard was left to the individual discretion of banks… it may be noticed that the definition is inclusive and not exhaustive. Further, the same has been worded in a wide manner and the agreement does not necessarily have to be in the form of a formal document executed by the parties. Thus there is no need for an explicit agreement and the existence of the agreement can be inferred from the intention and objectives of the parties. In the cases of conspiracy the proof of formal agreement may not be available and may be established by circumstantial evidence only. The concurrence of parties and the consensus amongst them can, therefore, be gathered from their common motive and concerted conduct.”

It was found that the IBA extracts clearly indicated at least a common approach, and from this, an agreement could be inferred. (Shri R. Prasad also dissented; and again found that agreement has to be given a broad understanding.)

Thus, the members took a diametrically different view on when Section 3 of the Act would be attracted; and the decision raises important legal questions on the scope of Section 3. In the next post, I will discuss some further aspects around the interpretation of ‘agreement’ in competition law; before looking at the decision of the Commission on the other issues.