The Competition Commission of India (“CCI”) in its order dated 23.08.2021 penalized Maruti Suzuki India Limited (“Maruti”) with a fine of INR 200 crore for its Discount Control Policy (“DCP”). The DCP restricted the amount of discount a Maruti dealer could offer to its customers. Maruti also required the dealers to seek prior approval if they wanted to offer discounts (cash and non-cash) beyond the prescribed limits. The CCI found that a complex and vigorous system was implemented by Maruti to monitor adherence to the DCP through Mystery Shopping Agents (“MSAs”) posing as customers. Moreover, dealers found flouting the DCP were reprimanded by way of penalties and stoppage of supplies was also threatened in some cases. Interestingly, Maruti not only penalised the dealerships for violating the DCP but also their individual employees such as showroom manager, team leader etc.
The CCI found that the act of controlling, and monitoring discounts resulted into Resale Price Maintenance (“RPM”) which is a type of vertical agreement, prohibited under Section 3 (4) of the Competition Act, 2002 (“Act”). The CCI found that Maruti had a significant presence in the passenger vehicles segment with a market share of 50%. Given the significant presence of Maruti in this market, the DCP had an effect on both intra-brand and inter-brand competition. The DCP eliminated intra-brand price competition amongst the dealers of Maruti which resulted in higher prices for customers. Further, the DCP also reduced pricing pressure on competitors who could factor in the minimum price of Maruti’s vehicles while pricing their own vehicles. As a consequence, the competitors’ prices were now higher than when such prices were determined competitively, thus lowering inter-brand competition as well. The reduction in competition results in higher prices for consumers across all brands. Hence, the DCP led to denial of benefits to consumers. In view of the above, the CCI in addition to imposing a penalty, ordered Maruti to cease and desist from indulging in such activities in future.
In this article, we will discuss the various factors considered by the CCI in its investigation such as what constitutes an agreement; the standard of evidence; determination of the relevant market; Appreciable Adverse Effect on Competition (“AAEC”); the role that intention (mens rea) plays; and penalty, in seriatim below.
Nature of an “agreement” under the Act and the standard of evidence
The Maruti case reiterates the settled position with respect to the wide interpretation given to the term agreement contained in Section 2 (b) of the Act. Maruti argued that the dealership agreements were the only agreements between Maruti and its dealers. These agreements allowed the dealers to provide discounts as per their own will. Further, these dealership agreements did not authorise Maruti to penalise the dealers for offering discounts beyond the prescribed limit. The CCI observed that an agreement under the Act may not necessarily be in a written or formal form. Rather, any arrangement or understanding or action in concert, even in tacit and informal form will be considered an agreement. As such, upon review of the e-mails that Maruti sent to its dealerships prescribing, maximum discounts; need for approval to provide discounts beyond the prescribed limit; and penalty for non-adherence, the CCI concluded that such communication amounted to an agreement under the Act.
As such, the CCI did not confine its investigation to the contractual agreements between Maruti and its dealers and instead looked at the actual conduct of Maruti to see any anti-competitive conduct.
Interestingly, Maruti also argued that even if an agreement imposing DCP existed, Maruti was only an independent third party enforcing the DCP on behalf of the dealers. CCI while rejecting this argument highlighted that (a) every discount by the dealers beyond the prescribed limit had to be permitted by Maruti; (b) Maruti issued threats of penalty and stoppage of supply for violation of DCP which would not be done if it were an independent third party and since supply of vehicles is the prerogative of Maruti, any threat to stop the supplies can only be from Maruti and not the dealers; and (c) Maruti directed the manner and place of deposition of penalty. This shows that the CCI looked beyond the written agreements and analysed which entity was in a position to actually enforce such an agreement and to whom did the benefit accrue.
Determination of relevant market
The CCI for determining the effect of the discount control policy on competition, assessed the market in which Maruti operates. The relevant market was defined as the market for “passenger vehicles” and the CCI observed that the anti-competitive impact of Maruti’s conduct is reinforced by the fact that it is a significant player with a market share of approximately 50%.
It can be inferred from CCI’s decisional practice that competition analysis in the automobile industry is conducted with respect to different segments such as commercial four-wheeler segment, passenger four-wheeler segment or two-wheeler segment etc., as all of these constitute independent relevant markets. Thus, it can be said that in the context of the automobile industry, the relevant market determination is done narrowly given that the products are clearly separate and distinct and hence not substitutable.
It is interesting to note, that in its orders reviewing combinations the CCI has noted that the relevant markets can be further divided into sub segments. In approving the Mahindra and Ford combination, the CCI noted that passenger vehicles can be broadly classified into passenger cars and utility vehicles. Each of this category can be further sub-segmented based on size, dimension, price and utility of the vehicles.
However, so far, the CCI has not indulged in such sub-segmentation of the market for passenger vehicles in assessing violations of Section 3 and 4 of the Act.
Determination of AAEC
Once the existence of a vertical agreement is established in a given relevant market, the CCI undertakes an analysis of the effect of such an agreement based on the factors contained in Section 19(3) of the Act. Section 19(3) provides six-factors for the analysis of the effect of an agreement. While CCI in a host of cases has analysed all or majority of the factors mentioned and has even observed in one of the cases that it is prudent to examine all the factors to arrive at a net impact on competition, in the Maruti case, it has followed a literal interpretation of the Act which gives the CCI discretion to analyse ‘all or any’ of the factors for a determination of AAEC.
It is interesting to note that the CCI did not undertake an analysis of all the factors in concluding that the RPM by Maruti resulted in an AAEC. Moreover, it only relied on denial of consumer benefit, in the form of higher prices being charged due to the effect of the agreement on intra-brand and inter brand competition, as a factor to conclude AAEC.
Thus, it can safely be stated, that the CCI while undertaking an effect analysis of an anti-competitive agreement does not necessarily look at all or even a majority of factors and may even rely upon one of them to determine the AAEC.
Relevance of motive or means rea of the violator of competition law
Maruti argued that it does not benefit by enforcing the DCP and as such it does not have any motive to engage in this practice. The sale of vehicles is largely unaffected by this and at the most, the direct effect is only on dealers. Once Maruti supplies the vehicle to the dealer, the title of the vehicle passes to the dealer. Therefore, there cannot be any significant motive for Maruti to indulge in RPM.
The CCI in this regard noted that by controlling the dealers’ margin, inter-brand competition softens due to ease of monitoring of retail prices by the competitors. This provides the manufacturer more liberty to regulate its own margin freely. Thus, RPM lowers the pressure on the margin of manufacturer. Hence, Maruti may have a motive to indulge in RPM through DCP. Nevertheless, the CCI concluded that motive or men rea of the alleged violator of competition law is of no value or significance.
The CCI typically does not undertake an analysis of the motive of the alleged violator while arriving at a conclusion of an anti-competitive conduct and the observation in the Maruti case echoes the spirit of the Act as it does not indicate an element of knowledge or intention on the part of the violator as a necessary factor for attributing liability. While there hasn’t been a lot of discussion on this aspect in the context of Section 3 of the Act, previously, the Hon’ble Supreme Court of India in Thomas Cook observed that since imposition of penalty for failure to notify a combination does not require such failure to be wilful under the Act, the requirement of mens rea cannot be brought in. Drawing inference from this, we can safely state that intention or motive are not attributes required to be considered by the CCI, under the Act.
Assessment of penalty amount
Section 27(b) of the Act empowers the CCI to impose a monetary penalty of up to 10 % of the average turnover of the entity for the last three preceding financial years for contravening the provisions of Sections 3 and 4.
As such, having established an agreement in contravention of Section 3(4) of the Act, the CCI imposed a penalty of INR 200 crore on Maruti. However, the penalty was imposed without providing any basis for arriving at the determination of the penalty amount. Neither does the CCI order advert to the financials of Maruti nor does it refer to other mitigating or aggravating factors. Further, it inexplicably suggested that it took a considerate view in light of the nature of infringing conduct and the post-pandemic recovery phase of automobile sector in not imposing the maximum penalty amount permissible under the Act.
This approach of the CCI in imposing penalty in the manner described above, points towards arbitrariness and is not in line with its otherwise reasoned order.
The Maruti case is an addition to the long list of orders of the CCI that can help deduce that automobile sector is one of the key sectors that the CCI is investigating. The CCI in the case of Shamsher Kataria penalised a large number of Original Equipment Manufacturer(s) (“OEM(s)”) for vertical restraints in the nature of exclusive supply and distribution agreements, refusal to deal as well as abuse of dominance. Further, the CCI for the first time in the case of Hyundai, dealt substantively with the issue of RPM. In the said case, the OEM implemented a DCP similar to Maruti, and also indulged in tie-in arrangements. Further, an investigation has recently been ordered into the practices of Tata Motors in the context of exclusive distribution agreement and abuse of dominance.
Additionally, there are instances of the CCI’s investigation in automotive sector based on lesser penalty applications in terms of Section 46 the Act and CCI (Lesser Penalty) Regulations, 2009, disclosing the existence of a cartel, which shows that CCI is actively scrutinising violations in this sector, thereby motivating the contraveners to benefit from penalty reductions, as much as possible, under the leniency regime. In one such case, CCI found NSK Limited and JTEKT Corporation and their Indian subsidiaries to be indulging in cartelisation in the electric power steering systems market. In another case, Schaeffler India Limited and National Engineering Industries Limited filed lesser penalty applications disclosing a price fixing cartel for automotive bearings..
There are also cases, especially in the two-wheeler segment such as Yamaha, wherein the CCI has held manufacturers of scooters and motorcycles, not to be dominant in their respective relevant markets due to the existence of well entrenched inter-brand competition from a large number of players. Therefore, in the absence of significant market power, the CCI did not indulge in an effects analysis for the determination of AAEC. However, with fast-changing market dynamics, in future, it may not be surprising to find a two-wheeler manufacturer to be dominant in its relevant market.
The above cases demonstrate how automobile sector is susceptible to anti-competitive conduct unilaterally as well as by way of collusion. In view of the above, entities in the automobile or its related industries should be cautious of their conduct and undertake competition compliance programs and increase their awareness of competition law in order to weed out any anti-competitive practices and prevent inadvertent violation of the Act.
[The authors are Partner, Joint Partner and Associate, respectively, in Competition Law practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]
Combinations refers to acquisitions, mergers and amalgamations which require approval of the CCI for consummation.