By Rupin Chopra and Apalka Bareja
The market watchdog i.e. Competition Commission of India (CCI) imposed a fine of ₹ 200 crore on India’s largest car manufacturer Maruti Suzuki India Ltd (MSIL) for its discount policy under Section 27[1] of the Competition Act, 2002. The matter which was taken up suo moto by the Commission in the year 2017 was finally concluded on August 23, 2021[2], wherein the Commission deduced that MSIL indulged in unfair business practices thereby causing an Appreciable Adverse Effect on Competition (AAEC) within India and in doing so, committing contravention of the provisions of Section 3(4) (e) read with Section 3 (1)[3] of the Act.
In furtherance to this, the Commission also passed a cease and desist order under Section 27(a)[4] of the Act against MSIL.
BACKGROUND
In 2017, CCI received a complaint from a purported Maruti Suzuki India Limited (MSIL) dealer, through an anonymous e-mail, wherein it was alleged that MSIL’s sales policy is against the interest of the customer as well as the provisions of the Competition Act, 2002 which prompted the Commission to take up the matter suo moto.
Maruti’s Discount Control Policy
The Commission had ordered a preliminary inquiry by the Director General (DG) on the basis of which it found out that MSIL had a “Discount Control Policy” in effect for the dealers, as per which the dealers were restricted from offering discounts beyond that prescribed by MSIL, freebies and so on to the consumers beyond what MSIL allowed thereby resulting in Resale Price Maintenance (RPM) which in turn was monitored by MSIL by appointing Mystery Shopping Agencies (MSAs) and was further enforced through the imposition of penalties.
Discount Control Policy: As per the said policy, the dealers of MSIL are not permitted to give discounts to their customers beyond that prescribed by MSIL in the announced ‘consumer offer’. If a dealer is found giving extra discounts, a penalty is levied upon the dealer by MSIL.
RESALE PRICE MAINTENACE AND ITS EFFECT ON THE MARKET
As per explanation (e) of Section 3 (4), resale price maintenance means and includes “any agreement[5] to sell goods on condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged.”
The CCI after finding out such a practice of RPM being implemented by MSIL observed that RPM can prevent effective competition both at the intra-brand level as well as at the inter-brand level thereby reducing consumer welfare and in doing so, facilitating a formation of cartel.
The order also stated that “When a minimum RPM is imposed by the manufacturer upon the distributors, the distributors are prevented from decreasing the sale prices beyond the imposed limit. In other words, the mechanism does not allow the distributors to compete effectively on price. As such, stifling intra-brand competition results in higher prices for consumers.” Undoubtedly such a practice of RPM by MSIL has caused an appreciable adverse effect on competition (AAEC) within India and the Discount Control Policy has amounted to an anti-competitive agreement.
The said concept was also discussed by the Commission in a similar case of Fx Enterprise Solutions India Pvt. Ltd. V. Hyundai Motor India Limited, wherein CCI while imposing penalty of INR 87 Crore on Hyundai noted that the infringing anti-competitive conduct of Hyundai in the case included putting in place arrangements, which resulted into Resale Price Maintenance by way of monitoring maximum permissible discount level through a Discount Control Mechanism and also a penalty mechanism for non-compliance of the discount scheme which is similar to the mechanism adopted by MSIL.
WHAT ARE ANTI-COMPETITIVE AGREEMENTS?
As per Section 3 of Competition Act, 2002- No enterprise or association of enterprise or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provisions of services, which causes or is likely to cause an appreciable adverse effect on competition within India.
It can thus be said in order for an infringement of the provision to be established, it is important that the following elements are met with as in the case of MSIL:
- There must exist an agreement amongst enterprises or persons;
- The parties to such agreement must be at different stages or levels of the production chain, in respect of production, supply, distribution, storage, sale or price of, or trade in gods or provisions of services;
- The parties to the agreement must be present in different markets;
- The agreement should be of the nature as per section 3(4) of the Competition Act; and
- The agreement should cause or should be likely to cause an AAEC in India.
Since such practice of RPM by MSIL caused appreciable adverse effect on competition within India which amounted to an anti-competitive agreement, it also lowered inter-brand and intra-brand competition and led to products not being offered to the consumers at best prices.
CONCLUSION
The said case has brought the spotlight on the significance of Competition Rules and Policies in formulation of agreement and arrangement for those companies while entering into an agreement. The agreements shall be made to keep the both the parties at parity, ensuring that neither of them an advantage at a price paid by another. It is therefore important for companies to bear in mind the following points while entering into agreements:
- Not enter into agreements/arrangements that result in RPM either directly or indirectly;
- Not enter into an agreement that is likely to cause an appreciable adverse effect on competition by imposing:
- Any conditions that compel the reseller to buy an undesired product of the manufacturer resulting from the dominant position of the manufacturer.
- Any conditions that restrict the distributor from buying goods of other manufacturers.
- Any conditions that enable the distributor to have exclusive selling rights over the products of the manufacturer
- Any conditions that restrict persons or class of persons from purchasing and selling of a goods.
- Any conditions through which the manufacturer ascertains price for resale of a product below or above which a reseller cannot resale the goods.
- Not enter into an agreement that is likely to prevent an effective competition both at the intra-brand level as well as at the inter-brand level
However, what is also evident is that the Competition rules and policies in India though still at a nascent stage play a significant role in formulation of agreements and arrangements for those companies that consider entering the Indian marketplace. It is, therefore, important for such companies to carefully calculate and understand the effect of such arrangements and agreements and not be detrimental to the interest of the consumers and the economy.
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[1] Orders by Commission after inquiry into agreements or abuse of dominant position- https://www.cci.gov.in/sites/default/files/cci_pdf/competitionact2012.pdf
[2] https://www.cci.gov.in/sites/default/files/press_release/PR-322021-22.pdf
[3] Anti-competitive agreements- https://www.cci.gov.in/sites/default/files/cci_pdf/competitionact2012.pdf
[4] Orders by Commission after inquiry into agreements or abuse of dominant position- https://www.cci.gov.in/sites/default/files/cci_pdf/competitionact2012.pdf
[5] Section 2(b) of the Act states “agreement includes any arrangement or understanding or action in concert- whether or not, such arrangement, understanding or action is formal or in writing or whether or not such arrangement understanding or action is intended to be enforceable by legal proceedings.