Principles of Competition Law That Every Business Needs to KnowAugust 30, 2022 By Shyam Parmar
Everyone is in the race of staying ahead of the curve. With the rising competition among businesses in the same niche, the need for a strong competitive law is necessary to keep things in order. Thankfully, India already has a law to maintain market competition and businesses too are taking it seriously and understanding every nook and corner of it from the top competition law firms in India. So, here we are with yet another guide to enlighten you about the Competition Law in India.
Business Competition and Its Two Sides
We all are always competing with someone or something. It can be either on a professional front like designation, status, rank, price, quality, sales, location, marketing, or on a personal note like time, relation, possession, money, etc. Although it is said that competition is good, did you know, there are two sides to it? Yes, competition also has its dark side, and to maintain the balance between positive and negative competition, we have a law called - Competition Law.
Competition is indeed an inevitable part of the business world for businesses of any size but it can turn negative or positive depending on the emotion one feels regarding it. Like if one becomes obsessed and wants to win at any cost, it becomes negative competition which is bad while if one competes intending to improve oneself, stay motivated, spark creativity, and increase productivity and quality of work, it becomes a positive competition. Hence, it is up to us what we choose.
Types of Business Competition, its Advantages, and Disadvantages
Now, as far as business competition is considered, there are three types of it.
Where businesses sell the same product to the same audience and compete for the same potential market. Examples - Amazon, Flipkart, and Snapdeal. etc.
Where businesses competing not necessarily to sell the same products or services but satisfy the same customer need. Examples - Starbucks, McDonald's, Havmor, Pepsi, etc.
Where businesses offer a different product and have a different goal but use the same consumer resources. They can replace an existing product with an entirely new solution. For example - Smartphones are eliminating the need for calculators, calendars, radios, photo albums, etc.
With the rising rivalry among brands, the race to meet customers' demand exclusively and in a unique way, and due to the craving for attention to become a trend; the nature of competition among businesses today is becoming more and more negative which can cause the following disadvantages:
● Reduction in the business’s market share
● Pressure on business (a big risk for startups and small businesses)
● Work stress on employees due to increased pressure
● Health issues due to work pressure
● Business mismanagement
● Unnecessary expenditure to win the race
● Confused customers
On the other hand, if you take it as a healthy competition, you get the following advantages:
● Efficient workflow and employees
● Boost in constant business development
● Enhanced innovation and problem-solving skills
● Improved management
● Helps business find its competitive advantage
● Makes businesses serve customers better
So, that was all about competition and now let’s understand what laws we have to keep any kind of cut-throat competition among businesses in line, and what actions can be taken if anything goes out of hand.
What is Competition Law?
In the race to become the number one brand, businesses take competition so seriously that it imbalances the ecosystem of the market. Hence, to keep the law and order intact in the market, prevent any businesses from carrying out unfair trade practices by resorting to anti-competitive activities like abuse of dominance, cartels, etc., to control monopolies, and monitor the functioning of the market, Competition Law is enforced by the countries which is a set of rules designed to promote and sustain market competition.
Competition Law in India
Like other nations, India had its version of competition law known as the Monopolies and Restrictive Trade Practices Act 1969 (MRTP Act) based on principles of a “command and control” economy to limit the concentration of wealth in a few hands and limit monopolistic practices. But, after 40 years of abiding by it, the Indian government realized the need to make it more responsive to the economic realities of the nation and consistent with international practices. Therefore, on 6 August 2001, the Competition Act was introduced in Lok Sabha with an aim to inquire about the effect and extent of monopolistic and restrictive trade practices in important sectors of the Indian economy.
The Principles of Competition Law in India
The competition law in India came into force to serve various purposes such as to
● prevent anticompetitive practices.
● maintain and promote market competition,
● safeguard the interests of the consumers,
● ensure other participants enjoy the freedom of trade.
Now, in order to make the above-said purposes true and in action, the competition law in India contains the following elements together which make the law effective and beneficial.
1. Anti-competitive Agreements
As per Section 3(1) of the Companies Act, 2002, no individual or enterprise is allowed to enter into an agreement in respect of production, supply, distribution, storage, acquisition, or control of goods or provision of services, which can or is likely to cause an “appreciable adverse impact” on competition in India.
Further, Section 3(2) of the Act clearly states that the existence of any such agreement is considered illegal and the entire agreement is deemed void with the existence of anti-competitive clauses in it.
Here’s a list of stipulations under which an agreement would be considered to have an appreciable adverse impact:
● if it is directly or indirectly determining purchase or sale prices,
● if it is limiting or controlling production, supply, markets, technical development, investment, or provision of services,
● if it is directly or indirectly resulting in bid rigging or collusive bidding
● if it is sharing or diving into the market.
The Bill adds that if an enterprise or a person is not engaged in identical or similar businesses but actively participates in the furtherance of such agreements then they shall be considered to be part of such agreements.
Anti-competitive agreements are of two nature - Horizontal and Vertical. “Horizontal Agreement” means an agreement between/amongst competitors, each of which operates at the same level in the production or distribution chain. While "Vertical Agreement" is between enterprises or persons at different stages or levels of the manufacturing or distribution processes.
Now, under the Competition Act, horizontal agreements are preassumed to cause an appreciable adverse effect on competition (AAEC) in India. It does not mean that all alleged horizontal agreements are necessarily anti-competitive; they are per se illegal and the burden of proof will be on the defendant to prove that their agreement will not lead to AAEC and that the presumption is false.
On the other hand, for vertical agreements, the presumption does not apply. They are usually permitted unless it is established that they cause, or are likely to cause, an AAEC within India.
2. Abuse of Dominance
If an enterprise or an associated individual is in a dominant position means as specified in the Act, is in a position of strength enjoyed by an enterprise in the relevant Indian market, and is found to indulge in practices that are unfair or discriminatory; shall be considered an abuse of dominant position. And if found to be in abuse of its position, then they will be subjected to an investigation from the concerned authorities.
Under Section 4(2) of the Act the following actions are considered an abuse of a dominant position:
● Putting unfair or discriminatory terms or conditions on the sale or procurement of goods or services, directly or indirectly.
● Causing a reduction in the production of goods or services, or that of scientific or technological development in relation to those goods or services.
● Taking part in a practice that denies access to the market.
● Drawing conclusions to contracts based on acceptance by other parties of supplementary obligations which are not associated with the subject of such contact.
● Misusing one’s dominant position in one relevant market to protect or enter another relevant market.
The upper hand for determining the eligibility of any enterprise or group to enjoy a dominant position is vested with the Competition Commission of India (CCI) - a quasi-judicial body formed under the Companies Act for the administration of the Act, which considers several factors such as market share, size, and resources of the firm, market structure, etc. while establishing whether an enterprise is dominant or not.
3. Merger, Amalgamations, and Acquisitions Control
Under section 6(2) of the Companies Act, no person or enterprise is allowed to enter into a combination (i.e., acquisitions, mergers and amalgamations) that could result in an appreciable adverse effect on competition within the relevant Indian market. If anyone desires to do so, must obtain a notice requesting the same addressed to the Competition Commission of India.
Controlled by the government, it is a healthy way of promoting competition as it prevents big and successful companies from overpowering small businesses.
4. Competition Advocacy
Competition advocacy is a provision formed for the Central Government/State Government to avail the opinion of the CCI on the potential implications of the competition policy. It is a process of outreach to influence the economic behaviour of enterprises, extract support for adhering to the principles of competition and convince stakeholders about the innate advantages of fair competition. The Act also authorizes the CCI to adopt suitable measures for the promotion of competition culture and impart training for competition awareness.
Other than these, the competition law in India has certain powers through which it ensures that commercial competition is practised healthily. The Commission is empowered to
- impose a monetary penalty for providing unfurnished information about combinations,
- hold guilty any individual or enterprise found to be responsible for the actions that lead to the contravention of the Act,
- inquire into any cartel and abuse of its position by a dominant enterprise,
- provide a leniency provision to incentivize any cartel members who choose to share the information and cooperate with the Commission,
- punish or impose a penalty upon any person/enterprise who fails to comply with the orders or directions of the Commission
The Evolution of Competition Law in India
Since the formation of The Competition Act, 2002 (“Competition Act”), several amendments have taken place to help businesses keep up with the changing market. In fact, recently The Competition (Amendment) Bill, 2022 was introduced in Loksabha seeking approval for amendments such as;
● addition of a settlement framework,
● reduction in the timeframe for combination approvals and incentivisation for parties to reveal information in cartel probes
● incorporating provisions for having 'value of transaction' as a criterion for notifying combinations to the Competition Commission of India (CCI).
Competition law is important and it is the lack of knowledge regarding it that is causing many businesses to become victims of negative competition. Misusing the power of dominance, many startups and small businesses often get crushed by huge brands which is in fact a punishable offence under the Competition Act which only an experienced competition law firm in India like Parker and Parker Co. LLP can explain in detail.
So, get in touch the moment you suspect a competitor, supplier, customer or any business engaging in an anti-competitive activity or file a complaint directly to the Competition Commission of India formally by filing information under section 19 (1) (a) or by providing miscellaneous information using the feedback section or the miscellaneous information tab on the Commission Website at http://www.cci.gov.in/feedback.