Navigating the Choppy Waters of Anti-trust Regulation in the Maritime Industry

[Aditya Trivedi is an Associate with the Competition Advisory Services (India) LLP, New Delhi and an LL.M. student in Competition Law & Economics at the Brussels School of Competition and Vanshika Arora is a 4th Year B.A.LL.B. student at the Army Institute of Law, Mohali]

In the vast tapestry of India’s economic landscape, the maritime sector stands as a pivotal contributor, shaping the nation’s growth and prosperity. According to the Ministry of Shipping’s Annual Report 2022-23, the sector accounts for approximately 5% of India’s gross domestic product (GDP), encompassing various segments, each with its own unique role and significance. Pertinently, the shipping and maritime industry is experiencing a meteoric rise in scale and contribution to the Indian economy. At the Global Maritime India Summit 2023 in Mumbai, the ‘Maritime India Vision 2047’ was revealed. Amidst the ambitions and aspirations of India’s maritime growth, a new narrative of equitable competition has emerged.

In the spirit of public accountability, the Maritime India Vision 2047 suggests restricting mergers and acquisitions (“M&A”) that could lead to dominance of a company, or its subsidiary. It further states that Competition Commission of India (“CCI”) would oversee any deals which could breach competition laws. Therefore, the country’s competition regulator is set for another task of monitoring anti-competitive practices in the maritime sector which, until recently, was largely exempt from the safeguards of anti-trust regulations.

This post aims to capture the various anti-competitive concerns in the shipping and maritime industry. It starts with a comprehensive account of the maritime freight sector, and attempts to state and analyse the regulatory efficiencies and barriers prevailing in this sector. Secondly, the authors delve into the various behavioural conduct and activities that call for regulatory scrutiny by the competition regulator in India. Finally, the authors touch upon the international jurisprudence, and conclude with several suggestions for efficient regulation in the sector.

The Maritime Industry in Perspective

Maritime freight transport includes seaborne freight transport and auxiliary services such as cargo-handling and pilotage. A broad categorisation of the sector includes bulk shipping and container liner shipping. The former involves carriage of products in bulk, such as heavy metals and coal, while the latter involves a routine carriage of products through containers and vessels, regularly scheduled for freight transport. The maritime supply chain consists of several segments such as registration of ships, operations, maintenance, freight and scrapping. Each segment involves specialised players with unique competitive strategies and advantages.

This industry is characterised by high fixed costs and widespread cooperation agreements, which have historically resulted in concentration of market players and costs. Until the last decade, the maritime transport industry was marked with inadequate infrastructure, less efficient ports, limited economies of scale and lesser competitive markets. However, the industry has lately noticed widespread horizontal consolidation through M&A and vertical integration of vessel carriers with the container terminal facility.  

Understanding Cooperative Agreements

The liner shipping industry is characterised by cooperative agreements that originated through liner conferences and the subsequent practice of containerisation. These cooperative agreements have taken several forms over the years. The international regulatory regime has witnessed a phased rise in consortiums, strategic alliances, Capacity Stabilisation Agreements, Vessel Sharing Agreements, Slot Charter Agreements and Voluntary Discussion Agreements. These agreements, in all their various forms, focus on the regularisation of costs and profitability in the maritime sector, thereby bringing uniformity in freight rates.

Opposing hypotheses in various studies suggest that cooperation agreements can be both anti-competitive and pro-competitive. While in principle these agreements seem pro-competitive, they embody the tendency to flout competition safeguards and regulations. The definition of a liner conference can be found in The Convention on a Code of Conduct for Liner Conferences (1974), which states:

“A liner conference is a group of two or more vessel-operating carriers which provides international liner services for the carriage of cargo on a particular route or routes within specified geographical limits and which has an agreement or arrangement, whatever its nature, within the framework of which they operate under uniform or common freight rates and any other agreed conditions with respect to the provision of liner services”.

This definition has various aspects that invite the scrutiny of competition laws: providing cargo services within specified routes of geographic markets, common freight rates and other agreed conditions, collusion over cost rationalisation, commercial understanding over sharing risks and achieving economies of scale. Resultantly, these conferences (or agreements, in all their different forms as described above) fall under the category of ‘price-fixing cartels’ that lead to market concentration.

A 2017 study suggested that upon an examination of equilibrium prices, aggregate quantities and welfare statistics, cooperative agreements have exhibited competitive efficiencies and facilitated consumer welfare by contributing in lower freight rates. In 2021, 86% of the global containership capacity was operated by the top 9 carriers, which work together in three global alliances and in the majority of more than 500 consortia agreements. However, the industry concentration ratios of liner shipping at the global level have often been described as fairly moderate with a HHI (Herfindahl-Hirschman Index) lower than in many industries.

These agreements, until recently, remained exempt from competition law, on the justification of balancing out high fixed costs, overcapacity, large capital investments, unpredictable demand and supply, and lack of a regulating body. However, these exemptions have now been lifted. The shipping industry is indeed under the lens of competition regulators and a subject of merger and cartel control. A major reason behind this change is policy is the resultant softening of competition and increasing anti-competitive practices in the sector.

Competition Law Enforcement in the Maritime Sector

The Competition Act, 2002 warrants prohibition of anti-competitive agreements, abuse of dominance and regulation of combinations. Under section 3 of the Act, anti-competitive agreements such as horizontal agreements and vertical agreements are per se anti-competitive. Therefore, any horizontal agreements, be it collusion between consortiums to rig bids, vessel sharing agreements in the liner shipping or tramp shipping industry may invite a close look by the CCI. The following conduct may be raise concerns:

  1. Enforcement of loyalty contracts and exclusive dealing contracts granting discounted freight rates (prohibited under 3(4) of the Competition Act);
  2. Predatory pricing (prohibited under 4(2)(a));
  3. Disbursement of sensitive data facilitating a robust pricing strategy and capacity expansion (prohibited under section 3(1)); and
  4. Agreement between ports and service providers consisting of terms relating to bundling of services, refusal to deal (prohibited under section 3(4)).

The CCI’s tryst with maritime sector occurred recently, when it fined four Japanese maritime companies, including Nippon and Nissan, for cartelisation of maritime motor vehicle transport services to automobile original equipment manufacturers (“OEMs”) for various trade routes. It imposed heavy penalties on the parties at the rate of 5% of the average of their incomes in the relevant period. Moreover, according to its mandate, the CCI approves the M&A beyond a certain threshold. In the recent past, it approved additional 25% shareholding of Adani Krishnapatnam Port Limited by Adani Ports and Special Economic Zone Limited. It also approved acquisition of 10.4% stake of Adani Ports in Gangavaram Port in Andhra Pradesh, among other combination approvals.

Earlier, in 2015 (Case No. 42 of 2012), the CCI imposed a penalty on Dumper Owner’s Association (“DOA”) for cartelisation, fixing supply prices and controlling the supply of dumpers at the Paradip Port. The CCI imposed a penalty of 8% of average turnover of the preceding three years, while also imposing a separate penalty of 5% of average income of the preceding three years on the individuals involved.

International Practices

Historically, the European Commission (“EC”) exempted price-fixing in the maritime sector through the Consortia Block Exemption Regulation (“CBER”) that excused from the application of Article 101 of the Treaty of Functioning of European Union, subject to certain conditions. However, noticing a decline in efficiencies as opposed to the expectation of positive increase, the CBER was not extended and is set to expire on 25 April 2024. Similarly, the United States’ Shipping Act of 1984 exempts consortia agreements between maritime shipping carriers and terminal operators, with an exception of agreements that have a direct, substantial, and reasonably foreseeable effect on the US commerce. At present, the Ocean Shipping Reform Act of 2022 empowers the Federal Maritime Commission to monitor monopolistic behaviour and anti-competitive conduct.

Way Forward

The Deloitte Report on “Competition Issues to be watchful of in the Indian Shipping and Maritime Logistics Industry” exhaustively suggests several proactive compliance actions that can be adopted by shipping enterprises to ensure competition law compliant trade policies, while promoting market efficiencies. Some of these suggestions include fixing internal protocols for decision making and sharing of commercially sensitive data, and exercising caution while attending a trade association meeting that may exude characteristics of collusion.

Further, the authors believe that entities can ensure additional compliance through training programmes for employees and teams, and conducting thorough and timely due diligence of agreements to ensure terms are not incongruous with the Competition Act, 2002. Further, entities must ensure that pricing strategies have sound rationale and do not yield negative efficiencies in the market. To promote growth in the sector, public-private partnership with checks and balances on fair competition need to be maintained. As India looks forward to implementation of other maritime projects, the regulators, including CCI and Ministry of Shipping will play a crucial role in ensuring a level playing field in the sector.

Aditya Trivedi & Vanshika Arora

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