CCI’s Opaque Penalty Regime: Need for Perspicuous Penalty Guidelines?

[Naman Katyal is a 4th-year B.A., LL.B. (Hons.) student at Gujarat National Law University, Gandhinagar]

Since its inception, the Competition Commission of India (‘CCI’) has faced criticism for not supporting its calculations of quantum of penalty with suitable justifications and, therefore, levying arbitrary penalties in a number of judgements by courts and tribunals alike. In fact, section 27(b) of the Competition Act, 2002, which deals with the CCI’s penalty imposing power, faced a constitutional challenge before the Delhi High Court in Mahindra Electric Mobility Ltd. v. Competition Commission of India (decided 10 April 2019). This is for the reason that the Act provides no guidelines with respect to the scale of penalty to be imposed in any given case.

In this light, the author seeks to examine the CCI’s failure to justify its assessment of the quantum of penalty with adequate reasoning and, consequently, analyze the factors at play in determining the quantum of penalty arising out of antitrust law violations, and discuss the benefits that accrue owing to the issuance of penalty guidelines.

Background

Section 27(b) of the Competition Act empowers the CCI to “impose such penalty as it deems fit”, which is not more than 10% of the average annual turnover of the delinquent entities for the preceding three financial years. However, this purported discretionary power of the CCI has been in the line of fire since the CCI’s inception due to its failure to justify the calculation of the amount of penalty imposed.

In Excel Crop Care Ltd. v. Competition Commission of India, the erstwhile Competition Appellate Tribunal (‘COMPAT’) observed that the CCI’s order on the calculation of penalty amount suffered from the total absence of reasons. The tribunal went on to reiterate the requirement of reasons while ordering the imposition of penalty and ordered the CCI to take serious note of this.

In  International Cylinder (P) Ltd v. Competition Commission of India, the CCI imposed a penalty at the rate of 7% of the average turnover of the last three years on all the parties found engaged in bid-rigging even when, in case of some parties, only two years’ or one years’ turnover data was available. The COMPAT lamented that this approach is without reason and, therefore, arbitrary. In Rajkumar Dyeing & Printing Works Pvt. Ltd. v. Competition Commission of India, the Delhi High Court set aside a CCI order imposing a penalty on the ground of non-application of mind. The Court further observed that the quantum of penalty had little correlation with the gravity of the offending acts, and that the order violated the principle of proportionality.

In the recent past, in the CCI’s orders in the low-density polyethylene cartel case (dated 29 October 2021), axle bearings cartel case (dated 12 October 2021), automotive bearings cartel case (dated 5 June 2020), and the composite brake blocks cartel case (dated 10 July 2020), this pattern of imposing an unreasoned amount of penalty has emerged in the form of non-imposition of penalty altogether, despite the CCI concluding that the provisions of the Competition Act were contravened. A common thread running through all these orders was the CCI’s observation regarding the stressful situation of the micro, small & medium enterprises sector during the pandemic. Although it is necessary to offer financial assistance to struggling businesses in order to keep them up and running, the approach should be based on a thorough examination of the parties’ financial circumstances. In none of the orders cited above was there an attempt to examine the financial situation of the opposite parties and, as a result, a blanket relief was granted. In fact, in July 2020, the income tax authorities were granted powers to share information or details in their possession with the CCI. In any case, financial difficulties and the pandemic may, at most, be considered mitigating circumstances for lowering penalties.

Therefore, it is evident from the aforementioned decisions that the CCI has consistently failed to equip its penalty imposing orders with adequate reasons. A major factor contributing to this practice, as noted by the Supreme Court in Excel Crop Care Ltd. v. Competition Commission of India, could be the absence of guidelines as to the appropriate amount of penalty.

The Relevant Factors

Throughout major jurisdictions such as the US and EU, the prevailing antitrust violations penalty framework largely rests on a four-tier fine calculating system through elaborate guidelines in the form of United States Sentencing Commission’s guidelines on antitrust offences and 2006 EU fine-setting guidelines. These involve calculating a base fine at the first level, adjusting the base fine by evaluating aggravating and mitigating factors at the second level, imposing a maximum statutory limit on the amount at the third level, and finally making considerations for leniency and settlements.

At the base fine level, in the EU, the ‘basic amount’ of fine is set with reference to the ‘value of sales’ of the relevant product by the defaulting undertaking in the relevant geographic market. The proportion of the value of sales taken into account is set at a level of up to 30% of the value of sales. This ‘basic amount’ is then multiplied by the number of years of infringement.

In the US, the ‘basic amount’ is commonly set at 20% of the volume of the affected commerce. The final fine level can range between 20% and 40% depending upon a number of qualitative factors, such as firm size, the nature of the offence, past history of violations, obstruction of justice, and degree of involvement in the conspiracy, and the level of cooperation.

The second step involves the evaluation of aggravating and mitigating factors to adjust the base fine amount. The EU Guidelines provide a clear set of aggravating and mitigating factors. For instance, under the EU Guidelines, repeat infringement of the same type leads to the basic amount to be increased by up to 100% for each such infringement established. In the US, a concept of ‘culpability score’, which takes into account clearly spelled aggravating factors and mitigating factors, is put to use. The maximum statutory limit on the fine amount is capped at 100 million USD in the US while the same is limited to 10% of the overall annual turnover of the company under the EU Guidelines.

Leniency and Settlements considerations are taken care of in the US by The Antitrust Division’s Leniency Program, which lays down a very elaborate system by dividing the program in two categories: (1) Type-A Leniency where the illegal conduct is self-reported before a government investigation has begun; and (2) Type B Leniency where the illegal conduct is self-reported after an investigation has been initiated. On the other hand, the European Commission has published a detailed leniency notice.

Although the CCI’s fine setting regime largely follows the aforementioned system, it lacks the much-needed refinement and certainty that the major jurisdictions offer in principle due to the lack of similar guidelines in India, as observed by the Supreme Court in Excel Crop. None of the levels discussed, save for leniency and settlements, finds any guidelines. Even the leniency framework under the Indian competition law has been noted for its regular inconsistent approach. In fact, the indefiniteness regarding the maximum statutory limit on the fine amount was so much that, until 2017 (when the Excel Crop judgement of the Supreme Court decided the issue), there was no clarity as to the meaning of ‘turnover’ in section 27(b) of the Act. The Supreme Court held that the penalty to be imposed on enterprises involved in anti-competitive practices should be calculated on the basis of ‘relevant turnover’ of the enterprise and not the ‘total turnover’.

The Benefits

Penalty guidelines across the world have been noted to provide transparency and legal certainty. They serve to complete the abstract criteria and very general legal limits often laid down in the law. However, the application of this abstract criteria by the CCI has made the courts and tribunals in India more intrusive with regard to penalty imposing orders. Several of the CCI’s orders are appealed before the National Company Law Appellate Tribunal (‘NCLAT’) or challenged before the High Courts and the Supreme Court and, therefore, the rate of realization of penalties imposed by the CCI goes down. The penalty realization rate of the CCI was a bare 8.4% in 2015-16, in 5.89% 2016-17, 1.04% in 2017-18, and 1.41% in 2018-19.

Furthermore, a degree of orientation as to the possible level of fines may reinforce incentives for leniency because, in order to be encouraged to apply for leniency, companies should have a rough idea of what they are up against. Here, it must be noted that the Competition Law Review Committee in its report has acknowledged the importance of penalty guidance and, accordingly, the Competition (Amendment) Bill, 2020, require the CCI to issue the much-awaited penalty guidelines.

Concluding Remarks

For the purposes of effective competition law enforcement, the calculation of penalties using a set of objective parameters is critical. A lack of guiding principles for calculating the penalty amount may result in arbitrary and unjustified penalties, and the CCI will see each of its orders being litigated before the NCLAT. Such litigation creates credibility concerns for the CCI. A consistent policy in imposing fines is crucial to gaining credibility. Without this, the NCLAT would second-guess almost all determinations of the CCI, demonstrating a lack of trust in the CCI’s expertise.

Naman Katyal

 

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