The story so far: Striving to strengthen the existing ‘whistleblower’ mechanism in the Competition Act, the Ministry of Corporate Affairs (MCA) notified the ‘Lesser Penalty’ Regulations, 2024 to introduce the ‘Lesser Penalty Plus’ regime. It incentivises existing industry participant(s) turned ‘whistleblowers’ to present “full, true and vital disclosures” about another cartel in the ecosystem which is unknown to the Competition Commission of India (CCI). The regulations were finalised subsequent to a draft regulation floated for comments in November last year. 

What is this regime about?  

The existing ‘lesser penalty’ provisions, under Section 46 of the Competition Act, incentivise enterprises, accused of cartelisation, to come forward and disclose information, documents and evidence to help the competition regulator establish potential cartel conduct. The idea is to refine the regulator’s investigation with insider information, potentially throwing light on their secret agreements and concerted practices.

The latest provision, that is, ‘lesser penalty plus,’ provides for existing leniency candidates to disclose information about the existence of any other such cartels. The candidates are in turn granted reduction in penalty with respect to their involvement in the second cartel. This is over and above the reduction in penalty levied for their involvement in the initial cartel. 

The ‘lesser penalty’ applicant is required to state their role in the cartel, goods or services involved, entities involved, geography covered, date of commencement of the alleged cartel, its present status and the estimated volume of business affected in India by alleged anti-competitive act. The ‘lesser penalty plus’ applicants, on the other hand, are required to elaborate if there are any similarities or differences in the conduct, product, service or parties with respect to the first cartel, among other things. 

The benefits to be accorded are assessed using two broad parameters, namely, priority status and significant added value. 

Priority status is the applicant’s position in the queue, as compared to other applicants, for being accorded leniency. Timing is the primary determinant here because, as argued by the regulator, the idea is to encourage disclosing the cartel “as soon as possible” for securing maximum benefit. 

Significant Added Value is assessed based on qualitative parameters. It examines the quality of evidence presented— how far it strengthens the regulator’s ability to prove the existence of a certain cartel. This relates to the nature and level of details presented, keeping in mind the timing of perusal (by the applicant) and the amount of corroboration needed from other sources. 

Lastly, incriminating evidence directly relevant to the matter is accorded greater weightage, in comparison to that with indirect relevance. 

How does this look in practice? 

Applicants can file for leniency only before they receive the regulator’s investigation report, in other words, during the course of the investigation. 

The first ‘lesser penalty’ applicant approaching CCI with evidence would have their penalties reduced by up to 100%. The second and third in line may receive up to 50% and 30% respectively. Now, with ‘leniency plus’: the applicant, irrespective of their earlier priority status, may receive an additional reduction in penalty of up to 30% with respect to the first cartel. Let’s say, applicant A was initially awarded a penalty reduction of 50% in the earlier stage.They would now receive an additional benefit of up to 30%, thus, a total 80% reduction in penalty. The applicant may also be entitled to a 100% reduction for their involvement in the second reported cartel with ‘leniency plus’. 

The latest regulation is similar to existing regimes in several regions, including the United States, European Union and Brazil. 

Overall, leniency programmes globally have yielded quality results in terms of revealing other existing cartels and associated players. For example, the U.S. Department of Justice (in 2008) cumulatively fined several international airlines, including Air France, Cathay and KLM Royal Dutch Airlines, among others, a total of $504 million for their involvement in a “multi-year conspiracy to fix prices for air cargo rates.” Earlier, Australian carrier Qantas and Japan Airlines had been fined too. The trail had commenced with British Airways being fined in 2007, for colluding to fix passenger fuel surcharges for long-haul international travel. They were also revealed to be involved in conspiring to fix air cargo rates. British-airline Virgin Airlines escaped without paying any fines, having sought leniency by turning whistleblower. 

But is this incentivisation enough?  

The authors of a working paper titled ‘Leniency of the Competition Commission of India’ (presented in March 2022), assessed that the incentive to self-report would only exist if the “cartelists believe that they will not be caught or can predict that the sanctions imposed will be lesser than the gains from the collusion.” 

Elaborating on the same notion, CCI held that in cartel cases, penalties may go up to three times the profit accrued in each year when the cartel was operating or 10% of the turnover or income of the infringer. For individuals, the CCI may impose a penalty of up to 10% of their average income in the three preceding financial years. However, by applying for the leniency programmes, they may avail complete penalty reductions, that is, up to 100%. 

Manika Brar, Partner at law firm Shardul Amarchand Mangaldas and Co., pointed to the framework being built on the concept of ‘game theory.’ This means that even if one participant opts to continue with their conduct, it constantly faces the risk of another disclosing the existence of the cartel. “Therefore, it is always beneficial to be the first party to come clean, as that would mean that the leniency offered can even extend up to 100%,” says Ms Brar. 

What about confidentiality?  

According to CCI, the identity of the ‘lesser penalty’ applicant is kept confidential till the passing of the final order and completion of proceedings. Risks here emerge on two potential fronts: first, harm to reputation at a larger scale, and second, turning against peers. 

Ms. Brar states that the confidentiality clause has not disincentivised companies so far from seeking leniency. “Of course, there are considerations, such as community and reputational harm, but for businesses, the risks of not seeking leniency are significant in terms of huge penalties that can ensue, which can result in further loss of business opportunities as well as competitive disadvantage,” she said. 

Image for representational purposes

The story so far: Striving to further consolidate regulations pertaining to mergers, particularly those relating to the digital ecosystem, the Competition Commission of India (CCI) on September 5 floated a consultation paper proposing the CCI (Combinations) Regulations, 2023. The proposed code would replace the existing regulations, initially formulated in 2011. It would also follow up on the amendments introduced to the Competition Act by the Parliament earlier this year. Comments to the proposed regulations are invited until September 25.  

What is the endeavour behind the exercise? 

In April this year, the Competition (Amendment) Act, 2023 was enforced following its passage by both Houses of the Parliament. As enumerated when it was first introduced in August 2022, it had taken cognisance of “significant growth of Indian markets and a paradigm shift in the way businesses operate in the last decade.” Thus, the act, also relying on the “experience gained out of functioning of the Commission,” sought to introduce more regulatory certainty and an overall trust-based environment. 

Among other things, the amendment introduced a new notification criterion, that is, a deal value threshold of Rs. 2,000 crore, besides requiring that the enterprise being acquired, merged or being amalgamated should have substantial business operations in India. To put it simply, any merger or acquisition exceeding the threshold would mandatorily require CCI approval. This was among the recommendations made by the Standing Committee on Finance assigned the task of examining the bill when it was first introduced.

Taking note of the definition initially accorded to value of transactions, it highlighted that uncertainty about thresholds could potentially bring transactions likely to cause “adverse effects on competition under the merger control mechanism.”

The report notes imperative observations relating to the ‘value of transactions’ in the digital market space, while enumerating the salient features of the bill. It stated that though the enterprises being acquired have minimal assets and turnover, they may have huge potential in terms of valuable data, technologies and market information etc. Hence, there is a necessity for a definite threshold.

 

An often-cited example of this paradigm was Facebook’s acquisition of WhatsApp which did not require the competition regulator’s clearance for traditional companies.  

So, what do the regulations propose? 

The most important of the regulations relate to the definitions proposed with respect to ‘value of transaction and criteria for substantial business operations in India’.  

The regulations propose that an entity would be deemed to be an ‘enterprise’ with ‘substantial business operations’ in the country should the number of its users, subscribers, customers or visitors, at any point of time during the preceding twelve months constituted 10% or more of its overall global count. This would be cumulative of all products and sources. Additionally, the criterions also entail that gross merchandise value during the same is 10% or more of the global share. The same holds for their turnover in India with respect to its global share.  

For perspective, ‘gross merchandise value’ means cash, receivables, or any other consideration either for or facilitating sale of goods and/or provision of services on its own or as an agent or otherwise. It relates directly to any kind of goods sold. 

Entities would now also have to enumerate the arrangements entered as part of the transaction or incidental arrangements entered anytime during the preceding two years from the date of the transaction. These could be about technology assistance, licensing of intellectual property rights, usage rights to any product, service or facility, supply of raw materials or finished goods, branding and marketing (a non-exhaustive list.)

How do they help? 

Broadly, the proposed regulations address M&As in the digital space and list down definite criterions for easier compliance.  

According to Anshuman Sakle, Partner at Khaitan & Co, the overall changes are progressive and have been implemented after much deliberation. “Certain high-value transactions which earlier were able to escape scrutiny would be caught in the CCI’s net and would allow the regulator to assess the impact from transactions in the relevant markets,” he told The Hindu.  

Further, according to him, for transactions involving listed targets, there could be “significant ease in compliance”. “Until now, acquirers have faced gun-jumping risks due to the suspensory nature of the law. The exemption involving on-market transactions has long been demanded by the industry and would allow transactions involving listed companies to be structured with greater freedom,” he elaborated. Mr Sakle adds that acquirers would now be able to implement open market purchases at the first instance without risks from a competition law perspective. 

The proposals are also expected to bring about an increase in the number of merger filings, which Mr Sakle states would be because of an additional threshold to consider. “We could possibly see an increase in reportable transactions in the technology space. Transactions where acquirers are paying a significant premium could also fall within the regulatory net,” he added.