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by Amar Singh & Ayush Pratap
ABSTRACT
Correction of Market failures in India has been a big issue. It is not just the correction which is important, timely and efficient correction is as important if not more. In order to make this a reality and talking specifically with respect to competition law, different jurisdictions such as Singapore, U.K. etc have introduced settlement mechanisms varying in their framework and way of functioning. However, India has not introduced any such settlement mechanism for their competition law sector. This is surprising since India has a huge backlog of cases and there is a big problem of realisation of penalties if we look specifically into the competition law sector. If there was any more proof needed, the authors shall also provide a law and economics analysis which will further strengthen the need for a settlement mechanism. Finally, the authors analyse deferred prosecution agreements and suggest it as a form of settlement mechanism which could work well in the Indian competition law scenario if implemented properly.
The Indian Settlement Regime And Its Underlying Issue
Market Failure vis a vis Competition Law
Market failure can be defined as the failure of a particular market to deliver an optimal result.[1] It can also be summarised as an economic situation where there is an inefficient distribution of goods and services in the free market arena. A market failure arises when a firm performs anti-competitive activities such as predatory pricing, abuse of dominant position. The firm may even establish monopoly power and thus be able to fix the prices of a product at a very high rate. The telecom sector is an example of a market failure wherein Jio with the financial backing of Reliance entered the telecom market and engaged in predatory pricing. This led to a market failure as the other telecom companies suffered huge losses and it became nigh on impossible for them to recover. When a market failure situation arises, the individual incentives for rational behaviour do not lead to rational outcomes for a particular group,[2] which is exactly what happened in the telecom sector. There is a reduction of welfare that could have been created given the available resources if the market had not failed. The task then is to correct this failure.[3]
Competition law adds a new dynamic to this market failure situation. In new age markets, for instance digital platforms, the speed of market dynamics may warrant a swift correction. The ability to correct a given market failure defines the efficacy of the intervention in many cases.[4]
The underlying issue with correcting Market Failure in India
Competition law, 2002 provides for a remedy in relation to competition distortions. This remedy can be explained in two parts. Firstly, time taken to correct a situation of market failure. An annual report by the Competition Commission of India (“CCI”) in 2018-2019 found that out of cases between 2011-2019, penalties were realised only in 0.4 % cases i.e. approximately 4 cases out of 1000.[5] This is in contrast with the dynamic nature of competition law. Secondly, efficacy of remedy including penalties. It takes 1-5 years on an average for an investigation by CCI to be conducted. The cases then may be further appealed to either the NCLAT or the Supreme Court. According to a report, 35 % orders are appealed.[6] Therefore it becomes important to address this issue and form a structured settlement mechanism for better time management.
Precedents in favour of a Settlement Mechanism
Settlement mechanisms in India have been used in two cases. The Securities and Exchange Board of India (“SEBI”) introduced the SEBI Settlement Regulation 2014 under the SEBI Act, 1992 in which the party had to make a payment of fees without the admission of guilt.[7] The other instance was when an Income Tax Settlement Commission was formed in 1976 under the Income Tax Act, 1961 and Wealth Tax Act, 1957 which basically stated that this settlement commission could be approached at any point of the investigation.[8] Further the decision of the commission would be conclusive and no appeal would lie to any order passed by the commission.
Comparative Study With Other Jurisdictions
Singapore
Competition and Consumer Commission Singapore (“CCCS”) is the responsible body for enforcement of antitrust law in Singapore. In 2019, we have seen the CCCS settle cases and not proceed with the investigation into allegations of anti-competitive behavior based on voluntary commitment from the parties involved. This very recently happened in the ‘refusal to deal’ case of Chevalier Singapore Holdings Pte. Ltd and Fujitec Singapore Corporation Ltd.[9]In the Indian context, CCI can use this approach in absence of any particular statutory provision and rely on voluntary commitments from parties involved to close investigations.
Germany
The Federal Cartel Office (“FCO”) is the responsible body for Competition Enforcement in Germany. In December of 2013, they had published an explanatory note[10] relating to settlement proceedings in competition cases on its official website. Since 2007, The FCO had started terminating cases through settlements in 2007 but came up with the note in 2013. A number of general principles in the absence of a formal settlement procedure have been put into place to put the settlement mechanism in motion.[11] In this mechanism, a barter transaction takes place where in exchange for admission of guilt by the party the FCO has to reduce the fines imposed on a party by up to 10%. Further, these have to be in addition to a reduction under the leniency notice. Furthermore, the party in question would also be required to forgo their right to access files as well as the statement of objections. According to the Federal Court of Justice, it is not necessary that the power to forgo appealing of the final decision by the FCO would even be part of a settlement agreement. There have been question marks raised over the final decision given out by the FCO due to the lack of material present in them as it only contains the summarised version of the relevant facts. This proves to be a hindrance for third parties which may require information for the preparation of follow-on actions. These settlement agreements are individualistic in nature and the FCO has full authority to settle with one party and simultaneously end discussions in relation to settlements with another. However, a settlement would be binding on the FCO only if no new facts arise ex post which would justify re-investigating the violation. Again similar to Singapore, even in Germany there is no particular procedure for settlement, though a few general principles are adopted. Such an approach may be useful in India to avoid unnecessary delays in waiting for a legislative change which may or may not happen.
China
Article 45 of the Anti-Monopoly Law of China (“AML”) provides the general rules regarding settlement.[12] Further, the Interim Provisions on Prohibiting Monopoly Agreements (“IPP-MA”) and the Interim Provisions on Prohibiting Abuse of Dominant Market Positions (“IPP-AD”) contain detailed rules on settlement of investigations.[13] Furthermore, the Antimonopoly Committee of the State Council has specific Guidelines on Undertakings’ Commitments in Anti Monopoly Cases which specify when and how the concerned authority that is the State Administration for Market Regulation (“SAMR”) will suspend and terminate an investigation into alleged violations.[14] One such case where settlement was done is the Inner Mongolia Autonomous Region Branch (“IMAR”) of Agricultural Bank of China where the IMAR Administration for Industry and Commerce (a provincial AML enforcement authority) investigated IMAR Branch of Agricultural Bank of China for suspected abuse of dominance by imposing unfair conditions.[15] While China has particular rules relating to settlement of different types of anti-competitive practices like abuse of dominance or anti-competitive agreements, such an approach might not be very relevant in Indian context as it can be an unnecessary hindrance to ease of doing business. That said, such an approach should be carefully considered by a law reform committee before coming to a definitive conclusion. State specific regulations like those in China are not appropriate for India, since ours is a central law enforced by one single authority i.e. CCI at the central level.
Canada
The Competition Bureau of Canada runs an Immunity and Leniency Program with the intention to encourage cooperation in investigations and stopping engagement of parties in anti-competitive behavior.[16] Under this program, a grant is provided by the crown to forgo prosecution which is called immunity. Leniency is basically a discretionary decision of the crown in which they recommend reduction of costs that the court may impose.This kind of a separate leniency and immunity program can be considered in Indian context also. In fact such an approach may encourage a lot of offenders to voluntarily come forward and thus, reduce the overall level of anti-competitive behavior in the country.
United Kingdom
The United Kingdom (“UK”) Competition and Markets Authority (“CMA”) is the body responsible for enforcement of antitrust law in the country. Instead of declaring an infringement of antitrust law, the CMA has two options – first, it can give a commitments decision[17] if the parties agree to change their arrangement to allay any anti-competitive concerns. It is used in less serious cases where there is no intention to be anti-competitive and as a result does not entail a fine. Second option is a settlement. Under section 42 of the Enterprise and Regulatory Reform Act 2013,[18] a settlement may be possible if infringing parties admit liability, stop the anti-competitive behavior and agree to pay a discounted penalty. The first case under this was the investigation concerning an agreement preventing estate and lettings agents from advertising in the local property newspaper regarding their fees or discounts.[19] This two pronged approach of the UK might work in India, however it seems to be on the stricter end of the spectrum as there is a possibility of penalty in settlements. However, certain cases in India can be really serious, for example the cement cartelization in Assam. To ensure deterrence the requirement of penalty cannot be completely ruled out even in case of a settlement.
Law And Economic Analysis of a Settlement Regime
The basic purpose of this law and economic analysis is to show that a settlement is feasible not only theoretically but also in practice. This approach makes it clear that the benefits of introducing a settlement regime in India far outweigh the costs of not prosecuting the party.
Cost-benefit Analysis
When we look at the cost involved, they are as follows:
1. Authority: They don’t get to impose a very high fine or perform a proper investigation of their own.
2. Party: They will have to admit guilt, pay a penalty and amend their actions as per requirements of the authority – thus, their freedom to operate the way they want to is curtailed.
When we look at the benefits involved, they are as follows:
1. Authority: Time, effort and money in investigation and legal proceedings is saved. The uncertainty of whether a guilty party may escape conviction in legal proceedings is also eliminated. Moreover, they are able to set their own conditions for settlement like ceasing illicit behavior, they also get an admission of guilt and a penalty in some cases (though its reduced).
2. Party: Time, effort and money is saved in saving themselves from the legal proceedings and the danger of a conviction with onerous conditions is minimized. Settling early on also reduces damage to the public image of a company so that the air settles out and it could continue with its business.
Prisoner’s Dilemma/Game Theory
Game theory is a study of strategic interaction of individuals in situations called games which are characterized by the player or decision maker, strategy available to the player, rules governing the player’s behavior, outcome which is a result of choices made by a particular player and the payoffs accrued to each player as a result of the outcome or in other words what each player gains.[20] The players are assumed to be rational and the situation is within controlled rules.
Prisoners’ dilemma is one kind of game theory in which two crime suspects are apprehended and placed in two different cells where they are given the option by the prosecutor to confess or stay silent.[21] The conditions are that if both confess they will be sentenced to 5 years each, if one confesses, he is set free and the other faces 10 years in prison while if both remain silent, they both will get 6 months. It is a symmetrical game with a dominant strategy of confessing since neither knows what the other will do for sure. Therefore, 5 years in prison is Nash Equilibrium and the most probable while pareto efficient equilibrium would be 6 months which is very unlikely.
Now for guilty parties, broadly speaking there are two options – either to settle or to fight the legal proceedings initiated by the appropriate authority. Accordingly, the following table can be constructed from the point of view of authority:
| Party doesn’t settle | Party Settles | |
| Authority does not settle | 2 | 3 |
| Authority settles | 1 | 4 |
Analyzing the table it is clear that the most efficient step i.e. the pareto efficient equilibrium would be that both the party and authority settle (box no.4) and accordingly the individual burden on either of them taking the legal proceeding would be reduced. The Nash equilibrium would be when authority is willing to settle but the party is not because that situation undermines the power of the authority (box no. 1).
While the authority would strongly prefer that the party settles because that shows that they are guilty and they know it (box no. 3) that seems highly unlikely because parties would of course be concerned of their public image. This is of course preferred over a situation where neither is willing to settle (box no. 2) because it would mean both sides are willing to fight and would result in extra costs in terms of time, effort and money.
Therefore, from an economic viewpoint it seems that both the authority and party settle as that would be an optimal allocation.
Deferred Prosecution Agreement: A Form of Settlement Mechanism
What are Deferred Prosecution Agreements (DPAs)?
In the United States of America (“USA”), a DPA may be defined as an arrangement between the Department of Justice (“DoJ”) or the Securities and Exchange Commission (“SEC”) and a company which is going through an investigation. In a DPA, the DoJ or the SEC will file charges against the company but will also request for the postponement of the prosecution to allow the defendant to showcase its good conduct.[22] In return the company may be asked to pay a fine, enter into compliance and remediation programs, etc. Thus if the company showcases good conduct as well as fulfills the terms of the DPA, the Doj or the SEC moves to dismiss the filed charges. If the DPA is not fulfilled, it will lead to a restart of the case.[23]
Use of DPA in USA: Argos USA LLC with The USA DoJ
Argos USA LLC (Argos) DPA with the DoJ has been one of the recent instances of the use of DPAs. In this case Argos was charged with conspiracy to fix prices, rig bids and allocate market from sales of ready-mix concrete.[24] Thus under the DPA, a penalty of $ 20 million was imposed on Argos. Further there had to be a full admission of guilt from Argos’s side. The company furthermore agreed to cooperate with the antitrust division’s investigation. Under the DPA, Argos was also required to maintain a compliance and ethics program to prevent and detect any future antitrust violations. Periodic reviews and submission of annual reports regarding remediation and implementation of its compliance program also formed part of the DPA.[25]
Star Cements Case: Application of DPAs
The informants in this case levelled allegations of anti-competitive practises against Star Cements Ltd. An enquiry was ordered by the Competition Commission of India (CCI), under Section 26(1) of the Competition Act, 2002 directing the director general (DG) to investigate the matter.[26] Star Cements then appealed to the High Court which put a hold on the investigation.
The average pendency of a case in a High Court is 3 years, 6 years in subordinate courts and 13 years if the case reaches the Supreme Court. There is a very similar situation in the case at hand wherein the public has to be the one suffering. The cement company can basically get away with anti-competitive practises till the High Court orders a restart of the investigation. Further even if we assume that a trial comes to an end, even then convictions are rare which may be due to a lack of evidence or inadmissibility of evidence.[27] The lack of realisation of penalties is also a matter of serious concern. This is where DPAs can become game changers. A DPA will help in reducing the burden on courts and ensure that the case can arrive at a conclusion in a short period of time. A DPA will further ensure that monetary fines can be imposed on these big corporations who very often get away with minimal or no penalties in normal court procedures. Thus if we had a DPA for this particular case, the case would have reached a conclusion by now.
Conclusion
Addressing market failure in the competition discourse has been at the forefront of our discussion. The amount of time taken to resolve cases coupled with the existing backlog has made the process of justice delivery cumbersome. A penalty realisation figure of 0.4% has more often than not let big corporations off the hook. Thus it is crucial that a settlement regime be introduced in India. There are different layers as to why a settlement regime could be a huge success in the country.
Different Jurisdictions
While analysing different jurisdictions, it is clear that all of them have settlement regimes be it in the form of rules or statutory provisions. This again brings home the point that settlement regimes are very useful in the early disposal of cases. Since India does not have any statutory provisions with regards to settlement, the practice followed in Singapore can be adopted. In Singapore, parties settle on voluntary commitments in the absence of a statutory provision for the same. Another impressive framework for settlements is the immunity and leniency program by Canada in which the Crown may provide a grant to forego prosecution as immunity while also reducing sanctions to be imposed on their discretion in the form of leniency. This can again be a gamechanger in India as it would encourage offenders to come forward and speed up the whole process of justice delivery.
Law and Economics analysis
The cost benefit analysis shows that settlement is feasible not only theoretically but also in practice. This approach makes it clear that the benefits of introducing a settlement regime in India far outweigh the costs of not prosecuting the party. This is exemplified through the phase – ends justifies the means.
Game Theory proves that the most efficient step i.e. the pareto efficient equilibrium would be that both the party and authority settle and accordingly reduce the individual burden on either of them taking the legal proceeding.
Deferred Prosecution Agreements: A viable solution
With the conditions prevailing in India, DPAs as a form of a settlement regime could benefit India’s Competition Law field. The issue of realisation of penalties can be dealt with very efficiently by DPAs. Further the option for inserting a clause in the DPA which gives companies a second chance to show good conduct instead of having to go through prosecution could give positive results not just in the short run but long term as well. However a very important factor with regards to DPAs is the fact that they must always be established under judicial review i.e. whenever there is an agreement to put in place between a defendant and prosecutor, it shall always lie under judicial scrutiny.[28] This will ensure that DPAs are always fair and are in the interest of the public. In order to do the same the whole agreement shall be placed in public domain except in certain circumstances, the decision of which shall lie with the court. This is important so that there is transparency in the whole process and there is no misuse of DPAs in favour of a particular party.[29]
[1] Erik Baekkeskov, Market Failure, Britannica, (October 1 2019), https://www.britannica.com/topic/market-failure.
[2] The Investopedia Team, Market Failure, Investopedia, (April 7, 2020)https://www.investopedia.com/terms/m/marketfailure.asp#:~:text=Market%20failure%20is%20the%20economic,rational%20outcomes%20for%20the%20group.
[3] Erik Baekkeskov, Market Failure, Britannica, (October 1 2019), https://www.britannica.com/topic/market-failure.
[4] Dr. Navneet Sharma, Turbocharging market correction: Introducing a settlement and commitment regime in India, Bar and Bench, (February 20, 2021, 9:35 AM), https://www.barandbench.com/columns/turbocharging-market-correction-introducing-a-settlement-and-commitment-regime-in-india.
[5] Competition Commission of India, Annual Report 2018-19, Competition Commission of India, 1, 24 (2019).
[6] Competition Commission of India, Annual Report 2018-19, Competition Commission of India, 1, 30 (2019).
[7] Securities and Exchange Board of India (Settlement of Administrative and Civil Proceedings) Regulations, 2014, Gazette of India, pt. III sec. 4 (January 9th, 2014).
[8] Department of Revenue, https://dor.gov.in/rti/settlement-commisssion-itwt, (last visited June 14th 2021).
[9] Investigation into Lift Spare Parts Suppliers (Chevalier and Fujitec Singapore), 28 May 2019.
[10] Silke Heinz, The FCO publishes note on settlements in antitrust proceedings in Germany, Kluwer Arbitration Blog, http://competitionlawblog.kluwercompetitionlaw.com/2014/01/17/the-fco-publishes-note-on-settlement-procedures-in-antitrust-proceedings-in-germany/.
[11] Ulrich Schnelle, Cartels 2021: Germany, Global Legal Insights, https://www.globallegalinsights.com/practice-areas/cartels-laws-and-regulations/germany#:~:text=Administrative%20settlement%20of%20cases,-Back%20to%20top&text=A%20settlement%20requires%20in%20the,granted%20under%20the%20leniency%20notice.
[12] Anti-monopoly Law of the People’s Republic of China, 2007, Acts of Parliament, 2007 (China).
[13] Aiping Bao, New Regulations on Monopoly Agreements, CMS, https://cms.law/en/chn/publication/node_519186.
[14] Aiping Bao, Overview on Guidelines on Undertakings’ Commitments in Antitrust Cases, Lexology, https://www.lexology.com/library/detail.aspx?g=97b5c34f-648d-44b1-8180-4465f9ae43f1.
[15] Agricultural Bank of China Co., Ltd. Inner Mongolia Autonomous District Branch Suspension of Investigation Decision on Suspected Abuse of Market Dominance, Competition Enforcement Announcement No. 4 (2018).
[16] Government of Canada, Immunity and Leniency Programs under the Competition Act, CBC, https://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/04391.html.
[17] Euan Burrows, Competition law investigations by UK authorities, Ashurst, https://www.ashurst.com/en/news-and-insights/legal-updates/quickguide—competition-law-investigations-by-uk-authorities/#:~:text=With%20effect%20from%201%20April,cases%20under%20the%20Competition%20Act.&text=The%20CMA%20applied%20a%20settlement,on%20each%20of%20the%20parties.
[18] Enterprise and Regulatory Reform Act 2013, No. 24, Acts of Parliament, 2013 (United Kingdom).
[19] Property sales and lettings investigation, CE/9827/13.
[20] Don Ross, Game Theory, Stanford Encyclopedia of Philosophy, (Mar.8, 2019), https://plato.stanford.edu/entries/game-theory.
[21] Jim Chappelow, Prisoner’s Dilemma, Investopedia, https://www.investopedia.com/terms/p/prisoners-dilemma.asp#:~:text=The%20prisoner’s%20dilemma%20is%20a,expense%20of%20the%20other%20participant.
[22] Thomson Reuters Practical Law, https://content.next.westlaw.com/Document/I8b0f218c102b11e598db8b09b4f043e0/View/FullText.html?contextData=(sc.Default)&transitionType=Default&firstPage=true, (last visited June 13th 2021).
[23] Thomson Reuters Practical Law, https://content.next.westlaw.com/Document/I8b0f218c102b11e598db8b09b4f043e0/View/FullText.html?contextData=(sc.Default)&transitionType=Default&firstPage=true, (last visited June 13th 2021).
[24] McMillan LLP – Guy Pinsonnault, Jamieson D. Virgin and Komal Jatoi, Deferred Prosecution Agreements:The Continued Use of DPAs in the Antitrust Sphere in the United States, Lexology, (January 20, 2021), https://www.lexology.com/library/detail.aspx?g=2580ad41-bdc7-4642-ae8a-34f14efbf32b&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=SVAMC+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2021-01-22&utm_term=.
[25] McMillan LLP – Guy Pinsonnault, Jamieson D. Virgin and Komal Jatoi, Deferred Prosecution Agreements:The Continued Use of DPAs in the Antitrust Sphere in the United States, Lexology, (January 20, 2021), https://www.lexology.com/library/detail.aspx?g=2580ad41-bdc7-4642-ae8a-34f14efbf32b&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=SVAMC+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2021-01-22&utm_term=.
[26] Assam Real Estate & Infrastructure Developer’s Association (AREIDA) affiliated Confederation of Real Estate Developer Associations of India (CREDAI) vs. Star Cement Limited (Star Brand) & Ors, Case No. 77/2016.
[27] Percival Billimoria, Vivan Marwaha, Jhoomar Mehta, Combating corporate corruption in India through Deferred prosecution agreements, Observer Research Foundation, (November 23, 2017), https://www.orfonline.org/research/combating-corporate-corruption-in-india-through-deferred-prosecution-agreements/.
[28] Robert R. Wyld, Should India Adopt DPAs?, Legal Era Online, (19 December 2016, 1:12 PM), https://www.legaleraonline.com/articles/should-india-adopt-dpas.
[29] Robert R. Wyld, Should India Adopt DPAs? Legal Era Online, (19 December 2016, 1:12 PM), https://www.legaleraonline.com/articles/should-india-adopt-dpas.
