CCI introduces Leniency “Plus” regime in India- Will it suffice?
India’s leading car brand, Maruti Suzuki, was found guilty of unfairly controlling freedom of its dealers to give discounts on cars sold thereby controlling the resale price of its cars.
The Competition Commission of India (CCI) vide its order dated 23.8.2021 imposed a penalty of INR 200 Crore on Maruti Suzuki India Limited (MSIL) for the imposition of a Discount Control Policy (DCP) amounting to resale price maintenance (RPM) . The CCI’s inquiry concluded that MSIL not only imposed a DCP but also monitored the same by appointing Mystery Shopping Agencies (MSAs) and enforced the same through the imposition of penalties resulting in an appreciable adverse effect on competition (AAEC) within India, in contravention of Section 3(4)(e) read with Section 3(1) of the Competition Act, 2002 (Act) .
Background
Readers will recall that I had reported on the investigation into MSIL’s conduct directed by CCI in July 2019 was the second case of RPM in India after the Hyundai case . Investigation was directed against MSIL, on the receipt of an anonymous email dated 17 November 2017 from an alleged MSIL dealer in West -2 region (Maharashtra State region other than Mumbai and Goa.) It was alleged that as per MSIL’s DCP, dealers in the West-2 region (Maharashtra State other than Mumbai and Goa) were restricted from giving discounts beyond what is prescribed by MSIL. It was also alleged that if a dealer was found giving extra discounts, a penalty is levied upon the dealer.
DG’s findings
The DG concluded that (i) MSIL is a manufacturer dealing in the upstream market whereas dealers are distributors dealing in the downstream market. Hence, an agreement between MSIL and its dealers can be examined under Section 3(4) of the Act; (ii) Documentary evidence in the form of emails from August 2012 to July 2019 reveals that MSIL indulged in resale price maintenance through the implementation of its DCP on its dealers across India; (iii) The DCP lowered inter-brand and intra-brand competition and prevented products being offered at the best products to customers; (iv) In the upstream market, i.e., the passenger vehicles segment (which comprises passenger cars, utility vehicles and vans), MSIL had the highest market share in FY 2018–19, i.e., 51.22%, the second largest being 16.14% of Hyundai Motor India Ltd. Further, the DG found that MSIL’s market share had shown a consistently growing trend from 2011–12 onwards. Thus, such a practice by MSIL is in contravention of Section 3(4)(e) of the Act.
Maruti’s response & CCI decision
Firstly, MSIL argued that the dealership agreement that it executes with its dealers is the only agreement that MSIL has with its dealers. In terms of the dealership agreement, there is no provision to restrict discounts, and that the dealership agreement vide clause 28.1 specifically permits dealers to provide discounts as they deem fit.
CCI rejected this argument and held that the definition of ‘agreement’ in terms of Section 2(b) of the Act is very broad and covers all possible agreements/arrangements and understanding in written as well as tacit and informal form. It was also observed that an agreement to control discounts may also exist dehors the dealership agreement entered into in writing between the parties. Thereafter, from the emails exchanged between MSIL and its dealers, the CCI held that there exists an agreement between them to control discounts.
Secondly, MSIL argued that it had no role in formulating the DCP, except to enforce the same on behalf of its dealers as an independent third-party.
However, the CCI rejected this argument and held that the very act of MSIL monitoring and controlling the discounts by issuance of threats of penalties etc. with or without the active participation of the dealers, tantamount to indulgence of RPM by MSIL. It was also observed that errant dealers were threatened with the stoppage of supplies. The CCI further concluded MSIL’s active role in the imposition of the DCP from the fact that stoppage of supplies can only be done by MSIL.
Upon establishing an agreement in terms of Section 3(4) of the Act, the CCI undertook an analysis of whether the agreement resulted in AAEC in the market. The CCI observed that, ‘ RPM can prevent effective competition both at the intra-brand level as well as at the inter-brand level. 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.’ (Para. 45) It was, therefore, observed that the DCP impaired the ability of MSIL dealers to compete on prices, resulting in consumers paying higher prices for MSIL vehicles.
It was also observed that owing to MSIL’s significant market share, the imposition of RPM decreases the pricing pressure on competing manufacturers, which impacts competition in pricing across brands. Further, the CCI also observed that RPM as a practice by multiple manufacturers is conducive for monitoring tacit collusion amongst manufacturers.
from the extracted e-mails, it was observed that each and every discount offered by the dealers of MSIL over and above the customer offers of MSIL, had to be permitted by MSIL. If discount without prior approval was given, the imposition of a penalty was threatened. Further, analysis of the above e-mails showed that the DCP was not a limited evaluation and regulation by third party MSAs as claimed; rather, meetings on DCP were conducted by MSIL and it formulated policies wherein discounts were defined by way of limiting maximum discount allowed in cash or in terms of accessories, etc. The dealers were duly informed by MSIL that no discounts above the stated discounts are to be offered to consumers.
The CCI also rejected MSIL’s argument that RPM also has pro-competitive effects such as elimination of free riding. The CCI observed that the SOP and SPG put in place by MSIL for its dealers eliminate the free-riding problem, and that the elimination of price competition between dealers may not necessarily incentivize them to pass on the extra margins to consumers. It was also held that the improvement in complementary services provided by the dealer may not outweigh the anti-competitive harm caused to the market on account of the reduction in intra-brand competition.
Resultantly, CCI found, after a rule of reason analysis that MSIL’s conduct of controlling discount of the dealers amounted to anti-competitive agreement in the form RPM, which caused appreciable adverse effect on competition in India in the downstream market, in violation of Section 3(4) ( e) read with 3(1) of the Act. Consequently, CCI imposed a penalty of INR 200 crores only, considering the slow down of the automobile sector during the COVID-19 pandemic. COMMENT- The CCI order is well reasoned and based on sound legal analysis considering the plethora of incriminating evidence in the form of emails between MSIL sales department and the dealers across India. Appeal filed by MSIL challenging the order is pending before the appellate tribunal, the NCLAT and as per last reports, the impugned order has been stayed by NCLAT subject to deposit of 10% of the penalty amount. While the decision on merits is sub judice, the absence of any rationale on the determination of the amount of the penalty of Rs.200 Crores in the order, has led force to the demand for some guidance on penalty has remerged to avoid allegations of arbitrariness .
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