Competition penalties going by global turnover call for a rethink
They could deter multinational business investments even though our penalty recovery rate is low
There was a flurry of developments in competition law last month. These included monetary penalty guidelines, regulations for settlements and commitments, new thresholds and the report of a committee on Digital Competition law with a draft bill. These are inter-related, emanating from the Competition Law Amendment Act of 2023 and reflecting the Competition Commission of India’s (CCI) approach that seeks speedy market corrections. According to the CCI chief, the recently notified competition regulations on settlement, commitment, ‘leniency plus’ and global turnover will be applicable to cases that are under CCI investigation.
On 6 March, the CCI issued its 2024 guidelines for the determination of monetary penalties. These provide a methodology for the imposition of fines for competition-law violations. Under the new regime, a penalty can go up to 30% of the average relevant turnover/ income, subject to the legal maximum of 10% of the company’s global turnover. This provision could have a substantial impact on companies with global operations. The CCI’s rationale would understandably be that the fines’ deterrent effect would lead violators to opt for commitments and settlements or the leniency-plus regime.
It has to be borne in mind that the Supreme Court in its 2017 judgement in the case of Excel Crop Care vs CCI, upheld the Competition Appellate Tribunal’s decision of levying a penalty based on ‘relevant turnover’ rather than ‘total turnover,’ settling a contentious issue in Indian antitrust law.
In India, the actual recovery of fines for violations of the competition law has been meagre, with most cases stuck in courts and tribunals, and some fines stayed or reduced on procedural or evidentiary grounds. Unfortunately, this deprives penalties of their sting; it also results in wastage of the CCI’s time in defending its decisions at various forums. In 2022, the CCI imposed fines of ₹64.3 crore while in 2021 it was over ₹1,000 crore. Recovery of such fines has only been 0.4% over the past five years.
The current framework for fine imposition and recovery must be made more enforcement-oriented. As of now, there is a provision in the Competition Act (Section 39) for recovery of the penalty amount under the Income Tax Act 1961, which could be used liberally after getting cases finalized in appeals, etc. Perhaps the CCI needs to be provided additional manpower and a dedicated wing for this purpose.
The preamble of our Competition Act begins with “keeping in view of the economic development of the country…” and we must concurrently analyse its impact on foreign direct investment (FDI). Globally, India is among the most attractive FDI destinations, ahead of China, with 8% plus economic growth, low inflation, a huge consumer market and the world’s largest population (with a median age of under 30), apart from a stable regime and friendly policies, all of which offer investors high returns. Strong inflows of FDI are accompanied by technology that benefits us. Fines imposed on global turnovers could deter firms that sell multiple products in multiple markets across the world. The prospect of being penalized in various jurisdictions based on their global instead of relevant turnover could also expose them to double jeopardy.
If we look at other jurisdictions, while some mention penalties on global turnover, these are scrutinized at various stages. As per the EU Digital Markets Unit, the EU regulator can fine a firm up to 20% of its global turnover, but European Commission guidelines have a two-step approach that takes the nature of infringement, firm’s market share and other aggravating circumstances into account. The UK competition authority takes a six-step approach; it looks at the relevant product as well as geographic markets, duration of infringement, aggravating conditions like whether the company acted as an instigator or leader of a cartel for law violations, the penalty’s deterrence effect, its proportionality, and also factors that may put the firm to financial hardship. The German regulator also has a cap on its fines, 10% of total turnover in a year. It also considers the nature of infringement, consequential harm, market share, etc, to determine penalties. True, India’s guidelines for penalty imposition also elaborate such parameters as the violation’s nature, gravity and duration, the role of the enterprise, recourse to coercive or retaliatory measures aimed at other enterprises, repeated contraventions, the extent of the firm’s cooperation with the director general’s probe, voluntary termination of alleged anti-competitive conduct and a competition compliance initiative being implemented within the business. These are important factors and call for capacity building.
We must bear in mind that sunrise sectors would play a key role in our economy’s growth over the next decade, propelled by manufacturing of semiconductors, electronics, electric vehicles, renewable energy, avionics and defence equipment. Investments from global companies to set up units in India, indigenization, research and development and localized manufacturing will play a critical role. The CCI’s role as a market regulator will also be crucial. Enforcement must be kept in tune with the ease of doing business.