[Himanshi Yadav and Kartikey Baid are 4th Year B.A., LL.B. (Hons.) students at National Law University, Jodhpur]
In the contemporary era of interconnected global trade and commerce, the principles of free and fair competition among not only private enterprises but also public and private sectors have become synonymous with a well-functioning free market. Consequently, the intersection of competition law and public sector undertakings (PSUs) in India necessitates careful consideration regarding equitable market competition between public and private companies.
PSUs and competition law inherently exhibit discordance, as their underlying principles and objectives are inherently contradictory. PSUs are endowed with a wide array of benefits by the government to advance economic, social, and developmental goals, transcending the sole pursuit of profit. Conversely, competition law aims to eliminate any kind of undue and discriminatory benefits conferred upon any entity, irrespective of their intended motives, in order to establish a market free from obstacles impeding fair competition among private and public enterprises alike.
It is noteworthy that the competition law in India, primarily governed by the Competition Act, 2002, does not provide for blanket exemptions to PSUs from its purview. Instead, it is the other governmental laws and policies, such as nationalization legislation, subsidies, preferential treatment in government procurement, and implicit guarantees of government backing, which create an environment conducive to unfair competition in the market. Consequently, the issue lies not with the competition law itself, but rather with the broader policies and market distortion caused by the government in the name of sovereign responsibility and the pursuit of the greater good. A notable argument raised by Coal India in a recent case also centered around the immunity provided to them from antitrust rules and regulations by the Coal Mines Nationalization Act, 1973 thereby implying an exemption to PSUs by the state.
Advocates of PSUs primarily assert that these entities frequently operate in sectors critical to the nation’s development. Their primary objective extends beyond profit maximization to encompass the welfare of the public. However, this argument is weakened by the pervasive dilution resulting from the proliferation of PSUs across various sectors of the Indian economy, ranging from natural resources, textiles, transportation, and telecommunication to consumer goods and beyond. Moreover, these PSUs consistently enjoy the same discriminatory benefits across these sectors.
Supreme Court’s Stance
In its judgement rendered in June 2023, the Supreme Court addressed the question of whether the Competition Act applies to Coal India Limited (CIL) – a creation of the Coal Mines (Nationalization) Act, 1973 – and its subsidiary Western Coalfields Limited as they are “geared and duty bound” to achieve the objects declared in Article 39(b) of the Constitution of India cannot be bound by the Competition Act, 2002.
The top court’s judgment has come on Coal India Limited’s challenge to the December 2016 ruling of the then Competition Appellate Tribunal (COMPAT) – whose role has now been assumed by the National Company Law Appellate Tribunal (NCLAT) – which had dismissed its appeal against the October 2014 order of the Competition Commission of India (CCI).
The CCI had held CIL guilty of abuse of its dominant position in the production and supply of non-coking coal to thermal power-producing plants in different states. The companies producing electricity from coal-fired power plants had objected to CIL increasing the coal prices from Rs. 1,631 per metric tonne to Rs. 2,177 per metric tonne. They had contended that the hike in price was without any justification and had imposed discriminatory pricing on buyers. Asking CIL to refrain from its anti-competitive practices, the CCI had imposed a penalty of Rs. 1733 crores on CIL. However, the same was reduced to Rs. 591 crores by the COMPAT, which remanded the matter back to CCI for fresh consideration.
The three-judge bench of KM Joseph, BV Nagarathna and Ahsanuddin Amanullah, JJ rejected the contention of CCI and observed that:
“If Parliament has intended that State monopolies even if it be in the matter of distribution must come under the anvil of the new economic regime, it cannot be found flawed by the Court on the ground that subjecting the State monopoly would detract from the common good which the earlier Nationalisation Act when it was enacted, undoubtedly, succeeded in subserving. We see no reason to hold that a State Monopoly being run through the medium of a Government Company, even for attaining the goals in the Directive Principles, will go outside the purview of the Act.”
The Court explained that section 19(4) in fact empowers the CCI to have regard to “all” or “any” of the factors to arrive at the finding that an enterprise enjoys a dominant position or not. Section 19(4)(g) declares that “monopoly” or “dominant position”, whether acquired as a result of the statute or by virtue of being a government company or a PSU or otherwise, is to be a relevant factor. Hence, this is a clear indication that far from excluding governmental bodies like a government company, a PSU or a body under a statute from the purview of the Act, the lawgiver has evinced its intention to include government companies, public sector companies and bodies incorporated under a statute within the ambit of the Act.
Government departments are also expressly covered within the expression “enterprise” under the Act. The Court explained that what is excluded from the definition of the expression “enterprise”, is a government department carrying on government functions. Hence, carrying on business in mining cannot, by any stretch of imagination, be described as a sovereign function. There is nothing in the definition which excludes a state monopoly which is even set up to achieve the goals in Article 39(b) of the Constitution.
An International Perspective
Professor Deborah Healey argues that state owned enterprises (SOEs) can harm competition more than private firms, because their behaviour “is likely to be more entrenched and more lasting”. Moreover, SOEs obtain benefits just because they belong to the government and many of them used to be monopolies running vital facilities. Taking an international perspective, we can find that countries such as Australia and EU already have a competitively neutral legal framework. We can take a look at the functioning of this practice in Australia to further understand its benefits as well as point out how we can adopt this approach in the most efficient way possible.
The competition framework in Australia allows it to treat state-owned enterprises and private enterprises similarly, which means that state-owned enterprises should not enjoy any net competitive advantage over their private sector competitors simply by virtue of their public sector ownership. This principle was adopted as part of the National Competition Policy reforms that started in 1995, following the recommendations of the Hilmer Report in 1993. The reforms are aimed at enhancing the efficiency and productivity of the Australian economy by introducing more competition and market discipline in various sectors, including those dominated by state-owned enterprises.
The competitive neutrality framework in Australia consists of several elements, including a legal and regulatory framework that ensures that state-owned enterprises are subject to the same taxation, regulation, debt guarantee and procurement rules as private enterprises, or that any differences are offset by appropriate payments or charges. It also includes a corporatisation process that transforms state-owned enterprises into separate legal entities with commercial objectives, independent boards and management, and clear performance and accountability standards among other such provisions that ensure competitive neutrality.
Two key mechanisms that exist in Australia to further a better implementation of this approach are their public benefit test and complaints handling mechanism. The public benefit test allows for exemptions or modifications of competitive neutrality requirements if they are outweighed by the net benefits to the community from pursuing other public policy objectives. In addition to that, the complaint handling mechanism enables private enterprises or other interested parties to lodge complaints about alleged breaches of competitive neutrality by state-owned enterprises and to seek independent investigation and resolution by designated agencies at the Commonwealth or State level.
This approach towards competition in Australia has improved the efficiency and performance of state-owned enterprises, as well as their private sector competitors, by reducing distortions and creating incentives for innovation and cost reduction. It has also enhanced transparency and accountability on behalf of state-owned enterprises and has also increased consumer welfare and social welfare by ensuring that prices reflect costs and quality and that public policy objectives are pursued in a more explicit and consistent manner.
Possible Issues From This Decision
Effect on FDI
PSUs in India have historically held dominant positions in various sectors, limiting market access and competition for foreign companies. This can potentially deter foreign direct investment (FDI) as investors may perceive limited opportunities for growth and market entry. However, in recent years, there have been successful examples of foreign companies entering sectors previously dominated by PSUs. For instance, in the telecommunications sector, private and foreign companies have emerged as significant players, challenging the dominance of state-owned companies. This has resulted in increased competition, better services, and improved access to advanced technologies for Indian consumers.
Influence Over Market
PSUs often represent large and established companies operating in various sectors such as energy, banking, telecommunications, and infrastructure. The sheer market capitalization of PSUs, which stems out of financial reliance on governmental support instead of business activity, gives them and, by extension, the government considerable influence over the market. This poses a threat to the natural cycle of the market, which more often is used as a tool for market manipulation by the government, rather than a tool of growth for true private businesses.
Public Sector Banks
Public sector banks (PSBs), as government-owned entities, have historically held a dominant market position, accounting for a significant share of the banking sector. PSBs collectively hold a substantial market share in terms of deposits, loans, and branches. Their dominant position can limit competition by making it challenging for smaller banks or new entrants to gain market share. This concentration can reduce the number of players in the market and potentially stifle innovation and customer choice.
Further, PSBs’ actions, including their lending and deposit rates, can influence market pricing. PSBs have access to government resources and preferential treatment, such as deposits from government agencies, public sector enterprises, and priority sector lending requirements. This can provide PSBs with a competitive advantage in terms of availability and cost of funds. The access to low-cost funds may enable PSBs to offer more favorable loan terms, potentially putting pressure on smaller banks or non-PSU banks to compete. The government’s policies and initiatives play a crucial role in shaping the competitive landscape of the banking sector. Reforms such as the merger of PSBs, recapitalization efforts, and increased focus on governance and transparency aim to strengthen PSBs and enhance their already unfair edge over private players.
Preference to PSUs in Government Procurement
The government is one of the largest consumers in any economy. When PSUs are given preference in government procurement, private players face barriers to entry or limited opportunities to participate in government contracts. This can restrict competition as PSUs enjoy preferential treatment in accessing government tenders and contracts, potentially reducing the number of private players involved in government projects.
Further, this preference can also sometimes lead to a lack of transparency and accountability. This may result in limited visibility into the selection criteria, bidding process, and decision-making, raising concerns about fairness and integrity in the procurement process. Lack of transparency can erode trust and discourage private players from participating in government contracts.
Challenge to MSMEs
The unfair competitive advantage bestowed upon PSUs creates barriers for micro, small and medium enterprises (MSMEs) in accessing government contracts and markets. PSUs enjoy preferential treatment, resulting in unequal competition due to their larger scale, resources, and market reach. This creates an uneven playing field, limiting the ability of MSMEs to compete effectively. MSMEs face challenges in negotiating terms with PSUs, as the dominance of PSUs in government contracts reduces their bargaining power. Additionally, some MSMEs become overly dependent on PSU orders, making them vulnerable to disruptions caused by changes in procurement patterns. However, in recent times the government has started placing a selective quota for MSMEs in certain government procurements. This is a welcome start but more needs to be done to level the playing field.
In this post we examined the issue of competition law and PSUs in India, highlighting the inherent tension between the objectives and benefits of these entities and the principles of fair and free market competition. We also discussed the recent Supreme Court judgment that affirmed the applicability of the Competition Act to PSUs, rejecting the argument that they are immune from antitrust scrutiny by virtue of their statutory origin or constitutional mandate. Taking the example of Australia, which has adopted a competitive neutrality framework that ensures that PSUs and private enterprises are treated similarly and do not enjoy any net competitive advantage due to their public sector ownership, the post concludes by suggesting that India can learn from the Australian experience and adopt a similar framework that balances the social and economic goals of PSUs with the need to promote market efficiency and consumer welfare. Such a framework would not only enhance the credibility and legitimacy of PSUs, but also foster a more competitive and dynamic business environment in India.
The post also provides some creative insights into the possible implications of this issue for various sectors and aspects of the Indian economy, such as foreign direct investment, market influence, public sector banks, and government procurement. It argues that PSUs can potentially harm competition more than private firms, because their behaviour is likely to be more entrenched and more lasting due to their government backing and benefits. It also points out some of the challenges and opportunities that arise from applying competition law to PSUs, such as ensuring compliance, addressing market distortions, enhancing consumer choice, and pursuing public interest objectives. The post thus offers a comprehensive and critical analysis of the complex and evolving relationship between competition law and public sector undertakings in India.
– Himanshi Yadav & Kartikey Baid