MSMEs and Competition Law: A way forward

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The Micro, Small and Medium Enterprises (MSME) sector is the backbone of any economy and has the potential to generate employment across all sectors of the economy with limited capital and technology. It is estimated that India’s 63 million MSMEs contribute over 30% of India’s GDP and 45% of India’s of exports, while employing around 111 million people. MSME entrepreneurs are not only job creators but also drive economic activities across the value chain^[1].

To promote the growth of Micro, Small and Medium enterprises, the Ministry of Micro, Small and Medium Enterprises has formed National Small Industries Corporation (NSIC), which is a government of India enterprise providing support services such as marketing, finance, technology, and other services. NSIC also facilitates various schemes to enhance the competitiveness of these enterprises. Certain categories of wholesale and retail trades by MSMEs have been excluded from the requirement of pre-registration of Udyog Aadhar registration under the MSMED Act, 2006.  

Importance of Competition law for MSMEs

MSMEs by virtue of their size are vulnerable to market abuses by larger enterprises enjoying greater market power. Market abuses could either be in the form of strategies to eliminate smaller competitors from the market or creating unfair conditions/prices imposed by a dominant buyer or a supplier. Further, they may also fall victim to offences such as cartelization. For instance, cartelization between large producers of raw materials such as steel, cement etc could affect the prices and/or supplies of inputs required by MSMEs. In addition, in the absence of adequate knowledge about the prevailing laws, including the competition law, makes MSMEs are vulnerable to abuse of dominance by either the large suppliers of inputs or large customers/buyers.

Competition Act, 2002 lists down four overarching objectives it strives to achieve that is “to prevent practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in markets“[2]

Competition law in India does not carve out any exemption for MSMEs. Being a new law with severe consequences for breach , this makes MSMEs vulnerable . The application of the Competition Act is size neutral i.e., the turnover of the enterprise or the investment made in the plant and machinery is not a relevant factor for the application of Section 3 of the Act, dealing with anti-competitive agreements including cartels and bid rigging etc.

Section 4 of the Act prohibits abuse of dominant position but having a dominant position in the market by itself is not prohibited.[3] Abuse of dominance takes several forms like imposing unfair and/or discriminatory terms, price discrimination, margin squeezing and predatory pricing , denial of market access to new players etc.  However, before establishing abuse it is necessary to establish dominance. Enterprises practicing the said conducts but not having a dominant position in the market do not face the competition scrutiny. It is very rare to come across instances where a MSME would be a dominant player in the relevant market and hence it is very unlikely that MSMEs would be found guilty of abusing their dominant position.

One of the primary objectives of a competition agency is to prohibit cartels since they injure customers by raising prices and restricting supply, thus making goods and services completely unavailable to some purchasers and unnecessarily expensive for others.

MSMEs face stiff competition from big players and margin for error in their business activity becomes minimum and therefore the survival of MSMEs becomes critical when big players start abusing their prevalent market position. It is observed that MSMEs working together have a thin line to cross which may place them as indulging in anti–competitive formation of cartel. The same can be construed for their existence in the market.

However, keeping in mind, the policy and practices governing MSMEs, the role of competition law cannot be diffused. Therefore, the relation between MSMEs and competition law is indispensable.

Are MSMEs prone to cartelization?

In recent times it has been observed that since there is no exception for MSMEs in the Competition Act, 2002, various cartel cases are being filed before the Competition Commission of India (CCI) wherein Ministries/Government Departments/PSUs have, reportedly and as alleged, been suffering from bid–rigging at the hands of the MSMEs due to collusive bidding in Public Procurement Tenders. The government’s mandatory requirement of at least 25% of procurement from MSEs may further enhance the chances of MSEs indulging in cooperative behaviour bordering on cartelisation.

Possible reasons for Cooperation between MSME’s 

Stiff Competition to Large Firms: When these MSMEs cooperate or work together, they become larger than before by increasing productivity, pooling marketing skills and qualified employees, etc. They become better placed to compete in the market, which would otherwise have been difficult.

Increases Efficiency: MSMEs are small–scale industries with basic machinery and plants; by cooperating, they can efficiently use the resources and reduce the investment, which further increases the productivity and efficiency of the firms.

Uniform Distribution of Resources: Due to cooperation between MSMEs, it is usually observed that the procurement process is uniformly distributed among MSMEs, wherein they divide the tender either geographically, on a rotation basis, etc. They mutually agree, and therefore, all the companies survive.

Adverse effects of allowing co-operation among MSMEs

Restricts Entry of New Players The most common trend that can be observed in cases of cooperation between MSME players is that new players, whether MSME or not, are restricted from entering the market, unless the new player becomes part of the cooperation between the MSMEs.

Price Inflation The agreement/cooperation between MSMEs causes the inflation of prices, especially when there are few or no other players in the market. In such circumstances, the MSMEs may collude to increase the prices of the product, forcing the buyer to succumb and procure the product at the given rate, causing losses to the buyer.

Bid Rigging The cooperation between MSMEs are not always lucid, as it can be in regard to the restriction of supply of products, sharing of markets in regard to geographical areas, refusing to negotiate, etc., which are the methods used to rig the bidding process of procurers.

Based on the above analysis, it can be noted that every country has dealt with the issue of MSMEs primarily without a blanket exemption but from case to case depending on the character of such cooperation among the MSMEs. Countries with mature competition law jurisprudence have taken a balanced approach between the protection of small and medium enterprises, the developmental needs and anti-trust violations. Now considering the importance of MSME sector in Indian economy and government’s efforts to protect and promote MSME sector along with the preamble of the Competition law to promote it is the need of an hour that government should formulate and come up with some regulatory scheme in line with the practice followed by the countries with matured competition law jurisprudence.

An analysis through orders of the CCI w.r.t MSMEs

MSMEs as Victims:

In the Auto Parts case[4] the CCI held 14 car companies liable for abusing their dominant position in the relevant market of supply of spare parts and imposed a hefty amount of penalty amounting to INR 2544.65 Crores. OEMs  were found to be indulging in restrictive trade practices by not providing their original spare parts in the open market and also did not furnish other relevant information related to tools and technology required for carrying out repair. Therefore, it led to the denial of market access to the independent repairers, who are operating in the open market of servicing and spare parts.

In re:  Faridabad Industries Association (FIA)  v. M/s Adani Gas Limited[5] CCI found that that small firms are sometimes served with unconscionable terms and their position compels them to accept the adversarial offers as they don’t have option other than dealing with the dominant player. Moreover, in case of non-performance MSMEs are often subject to various unreasonable penalty clauses but the same high penalty clauses do not apply to the dominant player. Due to lack of bargaining power MSMEs in the downstream market left with no alternative other than accepting one sided terms of the contract viz unreasonably high prices, tie-in, bundling and to maintain minimum retail price.

 MSMEs as Perpetrators

Generally, MSMEs may not be able to abuse its position due its small size. However, there are instances whereby large number of MSMEs collectively created a dominant position and after attaining dominance they exploit their customers.

A common defence often raised is that MSME cartels are indispensable and help them to compete with larger enterprises. This has also been found by CCI in its 2018 study. CCI found that “majority of the infringement findings of the CCI reveal certain striking characteristics that may be common across transitional economies: (i) an extremely strong trade association forms the fulcrum of the cartel; (ii) the participants of these association are often small or micro enterprises or individuals with a low business turnover; and (iii) these participants operate in the informal sector, with a high degree of self-regulation. The association culture in large number of cases may be an attempt at increasing bargaining power and creating a collective insurance policy by small, unsophisticated service providers”.[6]

Another anti-competitive practice that the MSMEs have been following is bid rigging. Bid rigging is a main concern for government departments which procure goods and services from the non- state enterprises. Bid-rigging is treated seriously under the Competition Act, 2002, and it can be said that it is illegal per se, for there cannot be any efficiency justifications for bid-rigging.

CCI soft glove treatment to cartels by MSMEs during the COVID 19

Based on the trends shown by the CCI in imposing monetary penalty on the MSMEs, CCI can certainly be credited in starting a new trend of going soft on the so-called naïve cartels[7], particularly, comprising of MSMEs during the ongoing COVID -19 pandemic. The trend is clearly visible from the recent orders described above wherein despite finding sufficient direct and circumstantial evidence of bid rigging/cartelization, CCI imposed nil or token penalty. This marks the beginning of the understanding of market and business realities by the Commission which needs to be applauded.

MSMEs and Competition law: The way forward

MSMEs Sector accounts to 37.5% of the GDP of India.[8] It is very imperative to support and promote the MSMEs notably viewing the repercussion of the COVID-19. The objective of the Competition Act is to promote the economy and maintain healthy competitions, the same cannot be achieved by imposing penalties on the MSMEs. However, it is not viable to say that a blanket exemption may be granted to all MSMEs. There is exigency of centric approach wherein MSMEs should be granted exemption in certain cases as they are not well established to sustain the competition at par with big players of the market.

At the very outset, the Commission need to deal with the status of the MSMEs in accordance with the Competition Act,2002. The Competition Act does not define MSMEs, and it goes with the definition of MSMEs entailed under MSMED Act, 2006. The analysis of the cases above shows that MSMEs are majorly involved in the conduct under the ambit of Section 3 involving cartelization and bid rigging. It would to be dismayed to make them liable for cartelisation since the government itself vide its policies is encouraging them to persuade cooperation among MSMEs through NSIC.

The CCI also need to take cognizance of the fact that a large no of MSMEs is still oblivious about the Competition Act,2002 and there is lack of awareness with respect to ensuring compliances of their internal rules and operating procedures. There is a dire need of advocacy programmes to make them aware of the Competition Act,2002. Further these MSMEs are also financial constrained to afford competition lawyers or advisors. The CCI needs to take necessary steps, so that it is viable for them to participate in Competition law proceedings.

A reasonable interference can be drawn from countries including Germany and EU. In Germany the cartelisation practised by the Small and Medium Sized Enterprises (SMEs) is not actionable if it has insignificant effect on the market and the object of such cartel is to maintain economic activities. Moreover, in EU it considers a conjuction of 5% of market share and EUR 40 million as a threshold for agreements having negligible effect on competition.

Though CCI have been lenient on the MSME’s during the Covid-19 Pandemic but is need of the hour that CCI should step in and promote Competition Advocacy among MSMEs and come up with some regulation regarding the exemption of De-Minimis Cartels if they have an inconsequential effect on the market in line with EU.

A close analysis of foreign regimes suggests CCI should go with case-to-case approach, wherein the cooperation agreements with the objective of promoting the efficiency of MSMEs may be exempted. The Competition Act, 2002 may be amended to provide exemption on a case-to-case approach considering the factors such as combined market share of MSMEs, the status of the MSMEs as against other competitors except where it is apparent that the objective is to eliminate the competition and to inflate the prices.

[1] https://timesofindia.indiatimes.com/business/india-business/gig-jobs-green-jobs-/articleshow/96835428.cms

** The Author is a competition lawyer based in New Delhi and heads the practice in Vaish Associates Advocates, a Law Firm based in Delhi, Mumbai & Bangalore. He was the former Additional Registrar in Competition Commission of India. Views are personal. He may be contacted at mmsharma@vaishlaw.com.  Mr Sudhanshu Prakash Singh , Associate,  assisted Mr Sharma in drafting this article .

[2] Competition Act 2002, Preamble.

[3] Section 4, Competition Act,2002.

[4] Order dated- 25.08.2014, Case No. 03/2011 Competition Commission of India

[5] Ibid.

[6] CCI (2018)

[7] “Naïve cartels” are cartels whose members do not attempt to conceal their activity, either because they are unaware that their conduct is unlawful or because they are not sufficiently sophisticated to do so. In the case of naïve cartels direct evidence is relatively plentiful, rendering circumstantial evidence less important[1]. Naïve cartels are much more common in developing countries and others that have not been active in prosecuting the conduct. Such cartels probably do not deserve to be sanctioned heavily, especially if their members cooperate with an investigation and immediately cease their prohibited conduct

[8] Micro, Small, and Medium Enterprises in India – An Explainer – India Briefing News, , https://www.india- briefing.com/news/micro-small-medium-enterprises-india-explainer-17887.html/