[2020] 

119 taxmann-nlul.refread.com/rpa/taxmann_com 352 (Article)

Date of Publishing: September 24, 2020

The Ambiguous Nature of Penalty and Leniency in The Indian Competition

Regime Decoded
SHIV VERMA

Introduction

A. The Competition Act, 2002 ("Act") follows the modern philosophy of promoting fair and clean
competition in the market by protecting against anti-competitive practices by enterprises. The Act
prohibits any agreement which causes, or is likely to cause, appreciable adverse effect on competition
("AAEC") in markets in India. Cartels are a result of one such agreement between various players in a
market. Section 2(c) of the Act defines 'cartel' as 'an association of producers, sellers, distributors,
traders or service providers who, by agreement amongst themselves, limit, control or attempt to control
the production, distribution, sale or price of, or, trade in goods or provision of services.' To protect the
economy from anti-competitive practices such as cartelisation, the Competition Commission of India
("CCI/Commission") is vested with extensive investigatory, adjudicatory and penal powers.

In this article, we will be specifically discussing the penal powers which are vested with the CCI to
impose penalty for cartelisation, a creative leniency mechanism to better facilitate investigation and
lastly throw light on how parties under an investigation can make best use of the provided leniency
mechanism.

Punishment for Cartelisation

B. After concluding an investigation, if the CCI finds any party in violation of the provisions of the Act
and the existence of AAEC, it may pass appropriate orders under Section 27 of the Act which can
include a cease and desist order, imposition of penalty on the members of the cartel which is either
three times the profit made during the period of cartelization or 10% of their turnover for such year
(whichever is higher), direction to any modification to the impugned agreement and passing any other
order which the Commission may deem fit. The underlying objective behind imposition of penalty is
two-fold: to reflect on the seriousness of the infringement and to deter the infringing undertakings.

However, in spite of the clear text of Section 27, imposition of penalty remains a highly contentious
issue, especially in light of the varying factual conditions that exist between companies and in the
market. Indeed, while imposing penalty, the Commission itself acknowledges that it benefits from wide
discretionary power by the Legislature. However, there are no set guidelines, mechanism or precedence
to explain which factors result in a high punishment. This leads to varying results for similar situations
or meagre penalties in cases where a higher penalty is fully justified due to severe contravention and
substantial impact. For instance, in Cartelization by Public Sector Insurance Companies, In re [2015]
59 taxmann-nlul.refread.com/rpa/taxmann_com 214 (CCI) in rigging the bids submitted in response to
the tenders floated by the Government of Kerala for selecting insurance service providers for Rashtriya
Swasthya Bima Yojna (2015), the parties were found guilty of bid rigging by colluding to increase the
price for the tenders which were released by the government of Kerala. The CCI, after noting the bona
fide objective of the social welfare scheme, the collective and anti-competitive conduct of the parties
and the need to maintain the solvency of the insurance companies, surprisingly decided to only impose
a penalty of 2% which was significantly less compared to the annual turnover the parties generated in
the preceding three years. Moreover, many times the Commission itself takes the liberty to note various
mitigating factors even if the parties do not raise them. For instances, in In Re: Alleged Cartelization in
the matter of supply of spares to Diesel Loco Modernization Works (2014), the parties were again found
guilty of bid rigging but none of the parties raised any mitigating factors to claim lesser penalty and
instead the Commission noted mitigating factors itself, on the basis of which decided to impose a
penalty of 2%. The amount of penalties imposed by the Commission have also been inconsistent in
similar conditions. For instance, in the case of Director, Supplies & Disposals, Haryana v. Shree
Cement Ltd. [2017] 78 taxmann-nlul.refread.com/rpa/taxmann_com 70 (CCI) the CCI imposed a
meagre penalty of 0.3% of the average turnover of the preceding three years of the cement
manufacturers which were involved in bid-rigging, after noting the peculiarities of the tendering
process and the various pleas raised by the parties. However, in the case of Builders Association of
India v. Cement Mfgrs. Association [2016] 73 taxmann-nlul.refread.com/rpa/taxmann_com 247, the
CCI imposed its highest ever penalty of over Rs. 6.5 thousand crores on the same cement
manufacturers.

The case of Excel Crop Care Ltd. v. Competition Commission of India [2017] 81 taxmann-
nlul.refread.com/rpa/taxmann_com 173/141 SCL 480 (SC), brought much needed clarity regarding
penalty. In the case, the Supreme Court expounded the concept of 'relevant turnover' (which refers to
the turnover generated only from the product which was subject to cartelization) and illustrated certain
mitigating factors which the Commission can use to determine the quantum of penalty which includes:

  the nature, gravity and extent of the contravention;

  the role played (ringleader or follower);
  the duration of the participation;
  loss or damage due to the contravention;
  market circumstances;
  the bona fides of the company; and
  the profits derived from the contravention

The mitigating factors go a long way in help reducing the penalty and, in many cases, the Commission
has entertained them. The Excel Crop Care Ltd. case (supra) detailed the process of imposing penalty
by firstly determining the 'relevant turnover' of the products/services in issue and then calculating the
appropriate percentage based on the circumstance of the case. Even so, the wide discretion vested into
the CCI and its unpredictable nature in determining the quantum of penalty, makes it difficult for
parties to cope up with the losses of huge penalties (or prepare for it) and sometimes allows them to go
scot-free for their delinquent behavior. In cases where penalty is for certain, harsh penalties can be
devastating and the facts of the case are too complex, parties may do better by pleading for leniency and
seek reduction on the penalty.

Provisions for Lesser Penalty

C. The Indian competition regime also allows cartel members to receive a lesser penalty in exchange for
giving crucial information and cooperating to the CCI during its investigations of an alleged cartel. This
can be a seductive option for parties where the risk of the penalty is very high and when the facts of the
case are too complex to result in a favorable option while fighting the charges. However, this comes with
the caveat that the party pleading leniency essentially concedes of its participation in the cartel and
must apply for leniency before or during the investigation by the Director-General to successfully
benefit from leniency.

According to Section 46 of the Act, the CCI may impose a lesser penalty if an enterprise engaged in a
cartel makes a full and true disclosure in establishing a violation of Section 3 of the Act. To this end, the
Competition Commission of India (Lesser Penalty) Regulations, 2009 ("Lesser Penalty
Regulations") lay down extensive provisions for the leniency mechanism. Any cartel member or
individual on behalf of cartel member can approach the commission with a leniency application
admitting its participation. Individuals for whom a lesser penalty is sought should also be mentioned in
the leniency application. The 2017 Amendment to the Lesser Penalty Regulations brought substantial
changes in the regulations by removing the restriction on the maximum number of leniency applicants,
clarifying when the identity or any confidential information provided by an applicant can be disclosed,
expanding the scope of leniency applicants by allowing individuals to file for leniency and in providing a
clear cut timeline in the procedure for claiming leniency. The changes brought by the 2017 Amendment
encourages parties to assist the Commission in giving vital information about cartel since spotting
cartels in a market remains a tedious and difficult task.

The procedure to claim leniency is fairly straightforward and thoroughly explained in the regulations
themselves. Any applicant seeking lesser penalty must fulfill the following essential conditions-

  cease further participation in the cartel unless otherwise directed by the

Commission;
  provide vital disclosure (full and true information which suffices to form a prima
facie opinion about the existence of cartel or of breach of Section 3 of the Act) in
respect of contravention of Section 3 of the Act;
  provide all evidence, documents or information required by the Commission;
  cooperate fully, continuously and expeditiously with the Commission; and
  not conceal, destroy or manipulate any evidence;
  in case the applicant is an enterprise, provide the names of those individuals who
were involved in cartel and for whom lesser penalty is being sought.

The Commission may consider various factors while exercising its discretion regarding reduction of
penalty which includes: the stage at which the leniency application is filed, the evidence in possession,
the quality of information provided and the facts and circumstances surrounding the case. In case the
CCI finds that the applicant has made a 'vital disclosure' (through any vital information or evidence
which was not known previously) before or during the investigation which prima facie proves the
existence of a cartel, it may grant a penalty reduction of up to 100%. This is true for the first applicant
and subsequent applicants must provide 'significant added value' (which enhances or further adds on
the evidence proving cartelization) to the evidence already in possession to claim leniency with the
second applicant eligible to claim reduction up to 50% while third and other subsequent applicants are
eligible to a reduction of 30%.

There have been many instances where parties have availed the benefit of the Lesser Penalty
Regulations to reduce their liability. However, the trend of the CCI in entertaining leniency applicants is
unpredictable and mostly void of precedence as evident from settled cases. For instance, in the very first
leniency application decided by the CCI in In Re: Cartelization in respect of tenders floated by Indian
Railways for supply of Brushless DC Fans and other electrical items [2017] 78 taxmann-
nlul.refread.com/rpa/taxmann_com 111, only a reduction of 75% of the total leviable penalty was
granted to Pyramid Electronics since it had disclosure information only after the investigation had
commenced and had cooperated with the CCI. However, in Nagrik Chetna Manch v. SAAR IT
Resources (P.) Ltd. [2019] 109 taxmann-nlul.refread.com/rpa/taxmann_com 195, the CCI granted
leniency to 4 out of the 6 applicants where the first applicant had been granted a 50% reduction since it
had filed the leniency application after the investigation commenced and another applicant only a
reduction of 25%. In contrast, in the case of Cartelization in the Supply of Electric Power Steering
Systems In re [2019] 110 taxmann-nlul.refread.com/rpa/taxmann_com 74 (CCI) one of the parties was
granted a reduction of 100% while another party which filed the application during the course of the
investigation was allowed leniency up to 50% of the total penalty amount since it had provided
'significant value added' to the evidence. Therefore, while time remains of the essence in pleading
leniency, it may not be necessary that the Commission may fully entertain the application and allow a
reduction of 100%. Instead, an applicant, in addition to applying at the most opportune time, must also
provide vital information which can help in getting a reduction of 100%. However, since the CCI is
vested with great discretion while entertaining leniency application and does not seem to stick to
precedence, parties may be deterred from pleading leniency since it can result in an opposite outcome
and jeopardize their defense. This is further fueled by the fact that not every piece of information can
result in a reduction but only 'vital disclosure' or 'significant added value' which is ultimately based on
the discretion of the CCI due to lack of any judicial interpretation or detailed explanation under the
Lesser Penalty Regulations. So, while cooperation with the CCI alone, may not lead to substantial
reduction in the penalty, but when coupled with vital information at the most opportune time may lead
to full leniency.

In spite of the various issues while claiming leniency in an ongoing case, in case of whistleblowers, the
situation is quite different as the CCI appropriately awards the whistleblower with full leniency while
ensuring its confidentiality. For example, in Cartelisation in respect of zinc carbon dry cell batteries
market in India, In re [2018] 93 taxmann-nlul.refread.com/rpa/taxmann_com 71 (CCI), Panasonic
filed an application under Regulation 5 of the Lesser Penalty Regulations and provided vital
information which exposed a cartel in dry cell batteries in India. For this, it was awarded full leniency
while subsequent applicants were given a lesser reduction. Similarly again in Anticompetitive conduct
in the Dry-Cell Batteries Market in India, In re [2019] 102 taxmann-
nlul.refread.com/rpa/taxmann_com 153 (CCI), Panasonic tipped off a six-year long cartel between
Panasonic, Godrej and Geep by providing vital disclosures for which Panasonic was again awarded a
100% reduction on the penalty. Moreover, there may be instances where parties may claim leniency by
mentioning certain mitigating factors and proving its continued good conduct. For instance, in the case
of Cartelization in Industrial & Automotive Bearings, In re (2020), the CCI noted that one of the
parties had cooperated with the DG, provided vital information, was not a habitual offender and had
faced losses during the period of cartelization. Due to these mitigating factors, the CCI did not penalize
that party but only passed a cease and desist order and warned of strict action in case of failure to
comply. Therefore, leniency can be a fruitful option when an applicant can substantially prove the
existence of strong mitigating factors, good past conduct or when an applicant is a whistleblower.
However, for whistleblowers, the information must amount to a 'vital disclosure' to benefit from full
leniency or otherwise it can prove to be counter-productive.

Concluding Remarks

D. Leniency can prove to be a lucrative option in the Indian scenario since market players in the
country are motivated by incentives to act. The current leniency framework is moving towards the right
approach by codifying the exact mechanism, increasing the scope of leniency and protecting the
confidentiality of the applicant but rests too much on the discretion of the CCI which deviates from
precedence and is highly factual in its approach. Due to the unknown nature of the Lesser Penalty
Regulations and the amount of discretion vested with the CCI, parties often prefer to fight the case
instead of seeking a lesser penalty which may result in no good outcome and instead jeopardize the
defense. To make the leniency more productive, the Commission must reduce the amount of discretion
vested with it, rule or differentiate more on the basis of precedence and bring more clarity on the
functioning of the Lesser Penalty Regulations either by way of amendment, order or official note.

The penalty which the Commission has the power to impose can be troublesome for big corporates and
back-breaking for small and medium size enterprises. Therefore, companies must be wary that their
actions do not contravene the provisions of the Act and abstain from cartelization. In case a company
seeks leniency, it must keep in mind the following points:

  Evaluate the facts and circumstances of the issue to decide whether a leniency
application is the best course of action. Once an application is filed, the business
accepts its participation in the cartel, thus making it difficult to defend against the
same due to estoppel. Subsequent applicants may instead fare better to fight the
charges instead of claiming leniency,
  Fill the leniency application without delay to ensure maximum consideration and
reduction by the Commission. A subsequent application or an application during the
stage of investigation will generally not result in greater reduction of penalty.
  Provide extensive information which prima facie proves the existence of a cartel and
reduces the burden on the CCI. To this end, the applicant must mobilise all the
relevant information, communications, agreements, information regarding key
players, etc. which can directly prove the existence of a cartel,
  Any subsequent application must add significant value to the evidence already in
possession with the Commission. Any reiteration will not be helpful in claiming
reduction in penalty and would jeopardise its defence. Since a subsequent applicant
will not be aware of the disclosures made by the first applicant due to the
confidentiality provision, its application must be detailed and must contain
information which is unique, and
  Raise substantial mitigating factors such as cooperation with the Commission,
history of continued good conduct, no or substantially less profits during the period
of cartel, size of business, lesser role in the cartel etc. to benefit from small if not
total leniency.

While the above points are merely indicative, the CCI has shown to give due consideration to them in
the past cases. However, even in case the CCI grants a reduction, the damage to the goodwill and the
reputation to an enterprise which is found guilty of misconduct is irrecoverable. That is way, companies
must keep in mind that 'prevention is better than cure' when it comes to the competition law in India.

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