Comment on the Explosives Case: A Jurisprudential Analysis of Penalties under Competition Law

[Abhiroop Saha is a III Year student at the National Law School of India University, Bangalore]                                                                           

The primary aim of this post is to analyze the Explosives case based on the verdicts rendered by the Competition Commission of India (CCI order) and subsequently by the Competition Appellate Tribunal on appeal (COMPAT order). Through the same, an attempt has been made to identify certain shortcomings plaguing the determination of penalties in Indian competition law, and to address them effectively.

On 16 April 2012, the Competition Commission of India (CCI) sent shockwaves across the explosives industry as it found nine of the biggest explosive manufacturers in India guilty of bid-rigging and imposed a total fine of Rs. 58.83 crores. This order was directed against the complete boycott by these nine firms of the reverse auction process conducted by Coal India Ltd. (CIL) to procure explosives for manufacturing purposes. As the matter went on appeal, the Competition Appellate Tribunal (COMPAT) upheld every other finding of the CCI but, strikingly, proceeded to slash the penalty to 10% of the amount initially levied by the CCI (that is, Rs. 5.83 crores only).

However, the de-novo approach adopted by the COMPAT in this matter is not unusual, since it merely adds to the jurisprudential tussle between the COMPAT and the CCI on the issue of determination of penalties. In the Aluminium Phosphide Tablet case[1], perhaps constituting the most critical difference in the imposition of penalties by the two bodies, the COMPAT came down heavily on the arbitrariness often displayed by the CCI and observed that the penalty must be calculated on the ‘relevant turnover’ of the enterprise and not the entire turnover amount. In various other cases as well, where a significant amount of penalty had been levied by the CCI, the COMPAT often intervened on appeal and ordered a far lesser penalty.

The uncertainty created by the differences in approach of the two bodies is compounded by the utter lack of a modus operandi as well as any uniformity in CCI orders pertaining to penalties. For example, without adopting any particular method, the CCI imposed the maximum penalty in the Assam Drug Dealers’ Association case, and a fine of about 50% of the Net profit in the landmark Cement Cartelization case. At the same time, in the Explosives case under consideration, the penalty amount was only 3% of the average turnover. Apart from each case being decided on its own facts (and in spite of certain cases possessing highly similar fact circumstances), the CCI could offer no other justification for its highly variegated penalty amounts.

In the MDD Medical Systems case, the COMPAT observed that the CCI should not record a finding on the penalty unless it is accompanied by the reasons behind the same. The analysis must also give due consideration to the relevant aggravating and mitigating circumstances. These observations were made in light of the CCI often ordering substantial fines without sufficient justification. Unfortunately, neither the COMPAT nor any higher authority has actually issued proper guidelines or prescribed a method to determine the penalty amount.

In various cases including the Explosives case under consideration, the consequences of the above problem are highly visible. Initially, the CCI imposed a fine of 3% of the average turnover without recording any reason behind the same and without considering any aggravating or mitigating factor. This was challenged successfully on appeal before the COMPAT, which in turn proceeded to discuss some of the relevant mitigating factors including the appellants being first time offenders, the continued supply of explosives in spite of the collective boycott and, finally, the participation of all the appellant enterprises in the subsequent auction conducted by CIL. Unfortunately, owing to the lack of clear guidelines on the scope of mitigating circumstances, the COMPAT itself failed to take note of various potential mitigating factors such as the price ceiling fixed by CIL at a rate below the operational supply price, the aspect of ‘relevant turnover’ in respect of a few of the appellant enterprises and so on. Moreover, no analysis was devoted by the COMPAT to ascertain the impact of each of these mitigating circumstances. It simply held that certain circumstances did exist and, due to the same, ordered a reduction in the fine to 10% of the amount originally levied by the CCI. Hence, it is evident that the COMPAT has not contributed much towards clarifying the issue, but has instead made the determination of penalties perhaps even more ambiguous.

Currently in Indian competition law the lack of a sound method to objectively determine penalties inevitably leads to arbitrariness, and may hinder cost-benefit analyses of future transactions. The absence of a speaking order in respect of various significant penalties ordered by the CCI and the tendency of the COMPAT to take a slightly more lenient approach have led to a situation where parties frequently and successfully appeal against CCI imposed penalties. Inevitably, this results in tremendous inefficiency for the legal system as resources and time alike get wasted. Further, the failure of competition law adjudicators to mete out proportional sanctions in respect of wrongdoings is also a cause for concern. While disproportionately large sanctions would affect the ability of entities to accurately gauge the cost of their actions and discourage them from filing leniency applications, a dismally small penalty amount (as is often levied) would fail to achieve the objective of deterrence.

Clearly therefore, the penalty regime under Indian competition law requires a thorough re-evaluation and appropriate changes must be effected at the earliest. In this respect, a positive change would be to give parties the right to a separate hearing on the quantum of penalty. This would ensure a speaking order at all times and would also bring a large number of considerations in focus at the very first stage, that is, before the CCI itself. Before its amendment, Regulation 48 of the CCI (General) Regulations, 2009 used to provide for a separate hearing as a right. However, no such provision exists as of today.

Laying down proper guidelines for the determination of penalties is yet another change that must be resorted to at the earliest. Akin to the four-step method followed by the European Union (prescribed in the 1998 European Commission (EU) Guidelines) based on sales turnover, India must adopt a similarly comprehensive and predictable method to determine penalties, which are then contingent on delinquency, aggravating and mitigating factors, and so on. Although the Supreme Court did lay down a similar step by step method of determining penalties in the Excel Crop case, it is in no way as precise or comprehensive as the EU guidelines. The Supreme Court only listed various aggravating and mitigating factors which are to be considered while determining the penalty amount. Nowhere has it specified to what extent each of these varied factors would actually impact the percentage of penalty to be levied.

Further, unlike in the EU, there is no certainty as to the impact of key determining factors such as ‘duration of the violation’, which is compounded by an utter lack of conception of features such as ‘basic amount’, ‘entry-load’ and so on. Therefore, it may be observed that in the EU attempts have been made to leave as little to discretion as possible, and wherever discretion has been afforded, the contours of the same are clearly defined. Unfortunately in India, the entire process of determination of penalties is left to the discretion of courts, barring the ceiling of 10% on the average or relevant turnover, as the case may be. Hence, it is essential and urgent that changes be effected in the manner of determination of penalties in India at the earliest. While many more reforms may be proposed, introducing these two changes, namely, right to separate hearing on penalties and laying down objective and comprehensive guidelines for Courts to follow, will impact the core problems involved in the determination of penalties in India and at the very least ensure certainty and uniformity, while avoiding wasteful appellate litigation.

Abhiroop Saha

[1] Before the Supreme Court, the matter was taken up as Excel Crop Care Ltd. v. Competition Commission of India & Anr.

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