Competition Laws in India
If one goes by popular perceptions and natural expectations, every law ought to have its roots in, a felt need. The inadequacy or vacuum in the existing system, in meeting the challenges posed by a problem situation, leads to the need to evolve newer laws and more effective tools of implementation. The same applies to the case of Competition laws applicable in India.
By the time India won its independence, the impact of the two-century long British colonial rule was already showing on all aspects of the Indian economy. For years after independence, India followed the strategy of planned economic development. The broad policy objectives were achieving self-reliance and promoting social justice. The social and economic challenges before the country were enormous. The citizens of nation were habituated by the Rashan system were the shops was established by the government to satisfy the need and want of poor People as 1/3rd of the total population was labelled as ‘Below poverty level’ and price of all the P.D.S. items were redeemed for them so as to satisfy the basic needs of day -to-day goods. With the development of the economy and company orientation the concept of Production started Consumers will favour those products that are widely available and low in cost and hence the basic emphasis during those days was only on Production. With the rise of the Company and Privatization and large scale development of the Industry the new concept of Marketing is evolved. The reason for emergence of Marketing was the Competition Prevailing in the economy. The presence of a modern competition law is one indicator of the extent to which a economy has embraced the notion of encouraging effective competition in the marketplace.
The Constitutional Law of India has directed State by chapter IV, known as Directive Principles. The chapter III, gives fundamental rights to the citizens implementing this chapter by harmonizing the two. The concerned chapter IV directs State in matter of concentration of wealth, welfare of consumers' vis-à-vis Fundamental Rights (under chapter III) of a citizen (supplier of consumers). From this general mandate, government enacted MRTP Act, Consumer Protection Act, Competition Act, Company Act and few other Statutes.
The Emergence of Competition Act:-
Competition Act 2002 has come into force to replace the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969. After the economic reforms of 1990, it was felt that MRTP has become obsolete pertaining to international economic developments relating to competition law and there was a need of law which curbs monopolies and promotes competition. In 1990s India saw substantial increases in the value and volume of international trade in goods and services, in foreign direct investments (FDI), and in cross border mergers and acquisitions (M&A). Over the period of time, trade barriers fell and restrictions on FDI were reduced. The Competition Act, 2002 has been enacted with the purpose of providing a competition law regime that meets and suits the demands of the changed economic scenario in India and abroad.
Competition and Airline Industry: The Reasons Of Merger
The history of civil aviation in India began in December 1912, with the opening of the first domestic air route between Karachi and Delhi. Air travel remains a large and growing industry. It facilitates economic growth, world trade, international investment and tourism and is therefore central to the globalization taking place in many other industries. In the past decade, air travel has grown by 7% per year. As the economies of developing countries grow, their own citizens are already becoming the new international tourists of the future. The more rise in demand for the air services, the more is the supply. The urge to provide more better and better services with the zeal of high profit inducing market players join the regime of Airline Industry. Hence more is the competition among players.
But Economic theory tells us that competition in the market is good both for the consumer and the economy. It maximizes consumer welfare and offers wider choice, better products and services. Competition also enhances productive and allocative efficiencies and, as Michael Porter has emphasized in “The Competitive Advantage of Nations”, it sharpens the competitive edge of the national economy. Assuming this to be the some among thousands of advantage to the competition, here are some of the factors highlighted the creates the nexus between competition and Airline Industry. In other words this part gives the answer to the question to despite the fact that the developing country like India were flying in the air remains a Dream for lacks of the people, why the Air industry is facing competition??
Some of these factors are:-
1. GLOBALIZATION: - Despite various downfalls between 1990’s to 1994, the airline industry has proceeded along the path towards globalization and consolidation, characteristics associated with the normal development of many other industries. It has done this through the establishment of alliances and partnerships between airlines, linking their networks to expand access to their customers. Hundreds of airlines have entered into alliances, ranging from marketing agreements and code-shares to franchises and equity transfers. This does not only raised competition to the national level but has enlarged its scope to the global level.
2.RISING DOMESTIC PROSPERITY:- The most dynamic growth is centered on the Asia/Pacific region, where fast-growing trade and investment are coupled with “Rising domestic prosperity”. Air travel for the region has been rising by up to 9% a year and is forecast to continue to grow rapidly, although the Asian financial crisis in 1997 and 1998 will put the brakes on growth for a year or two. In terms of total passenger trips, however, the main air travel markets of the future will continue to be in and between Europe, North America and Asia. The rise in “standard of living’ of the people has lead to increase in demand and hence more competition to supply and serve better.
3. DEREGULATION “OPEN SKIES”:- Deregulation is also stimulating competition, such as that from small, low-cost carriers. The US led the way in 1978 and Europe is following suit. The EU's final stage of deregulation took effect in April 1997, allowing an airline from one member state to fly passengers within another member's domestic market. Beyond Europe in India too, 'open skies' agreements are beginning to dismantle some of the regulations governing which carriers can fly on certain routes. Nevertheless, the aviation industry is characterized by strong nationalist sentiments towards domestic 'flag carriers'.
4. MERGERS AND ACQUISITIONS :- The air over corporate India is thick with the heady scent of mergers and acquisitions (M&As). In an economy, long suppressed by the license and control regime, this is an entirely new experience and has been accompanied with a sense of nationalistic euphoria. M&As are presently undertaken by airline industries to achieve economies of scale and accompanying efficiencies, gain entry to new markets, or access to new technologies. But unfortunately, sometimes the motivation may be less driven by economics and more by personal ambition, as achieving a big presence over a market can be very ego-massaging. The Indian Competition Act, 2002 also has provisions for regulating mergers – these are known as ‘combinations’ which include mergers and amalgamations, acquisition and acquisition of control. However, the merger regime is liberal. To see whether the merger has caused negative impact on the society the Competition commission has “rule of reason” approach.
5. LIBERALIZATION POLICY:- There are several government policies which are liberalized which increased the role of market forces in the economy. Reform of trade policy by reducing physical barriers and import duties provide very powerful competition to domestic players except in non-tradable goods and low value, high volume products. At one time, our industrial policy, comprising of licenses, quotas and locational preferences, effectively stifled competition by creating huge entry barriers, inefficiencies and renter incomes for incumbents. Government procurement at the level of the State Governments was at one time highly skewed in favour of local enterprises and SSIs.
Due to all these above mentioned and factors and many others there is the emergence of competition regime in Airline Industry. This competition is not only affecting the Airline but also having the consequences on the Society and the Economy as the whole.
When it come to SOCIETAL IMPACT it is said that order to understand how new aircraft might fit into the current market, one must understand the customer. Jobs lost in one industry were more than compensated by jobs created in more efficient industries and hence this competition is providing more job avenues to the potential members of the society. The competition has lead to the fall in approximate of 30% fall in price as compared to those olden days of late 1990’s. This has helped many to make their dream come true to fly in the air.
ECONOMIC IMPACT:- Competitive pressures have helped suppress inflation, raise living standards, and pushed manufacturing productivity up by 4% a year. It has brought down real air fares and lot of other costs.
In turn it can be said that this competition has effected in positive manner and resulted as beneficiary for society and the Economy.
Impact of Competition On Airline Industry: Its Issues, Consequences & Relative Comparison
Nature of airline competition Since the start of deregulation in 1990, the Indian airline industry has grown tremendously. Figure 1 shows the number of domestic Indian airline passengers and, for comparison purposes. The number of Domestic passengers carried in 2000-2001 was about 14 million which increased to more than 45 million in 2009-10 registering more than 3 fold growths in 10 years period. The Indian industry experienced a 300% growth over this period, while Canada, which deregulated its airline industry later and has always had much less competition than the India, saw a much smaller growth rate of 150%.Thus, it appears that deregulation, particularly in combination with competition, can spur growth in the airline industry.
Figure 2 shows the average price for a domestic airline ticket over the same period for both the India and Canada. Again, average prices have fallen consistently in the India but have remained constant in Canada, suggesting a large benefit to consumers from Indian practices. Although average fares have fallen, unrestricted fares often paid by business travellers are generally thought to have risen steadily. This has led some observers to argue that airline competition has not benefited all consumers.
But a counterargument is that business travellers paying full fare also get a superior product, in terms of flexibility and service. Moreover, the increased demand for air travel suggests that there are additional new passengers who clearly find air travel their preferred option and therefore are better off as a result of deregulation. Thus, even if competition in the India has not benefited every consumer, it has succeeded in increasing the volume of travel and lowering average prices, which has almost certainly been beneficial on average.
The number of international passengers carried in 2000-2001 was around 4 million in 2000-2001 which increased to almost 12 million in 2009-10, showing about 3 fold increases in the 10 years period. Also the amount of cargo carried also increased substantially over the 10 years period from 2000-2001 to 2009-10. While the Domestic Cargo increased by almost 2 times and the international cargo increased by more than 2 times during the same period.
Deregulation spurred changes in the structure of airlines
Over the last 20 years, many of the nation’s biggest airlines have shut down or been acquired by other airlines. The list includes Indus Airlines, IFR Asia etc. Because of the huge amount of exit, some observers argue that the airline industry is inherently unstable and requires government intervention. It is true that profits in the airline industry can fluctuate wildly, precipitating exit. The reason for these fluctuations is that an airline’s costs are largely driven by labour and fuel, which are fixed in the short run. Hence, moderate fluctuations in demand, such as those caused by the events of September 11, can hugely affect profits. The robust earnings of most airlines in 1998 and 1999 can be traced both to the booming economy that spurred demand, particularly for high-fare business travellers, and to low fuel prices.
While profits are volatile, many industries with volatile profits—ranging from oil exploration to computer software—operate without substantial government regulation. Moreover, free markets generally work well for industries with large fluctuations, because the fluctuations provide incentives for firms to innovate in response to changes in demand and costs.
Impact of policies on competition:
Because the airline industry is a complex mix of a competitive and regulated industry, several policy choices could affect its level of competition. A central policy choice is the mechanism for allocating airport boarding gates and facilities. Many airport commissions rely on non-market mechanisms to allocate these scarce resources. Changes in policies by these commissions to allow for competitive bidding for boarding gates and landing rights might encourage competition among airlines, and it also might encourage airport authorities to increasesupply when bid values are higher than costs.
Antitrust policy also may affect the level of competition. A little over a year ago, United announced plans to acquire US Airways. These plans were later abandoned after the government decided to challenge the merger. Most observers anticipate that future merger attempts are likely. There is significant statistical evidence that airfares increase as market concentration increases, thereby harming consumers. However, concentrated markets also benefit some consumers by creating bigger networks with more frequent and convenient flights. Moreover, mergers also provide incentives for efficient managerial skills and business practices to dominate. In that mergers lead to concentrated markets, antitrust policies must balance these conflicting needs when deciding whether to approve a merger.
In the light of the above argument it becomes imperative to discuss the Jet-Sahara merger:
In January 2006, the Indian aviation sector witnessed its biggest merger so far when Jet Airways (“Jet”) announced its acquisition of Air Sahara (“Sahara”) for an estimated Rs. 2,300 crores (US$ 500 million). The deal created quite a stir in the aviation industry, and competitor airlines felt that the merger would create a monopoly, as Jet, who already enjoyed a dominant position in the Indian aviation sector, would gain further market share post-merger.
In March 2006, after a detailed review, the Aircraft Acquisition Committee cleared the transfer of all of Sahara’s assets to Jet. The Ministry of Company Affairs also gave its green signal to the merger under section 108A of the Companies Act, 1956, under which the Central Government’s prior approval has to be taken if a body corporate acquires more than 25% of the paid-up equity share capital of a public company, and either the acquirer or the target is a dominant undertaking (i.e., it controls 25% or more of any services that are rendered in India). Furthermore, the Monopolies and Restrictive Trade Practices Commission (“MRTPC”) gave its go ahead after the Director General of Investigation and Registration (“DGIR”) found that the merger between the two entities did not violate the provisions of the Monopolies and Restrictive Trade Practices Act, 1969 (“MRTP Act”).
The reasoning given by the DGIR and other government bodies to justify the merger was that, there had been tremendous growth in the civil aviation sector in the past few years and the sector was subject to healthy competition. Moreover, new carriers like SpiceJet, Kingfisher and Air Deccan created a wider playing field for consumers, and, therefore, the Jet-Sahara merger would not affect public interest.In our view the law being incompetent was not able to curb a company attain Monopoly and therefore all the authorities ultimately had to clear the obstacles. They were bound by the lex-loci or the law of land and therefore if the basic foundation is weak one can do nothing about it.
Clearly, the government authorities, including the MRTPC, have taken a soft approach towards this merger between Jet and Sahara. When two companies garner almost 50% market share in an industry, this should merit stricter scrutiny. For example, the merger control authority in Europe rejected the proposed GEHoneywellmerger some years back on anti-competition grounds.
Unfortunately, the MRTPC has also been watered down significantly over the years and the Competition Act, 2002 (the “Act”) was not fully in force. As of then, the more important provisions of the Act relating to anti-competitive agreements, abuse of dominant position and regulation of combinations had not come in force. This may also be another reason why the merger passed regulatory muster.
Impact of guidelines on competition:
It was pointed out that there should be guidelines for the use of airport infrastructure and landing rights, as there were no guidelines in this regard. This obstacle was cleared by the Ministry of Civil Aviation, which has now approved merger and acquisition guidelines relating to airport infrastructure (“Guidelines”). The Guidelines have been drafted keeping in mind various global practices and are based on the following general principles: The government’s approach towards airlines must be non- discriminatory.
The guidelines must not cause public inconvenience by disrupting flight schedules. The guidelines must not be arbitrary, and should not hamper growth and consolidation of the airline industry.
According to the Guidelines, only user rights like parking bays, landing slots, etc., given to a particular airline on a non-payment basis, can be used by the airline that takes over the aircraft of that particular airline. In other words, Jet cannot sell or transfer the airport infrastructure allotted to Sahara. These facilities can be used only by Jet or returned to the airport operator. Besides this, the airline that takes over the aircraft can only use those user rights, which are actually being used by the airline that transfers the aircraft and only until such time that the infrastructure is in actual use. For all other rights, the terms of lease/sale agreement between the airport operator and the airline will apply.
The Guidelines will ensured that airport infrastructure is used for its designated purpose by an acquirer for the benefit of the consumer and is not to be regarded as a tradeable commodity.
A third significant policy dimension involves restrictions on substantial foreign ownership of airlines and on domestic flights by foreign-owned airlines. Allowing foreign ownership of airlines could increase the level of competition for both international and domestic flights.
Been a proper legislative draft and been amended twice by the legislature still there remains some of the loopholes which are been scrutinized by the author in this portion. This are as follows:-
The term "appreciable adverse effect on competition" used in section 3, is not defined in the Act. However, the Act specifies a number of factors which the Commission must take into account when determining whether an agreement has an appreciable adverse effect on competition or not.
The principle of “shall be presumed” has been explained by the courts in India in numerous cases. In one such case,ii the court observed that “the words ‘shall presume’ have been used in the Indian judicial lore to convey that they lay down a rebuttable presumption in respect of matters with reference to which they are used and not laying down a rule of conclusive proof.
The Competition Act does not use the words horizontal or vertical agreements. However, it treats more harshly certain kinds of horizontal agreements. Any such agreement "shall be presumed" to have an appreciable adverse effect on competition.(Section 3(3)). This approach is similar, but not necessarily identical to, the per se rule in the United States.
There is no reference to the “abuse of dominant position" section of the Act. Hence each individual can use it according to its own interpretation and scope and causing effect adversely. This suggests that once it has been determined that an enterprise enjoys a dominant position (in the relevant market) and that it has engaged in any of the activities listed in section 4(2), the conclusion follows that it amounts to an abuse of a dominant position without a finding that it causes or is likely to cause an “appreciable adverse effect on competition.” Bad pt. and two contradictory parts as if any of the activity is found than the other party is not even given a chance to be geared and this amounts to the violation of principle of natural justice.
In India, since the reforms starting 1991, the winds of competition have been blowing across various sectors leading to perceptible gains for the consumer in terms of greater choice, lower real prices and better quality in products such as automobiles, telecommunication, and even services such as aviation etc.
The airline industry today operates in an environment where firms set prices and domestic routes given market conditions. The Competition Act was part of the process of reform to ensure that Indian markets are competitive and that the benefits of competition go to consumer welfare and economic efficiency. To ensure that the benefits do go to the right channels the two pre-requisites are the Competition Policy and Competition Law. Competition Policy advocates that the government policy should be to shed controls and restrictions, avoid barriers to entry and should be pro-competition. Once such a competition policy or competition promoting policy is in place, the market should sustain it. This would necessitate a competition law aimed at activities by enterprises to minimise or suppress competition.
The Competition Act mandates the Competition Commission of India (CCI) to prevent anti-competitive practices, promote competition, protect the interests of consumers and ensure freedom of trade. The Commission needs to swing into action undertaking substantial capacity building to implement the extra territorial jurisdiction that is embodied in the Competition Act, 2002. As India integrates at a fast pace with the global economy there is a need to ensure international co-operation to tackle cross border challenges in view inter alia of the above facts, the Commission has not commenced regulatory and adjudicatory work so far. All this work has laid a sound, professional foundation for the Commission’s regulatory and adjudicatory work, as and when that begins at the appropriate time, which hopefully will be soon, as India is one of the few major economies in the world today without a functional, modern competition authority.
“Competition is not only the basis of protection to the consumer, but is the incentive to progress.”
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# Herbert Hoover (American President, 1874-1964)
The author can be reached at: Tapanshugehlot@legalserviceindia.com