Imposition of Penalty by the CCI: Is it Justified?

[The
following guest post is contributed by Tarun
Mathur
, who is a
Manager
at Ernst & Young, LLP (Mumbai) and has earlier worked with the Competition
Commission of India in its Combination Division. Views are personal.]
Recently in an order
(Notice given by Piramal Enterprises
Limited
(PEL) (C-2015/02/249))
dated May 2, 2016, the Competition Commission of India (CCI) imposed a penalty of INR 50 Million on PEL for:
(a)        not
filing the combination notification for its pre-approval; and
(b)       consummating
the combinations transaction without its approval
as required under the the Competition Act, 2002 (Competition Act) and the Competition Commission of India (Procedure
in regard to the transaction of business relating to combinations) Regulations,
2011 (Combination Regulations).
The PEL order is an interesting read on various aspects of
competition laws as is applicable and as understood by the CCI.  Unless challenged before the Competition
Appellate Tribunal (COMPAT) by PEL,
this interpretation will remain the law of the land.
In my view, the issues and finding contained in this order need
further clarification as they go to the root of the basic nuances of
competition law in India. It is not clear if PEL has preferred (or will be
preferring) an appeal against this order.
Background
PEL acquired (a)
9.96 % stake in Shriram Transport Finance Company in May 2013 from the stock
exchange by way of a contract note (STFC Transaction); (b) 20% equity
stake (directly and indirectly) in Shriram Capital Limited (SCL),
pursuant to the execution of an agreement in April 2014 (SCL Transaction);
and (c) 9.99 % stake in Shriram City Union Finance Limited in June 2014,
pursuant to a preferential allotment (SCUF Transaction).
The CCI took suo moto cognizance of the above three
transactions and asked PEL to explain why no combination notification was filed
with the CCI for its approval. In a turn of events, PEL filed the Form II
combination notification with the CCI and the CCI approved of the combination
vide its order dated May 26, 2015, while simultaneously initiating the
proceeding for levying of penalty under Section 43A of the Competition Act (which
deals with the power of the CCI to impose penalty for non-furnishing of
information on combinations
). This post discusses in brief the penalty levying order by the CCI.
The CCI Order in brief
I have briefly highlighted the important aspects discussed
in the PEL order below:
1.   Wrongful
interpretation of ‘control’ by the Parties
: Since the conception of
Combination Regulations in 2011, competition law practitioners are being
constantly plagued by the possible interpretation of expressions ‘control’,
‘ordinarily not likely’,  ‘acquisition of
sole or joint control’, ‘solely as an investment’ etc., by the CCI. However,
much clarity (I must say at the expense of various parties to a combination
transaction) have come from the decisions / orders of the CCI over a period of five
years and for the time being has been laid to rest by the recent amendment (in
January 2016) of  the Combination
Regulations.
In
the instant case, PEL had admitted that it had committed an error and had
wrongfully interpreted the definition of ‘control’ and it ought to have filed
the combination notification, which it failed to do so. However, there was no mala fide intent to evade the
compliances required under the Competition Act. 
The
acquisition of 20% stake in SCL, including some affirmative rights such as: (a)
approval of the appointment of the chief executive officer and the chief
financial officer of SCL; (b) alteration of charter documents; (c) determining
the business plan and annual budget; (d) appointment or removal of auditors;
and (e) commencement of any new business line by SCL tantamount to acquisition
of ‘control’ and therefore becomes a notifiable transaction (although the
transaction does not hit the limit of 25% shares/ voting rights as prescribed
under item 1 of Schedule I of Combination Regulations (categories of transactions not likely to have appreciable adverse effect
on competition in India)
. However, according to the CCI, the presence of
certain affirmative rights such as those listed above gives rise to the
presumption that the acquirer has de
facto
control over the target enterprise (a stand that the CCI has adopted in
several previous orders). Therefore, such transactions are not eligible for
exemption under Regulation 4 read with Schedule I of the Combination
Regulations).
2.   What an
enterprise writes in its annual reports / other reports and speaks through its
representatives is important
: Seemingly, it appears that each of the STFC
Transaction and the SCUF Transactions are separate stand-alone transactions and
are independent of the SCL Transaction. The statements made in the annual
reports about these three transactions give the impression that, somehow in the
overall scheme of things, these transactions are inter-connected and strategic
in nature. In my humble submission, howsoever the word ‘strategic’ is
interpreted or viewed in the context of facts and circumstances, the core
essence remains that these three transactions are independent of each other and
have almost nothing in common and are completely different in terms of
transaction documents, rationale, mode of transfer, business and entities
involved and timing of each transaction.
3.   EU
concept of inter—connectedness incorporated into Indian competition laws
: Another
interesting feature of PEL order is the acceptance of European Union laws,
namely here, European
Commission Consolidated Jurisdictional Notice under
Council Regulation (EC) No 139/2004 on the control of concentrations between
undertakings (2008/C 95/01)  (EU Merger Control Rules) for
interpretation of competition laws in India.
In terms
of EU Merger Control Rules (at para 50):
“If two or more transactions (each of them bringing
about an acquisition of control) take place within a two-year period between
the same persons or undertakings, they shall be qualified as a single
concentration, irrespective of whether or not those transactions relate to
parts of the same business or concern the same sector… It is sufficient if
the transactions, although not carried out between the same companies, are
carried out between companies belonging to the same respective groups.”
By
this logic,
three acquisitions by PEL of equity shares
of companies belonging to the Shriram Group, carried out within a two year
period, were considered as inter-related transactions.
4.   Time-limit
before the CCI can initiate suo-moto inquiry
: Proviso to Section 20(1) of
the Competition Act provides that the CCI does not have any suo moto power to
inquire into a combination transaction in which one year has passed since the
transaction was given effect to.
In
the instant case, according to the CCI, STFC Transaction, SCL Transaction and
SCUF Transaction are inter-connected transactions and since the SCUF
Transaction was given effect to in June 2014 and the CCI inquired about these
transactions in October 2014, the CCI is well within its power to inquire into
such transactions.  If this logic is
followed, then any further acquisition of any other Shriram Group entity in
future by PEL (howsoever unconnected to the first three transactions (by June
2016)) will prolong the jurisdiction/ power of the CCI to inquire in to
transaction and leaves the question open as to whether the parties will be
required to file a new combination notification or not (even if the new
transaction is in itself a non-notifiable transaction).
5.   Mitigation
factors for imposition of penalty
: In terms of Section 43A of the Competition
Act, the CCI can levy a maximum penalty of one per cent of the combined value
of worldwide assets of the combination. However, while determining the quantum
of penalty, among other things, the CCI undertakes an analysis of certain
mitigating factors. In the PEL order, while penalizing PEL INR 50 Million, it
took into consideration, mitigating factors such as (a) lack of any mala fides intent;
(b) no prior competition law violation; and (c) continuous co-operation with
CCI through the process (from combination notification filing to this order) on
part of PEL. However, there is no specific list / guidelines for the
enterprises to ascertain what mitigating factors CCI will consider for quantification
of penalty amount.
Further,
what made it penalize PEL for INR 50 Million and  not INR 1 or for that matter INR 1.025 Billion
(maximum penalty of 1 % of the combined value of worldwide assets of the
combination) is not altogether clear. I believe now is the right time for CCI
to fulfil the demand of the business community of coming up with some sort of
guidelines / notification for calculation of penalties for antitrust violations.
It can even do so by medium of its decisional practice.
Epilogue
On the basis of reading of several orders passed by the CCI,
in my view it is rather clear that further contribution is desirable in the
field (especially in its interpretation, analysis and appreciable adverse
effect assessment of transactions) as to the predictability of the provisions
of competition laws. CCI’s orders (including the PEL order) leave wide gaps as
to the interpretation of competition laws, which give rise to a great deal of
uncertainty. CCI in its formative years ought to strive to create world-class
standards and a body of competition law jurisprudence, which stands the test of
time and scrutiny by the appellate courts.

– Tarun Mathur

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • Impromptu:

    The line of reasoning and critical comments of the writer are prima facie not without substance and merits; hence, as perceived, anyone concerned or provoked, may be justified in giving it an impartial but in-depth consideration as to why CCI so also the law makers are obligated to give more thoughts. In short, the urge is to independently form an opinion on, – why a change of direction influenced by common sense/pragmatism is the need of the hour; essentially, in such matters entailing nothing more than a venial or technical beach of the so called regulatory 'rules', serving no objective of social purpose.

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