Ramdev Wants Black Money, Competition Law Wants a Fair Economy

Article for Blog Post Writing Competition 2011 | by Victor Das


June 7th, 201110:00 pm


“While the law of competition may be hard for the individual, it is the best for the human race because it ensures the survival of the fittest in every department.”

-Andrew Carnegie, American industrialist.

Introduction

Once upon a time, in 1879, in a country we know today as the United States of America, certain unique economic conditions existed. It was a free economy, with minimal governmental interference except for a few stipulations. One of these was the prohibition of corporations owning stock or having any interest or linkage with other corporations. An upcoming attorney called C.T. Dodd of the iconic Standard Oil Company founded by John D. Rockefeller, hit upon an idea that was innovative as well as brazen. He devised a new form of trust agreement to overcome such prohibitions. A trust is a centuries-old form of a contract whereby one party entrusts its property to a second party. The property is then used to benefit the first party. (Defined by the Merriam Webster Collegiate Dictionary, 10th ed., 1998)

competition commission of india-logoIn 1882, they combined their disparate companies, spread across dozens of states, under a single group of trustees. By a secret agreement, the existing thirty-seven stockholders conveyed their shares “in trust” to nine trustees, prominent among whom was John D. Rockefeller. This trust agreement enabled the stockholders to engage in agreements which were clandestine in nature, with the single aim of turning Standard Oil into the leviathan of the U.S. oil production and refining industry. Needless to say, the idea was wildly successful, resulting in the adoption of similar frameworks in other industry segments as well.

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

-Adam Smith

What was harmful about this whole operation, you may ask? The answer to that lies in the results that followed. Standard Oil through agreements with other companies in the fields of transport, infrastructure, spare parts etc. managed to obtain for itself favours or concessions which its rivals could not obtain. For example, a rival oil association tried to build an oil pipeline to overcome Standard’s virtual boycott of its competitors. In response, the railroad company at Rockefeller’s direction denied the association permission to run the pipeline across railway land. In 1868, the Lake Shore Railroad, a part of the New York Central, gave Rockefeller’s firm a freight rate of one cent a gallon or forty-two cents a barrel, an effective 71% discount off of its listed rates in return for a promise to ship at least 60 carloads of oil daily and to handle the loading and unloading on its own. This, coupled with the shutting out of other potential rivals in the oil industry by Standard Oil aggregating all the major companies in a trust, resulted in any other company not getting such favourable operating conditions which naturally enabled Standard Oil to offer its wares at rock-bottom prices which its competitors could not keep up with. The consumer naturally began preferring Standard Oil as the law of demand, intrinsic to economic theory worked in its full glory.

Naturally, such actions though legal at that point of time, could not be allowed to continue as they were flagrant violations of the spirit of market freedom. John Rockefeller’s nemesis would turn out to another John, Mr. John Sherman, the senator from Ohio who was instrumental in getting the first U.S. anti-monopoly law named the Sherman Antitrust Act, passed. It restrained any contract or agreement in the nature of a combination or trust which acted in restraint of trade (section 1 of the Sherman Act, 1890). Further, any instance of monopoly, intentionally created by a person in any industry or industries, with or without the involvement of other persons was also outlawed (section 1 of the Sherman Act, 1890).Subsequently, more laws on competition like the Clayton Act followed in the U.S. and the world. Nowadays, almost every country has its own national competition law with the United Nations Commission on Trade and Development (UNCTAD) and the Organisation for Economic Development (OECD) emerging as international agencies for competition law.

Competition Law in India: MRTP, Competition Act, 2002 and beyond

Currently, the Competition Act, 2002 is the go-to statute to deal with matters related to competition on India. It was enacted to replace the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969. With the passing of the Competition Act, the MRTP Act stands repealed (no longer in use).

Reasons for Enactment of the Competition Act, 2002

The MRTP Act, 1969 was enacted in the spirit of Articles 38 and 39 of the Constitution of India, which aimed at the State securing welfare of the citizens of India and justice- social, economic and political. Over time, it was noticed that the MRTP Act did not contain provisions to deal with economic offences such as:-

1. Abuse of DominanceA process where an enterprise, which has come to enjoy the largest share of the market pie in a particular segment, such that it is in a dominant position, uses such dominant position to exclude competitors from the market. E.g., if Amul and Mother Dairy merge tomorrow with the intention to control the packaged milk and dairy business in India and use their capital resources to nullify competition.

2. CartelsAn agreement between various companies engaged in the same business, to fix prices of goods, supply chain mechanisms or demarcate territories unto themselves. This is anti-competitive as in the absence of such an agreement, the various competitors would be trying to capture the largest share of the market pie. Examples include the vitamins cartel in the USA in the 1990s.

3.Boycotts and Refusal to deal When a new company enters a market, the other established companies may refuse to deal with the new company in order to retain their hegemony and prevent new competition from entering the market. E.g., if Micromax, Nokia and Sony Ericsson reach an agreement not to deal in any manner or accord recognition in any manner to Karbonn Mobiles in order to hinder the business of Karbonn, it shall fall into the category of refusal to deal.

Another very significant reason for the repeal of the MRTP Act was that it vested no jurisdiction of quasi-judicial nature on the MRTP Commission, the quasi judicial body set up by the Act. This became a hindrance after 1991, when the economy was opened up to foreign investment and involvement. Effectively, this meant that if Cadbury Inc., headquartered outside India, committed an act through any Indian intermediary which was illegal as per the MRTP Act, no action could be taken against Cadbury as the ambit of the MRTP Act did not extend to such foreign companies. This has been remedied by Section 32 of the Competition Act, 2002 which clearly says that the provisions of the Act are applicable even if the offending company or offender person is outside India or any such act taking place outside India has, or is likely to have, an appreciable adverse effect on competition in the relevant market in India. (Section 32- Acts taking place outside India but having an effect on competition in India)

Some relevant concepts and provisions of the Act of 2002 are set out below:-

1. CARTELS– Defined in Section 2(c)- “cartel” includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services.

2. ANTI-COMPETITIVE CONDUCT– This is the core concept of the Act. Anti-competitive conduct is barred under the Act (Section 3(1) ) and any act which “causes or is likely to cause an appreciable adverse effect on competition within India.” (Section 3(1)). Such conduct may include determination of prices (Section 3(a)), limitation of supply (Section 3(b)) etc.

3. ABUSE OF DOMINANT POSITION– The concept has been explained above. In Indian law, holding a dominant position is not illegal but abusing that dominant position is. Acts amounting to abuse of dominant position would include price discrimination between consumers (charging different prices for the same product from different consumers), denial of market access by an existing company to a new entrant etc.

Conclusion

Competition law is applicable not only in highbrow questions on economic theory, but also in daily life. The examples are multifarious. Is your school directing you to buy textbooks from a particular shop? This is an anti-competitive agreement. Does your local milk supplier shop stipulate that along with your monthly supply of milk, you have to buy a certain quantity of ghee (clarified butter) in order to enjoy the services? This is a tie-in arrangement, illegal under law. (Proviso (a), Explanation to Section 3(4) of the Act). Hence, the applicability of competition law is everywhere and increasing awareness of the laws can only take this law further.

Image courtesy -www.cci.gov.in

Article by –

Victor Das

4th Year student, Dr. Ram Manohar Lohiya National Law University, Lucknow.

[Submitted as an entry for the MightyLaws.in Blog Post Writing Competition, 2011

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