• September 22, 2023

Proposed competition regulations: Boon for legal experts, bust for businesses?

Proposed competition regulations: Boon for legal experts, bust for businesses?

India’s amended Competition Act raises concerns about increasing regulatory complexity and trend of extending powers in various laws.

The Competition Act was amended recently and extensively in April 2023. The amended provisions are now sought to be implemented, one of which has attracted wide attention and criticism. This relates to the draft Regulations on Combinations that would replace the existing ones.

The criticism is focused on some specific aspects, a criticism that is quite fair though, but my larger worry is whether this is an unfortunate trend. Are we at risk of reversing the decisive Big Bang Reforms of 1991? There is an even more worrisome –possibly scary — part of whether this trend is becoming visible in other laws too, giving wider and even arbitrary powers to regulators and extending existing restrictive conditions?

The pre-amended Competition Act and the current Competition Regulations are found to be very complex. Now the amendments seem to make them even more complex to the extent of being convoluted. Add to that the widely drafted powers of the regulator (Competition Commission of India or CCI). Sure, till now the provisions seem to be well implemented and even transparent. But for how long? As the adage goes, absolute power leads to absolute corruption even if not of the monetary kind.

But let us quickly summarise the law and its intent first. Then we will cover some examples of amendments (they are just too many and too complex to go into details coverage, much less technical parts).

First, let us accept the reality. Businesses love monopolies. These help them extract the last drop of juice from customers, dictate terms to distributors. And so on.

Warren Buffet put it differently though, by referring to “business with a moat” which is a more benign way of saying the same thing. That is, due to natural reasons or efforts over the years, etc., the businesses are not easy to compete with.

That said, monopolies can be created in surreptitious ways too. If companies do not have a monopoly individually but as a group, they could have one, then they could make a cartel. But clearly this is anti-consumer and anti-industry. The regulator’s job is then to control such attempts or even an existing position of this kind.

The Competition law attacks this in broadly three major ways. One is by focusing on restrictive trade practices by large/monopolistic entities and stopping/punishing those who do. The other is strictly regulating attempts to make cartels. Third is keeping a watch on mergers, acquisitions, etc. (the term Combination is defined to cover as many variants of these as possible).

Fortunately, there is a high threshold point where the Regulations will apply, which will be now be Rs 2000 crores. Considering that this is barely 25 percent of the size of a “unicorn” (i.e., a company with a value of $1 billion plus), it still sounds low. But considering that this is only the starting point of investigation and not a ban or intense investigation, it sounds fair. That said, since the amendments/proposed Regulations will cover entities based abroad, the question is whether it could be higher for such overseas entities? The other point also is that there is a related low benchmark of 10 percent share in India. This could also be a very low cut-off point, particularly for pioneering startups that initially get high valuations but also, being pioneers in their chosen niche, could have more than a 10 percent share. Nipping them in the bud doesn’t make sense and sometime could be given for competition to evaluate the business model and perhaps make a more competitive and better alternative, which is actually the real intent of competition law. So, note the irony and self-defeating nature of such provisions.

The changes are several, mostly making the law’s reach even wider and more complex. Even calculating how the cut-off point of 10 percent share in India is quite complex, broad and even vague in places. This again gives discretion (arbitrary?) to the authority. The maximum timeline of the review process is reduced by nearly one third – from 210 days to 150 days. This still seem a lengthy timeline but, considering that they apply to large combinations and there is a shorter fast track process, it is acceptable.

Another saving grace of an amendment relates to penal consequences. The changes are subtle but in law and even as a stigma, they have important implications. For example, the consequences of several contraventions will now not be “punished with fine” which also carries a stigma. Instead, the consequences are being “liable to a penalty”. This is also particularly important in case of action against directors and officers. Instead of being “shall be liable to be proceeded against and punished accordingly”, CCI will now “impose such penalty”. Further, upper limits of the amount of penalty have been provided at up to 10 percent of their income. This will lower the fear for many directors/officers.

Then we have the core, larger point. Where is the trend of this law and several other laws going towards in recent times? Sure, even after amendments, the new law would not be as wide, as complex and as restrictive as the MRTP Act was. But if one compares with several other laws, the complexity and width of this amended law and proposed amendments can hardly be matched. So, while the MRTP Act is far away, the question is whether it is going in that direction?

Then consider some other laws. Take the anti-money laundering law. This was meant to cover very serious offences such as those of terrorism, drug trafficking and a couple or so more. Now, that list of offences covered by this law has expanded manifold over the years. While the harsh and wide powers and punishment apply nearly to all offences covered, some of which are relatively petty.

Consider even SEBI Regulations, say relating to Investment Advisers or to Research Analysts. The problems here are several. Entry requires prior registration before starting such activity, which in principle sounds good. But the fact is that the registration process can be quite vigorous. Then comes the post registration conditions that are very broadly drafted and are complex and vague in places and even stifling. And there are regular additions made to these. The fair grouse of such persons, a valuable pillar of this industry, is that how can one afford being in this field while scrupulously adhering to so many complex requirements? These have also, to rub salt in the wound, placed limits on the fees that can be charged. There is yet another consultation paper issued for them that intends to discourage unregistered finfluencers but would make the work of registered entities tougher. Unregistered entities can merrily avoid these, if they “structure” their business and strategy well in no man’s land where the scope/jurisdiction of SEBI does not apply. This is creating legislative arbitrage, meaning covering oneself under a more flexible/liberal law while often doing the same work as registered entities do, but in a covert way. Maybe that is why there are now merely a handful of persons registered with SEBI in the decade or so since the Regulations were notified. Maybe even some of the existing ones are inactive and renewing the registration just because it was obtained at considerable efforts and costs.

The big question for regulators and lawmakers is that instead of the carrot and stick being equally used in a balanced way, is the trend now focused more on the stick? Or to apply India’s traditional terms, is the focus more on dand (punishment) than shaam (recognition and encouragement).

Jayant Thakur is a chartered accountant. Views are personal, and do not represent the stand of this publication.

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