– Sheena Verma*
The COVID-19 pandemic has wreaked havoc on the global economy, thereby bringing various antitrust issues to light. One such issue pertains to whether competition authorities should consider allowing crisis cartels to function. I argue that an exemption for restructuring cartels is necessary to deal with the current economic crisis, specifically the problem of overcapacity. I substantiate my argument with examples of Indian industries that are currently plagued by overcapacity. First, I discuss the measures adopted by various antitrust authorities to combat the effects of the crisis on the economy. Second, I briefly analyse the advisory issued by the Competition Commission of India (‘CCI’) vis-à-vis the pandemic. I then introduce the issue of overcapacity, which is a major challenge faced by multiple sectors of the Indian economy, and lay out how the CCI can play an important role in mitigating its effects. I conclude with the suggestion that a temporary exemption be granted to the sectors worst affected by overcapacity.
Cartels are horizontal agreements between competitors who are on the same level of the production chain. Such agreements have, as their very object, the restriction of competition in the relevant market. Such restriction of competition is considered so deleterious for the market that all competition regimes across the world have strict policies against them.[I] Therefore, they are considered per se anti-competitive, which means that the burden of proof lies on the opposite party to show that the agreement in question does not cause Adverse Anti-Competitive Effect (‘AAEC’). Section 3 of the Competition Act, 2002 (‘the Act’), prohibits both vertical and horizontal anti-competitive agreements. Vertical agreements exist between parties on different levels of the production chain and are judged on a rule-of-reason basis. For this, the CCI refers to the factors laid down under Section 19(3) of the Act to determine whether the agreement is anti-competitive or not.
A crisis cartel, as the name suggests, refers to a cartel formed to mitigate losses suffered by businesses during an economic crisis. The 2011 Organisation for Economic Cooperation and Development (‘OECD’) report on crisis cartels states that for a cartel to receive government backing, the parties involved must prove that there are no policy alternatives that will be effective in reviving the industry. If there are alternatives, the parties must show that cartelization is less harmful than those alternatives. The European Commission has also adopted a rather strict approach towards crisis cartels following the 2008 crisis. Even though the European Commission acknowledged that market forces are not always capable of resolving unpleasant market situations, it stuck to its view that cartels do not benefit anyone. Therefore, it is amply clear that cartels are not condoned unless it is a matter of last resort. The CCI has followed the same unbending approach towards cartels. Anti-competitive agreements falling under Section 3 of the Act are presumed to cause AAEC on the market and the burden to prove otherwise is on the opposite party. In the Cement Cartel case,[ii] the CCI imposed a penalty of INR 63.17 billion on the opposite parties for entering into price fixing cartels and controlling the production and supply of cement in the market. The CCI also slapped a penalty of INR 2.58 billion on Jet Airways, Indigo, and SpiceJet for acting in collusion and collectively fixing fuel surcharge for the transportation of cargo.[iii]
How Are Global Competition Authorities Coping with the Current Crisis?
To deal with the current COVID-19 crisis, antitrust regulators across the globe have adopted a more flexible approach towards certain contraventions of their rules. However, it is evident that the intention behind such leniency is to ensure that competition rules do not hinder the supply of healthcare products and other essential goods and services. The European Union (‘the EU’) has released a detailed guideline stating that the European Commission shall provide guidance and legal certainty to pharmaceutical companies who may need to co-ordinate to meet the high demand in the sector. The Commission has also released a communication specifically for the airline sector, clarifying that it will not actively intervene against necessary and temporary measures taken to address a shortage of supply. The Norwegian competition authority, Konkurransetilsynet, has granted a temporary exemption from competition laws to the transport sector. The Icelandic Competition Authority has opened up an information centrededicated specifically to responding to queries regarding the current pandemic. Similar actions have been taken by the Finnish Competition Authority in granting exemptions to collaborations aimed at securing the supply of essential goods and services. The European Competition Network (‘the ECN’) also released a joint statement conveying similar intentions. The UK Competition Authority has rolled out an exhaustive list of products and services which qualify for the exemption that they are granting in view of the current situation. It is important to mention that all such exemptions have a caveat attached, i.e. no undue advantage shall be condoned by the authorities.
The CCI’s Position
The CCI has responded along similar lines and has rolled out an advisory to address the situation. Amidst all the panic and chaos, the advisory comes as a relief for businesses in the healthcare and essential services sector. It acknowledges that businesses may need to collaborate to ensure continued supply and fair distribution of medical equipment and other essential products. They may do so by exchanging information that is otherwise prohibited, such as data, research and development (‘R&D’), distribution networks, production, etc. This does not imply that businesses can take undue advantage of the situation and engage in profit maximization. The CCI has warned that it will only consider such conduct which is “necessary and proportionate”. It also emphasizes that the Act already has inbuilt safeguards to allow co-ordination that increases efficiency and consumer benefit. Such co-ordination shall be analysed in light of the factors laid down under Section 19(3) of the Act. Therefore, businesses may co-ordinate as long as it is to make sure that nobody suffers from a scarcity of essential products and services.
The CCI has provided a non-exhaustive list of the products and services that it considers essential. However, this might create a confusion as to which other products and services fall under the ambit of the advisory, because the advisory does not specify what ‘essential commodities’ means. For example, pet food might not conventionally be seen as an essential commodity, but it is essential for households with pets. Other such examples are gardening equipment or tobacco products. Perhaps the CCI could adopt the same approach as the UK Competition Authority that, as mentioned above, came up with an exhaustive list of essential commodities and services. Apart from this, the CCI is also vague in terms of what it means by “necessary and proportionate conduct”. Since this lenient approach of the Commission is unprecedented, it may be difficult for businesses to assess the CCI’s standards of what is necessary and proportionate. Considering the heavy penalties imposed by it in the past, not many businesses would be willing to take risks at a time like this. It may discourage parties from co-ordinating even for the purpose of ensuring the supply of an essential product, thereby defeating the purpose of the advisory altogether.
Overcapacity: An Antitrust Conundrum
As mentioned above, cartelization is detrimental to competition. However, under extraordinary circumstances such as the current pandemic, cartelization can facilitate the closure of excess capacity.[iv] However, like most competition authorities, the CCI has failed to address this pertinent issue in its advisory. Overcapacity refers to a situation in which the production rate of an industry surpasses the demand rate. As a response, competitors sometimes collectively agree to reduce the capacity in order to neutralize the losses suffered by them, thereby forming a cartel. Such agreements are generally prohibited because of their anti-competitive character.
However, there have been cases in the past wherein crisis cartels aimed at rationalizing overcapacity have been condoned. The 1984 Synthetic Fibres case is one such example. The European Synthetic Fibres industry had been suffering due to weak demand and increased import penetration, which made it difficult for the producer to reap economies of scale. Nine producers entered into an agreement aimed at reducing the capacity, thereby restoring the imbalance in demand and supply. One of the arguments presented by the parties was that the reduction in excess capacity will eliminate their plants which were non-viable and obsolete, leaving only those plants which were actually competing. The European Commission declared that the provisions of Article 101(1) of the Treaty on the Functioning of the European Union (‘TFEU’) shall be inapplicable to the agreement for 3 years, provided that the parties do not exchange information of their individual output and deliveries. Another example is the Stitching Baksteen case wherein the agreement in question also aimed at reducing overcapacity. The Dutch brick industry was beset by a structural fall in demand, and lower prices resulting in excess capacity. The European Commission granted an exemption of 5 years to the said agreement.
A Sector Wise Look at the Indian Economy
In light of the above, it is relevant to look at the condition of some of the worst-hit sectors of the Indian economy that are on the verge of overcapacity. According to the International Credit Rating Agency (‘the ICRA’), the Indian commercial vehicle industry has fallen prey to surplus capacity because of the pandemic and lockdown measures. The industry witnessed the worst volume contraction in more than a decade in FY2020, with wholesale sales going down by 29%. Industry volumes are expected to further contract by 25-28% during the current fiscal. The ICRA also reported that a recovery in sentiments is unlikely over the near to medium term. The lockdown has also severely impacted the auto component industry because of a halt in production and a scarcity of working capital. Research by the ICRA suggested that the production has gone down by around 14.7% and is expected to drop further by a double-digit decline in FY2021. The recovery of the sector is expected to be slow and gradual. It is important to note that the auto component sector employed 50 lakh people in 2018-19.
The aviation consultancy firm Centre for Aviation (‘CAPA’) has warned that the Indian aviation sector is at its breaking point due to the pandemic. It expects Indian airlines to lose around $3 billion to $4 billion in the current financial year, until the end of March 2021. The president of the PHD Chamber of Commerce and Industry (‘PHDCCI’), D.K. Aggarwal, said that a minimum of Rs 30,000 crore to Rs 50,000 crore of financial aid is required to revive the aviation sector. He also added that a full revival of the airline sector will not happen until 2022. This comes at a time when the Indian airlines industry was already in a deplorable state, with Jet Airways shutting down operation sin April 2019, and the government’s repeated attempts to sell the debt-laden Air India. The industry has been facing problems such as rising fuel prices, depreciating value of the Rupee, loss of employment, etc. This is in addition to the problem of excess overcapacity being faced by the airline industry globally.
The Micro, Small, and Medium Enterprises (‘MSME’) industry has also been one of the worst-hit sectors due to the nation-wide lockdown, and is on the verge of collapse, as stated by Union Minister, Mr. Nitin Gadkari. Non-performing assets in the industry are expected to go up as businesses find themselves incapable of paying the moratorium. It is relevant to note that job losses in the MSME sector could account to a whopping 45 million by the end of August.
The above data shows that several important industries are on the edge of overcapacity, and this issue might turn structural over time, because none of the rival market players will back down to reduce their capacity. This is also known as prisoner’s dilemma. Once plagued with structural overcapacity, businesses will resort to job cuts as a way of cost rationalization. Moreover, small businesses will be forced to exit the market and only a few big players will survive. This will directly affect the consumers in the long run because of the lack of options in the market created by restricted competition. It further disincentivizes businesses to compete in terms of lower prices, innovative products, and better quality.
However, this can be avoided if the CCI allows competitors to exchange information on production rates and co-ordinate accordingly to reduce surplus capacity, thereby forming a crisis cartel. The Commission can carve out temporary exemptions for competitors in those sectors that are currently at their lowest. However, such a measure will require strict regulation to ensure that no other confidential information is exchanged between the competitors. As mentioned earlier, such an approach has been adopted in the past as well (Synthetic Fibres case and Stitching Baksteen case). It is also important to note that if the status quo is maintained, the domino effect of the downfall in the above-mentioned sectors can severely impact the other sectors as well.
State Aid as an Alternative
As the world economy bears the brunt of the pandemic, the issue of overcapacity has become a global one. It is important to briefly look at how the other competition regimes are dealing with overcapacity. The EU has specific provisions to deal with economic losses during times of crises. One such effective provision is Article 107(2)(b) of the TFEU that provides for state aid measures during natural disasters or exceptional circumstances. The EU has classified COVID-19 as an exceptional circumstance under the said article and has introduced a temporary framework, approving at least 30 state aid measures, which total to more than EUR 325 billion. The French President, Emmanuel Macron, has guaranteed that no French business will face bankruptcy, with unlimited state financial aid available. State aid measures are capable of achieving efficiency benefits by removing inefficient capacity from a market.[v] It can help a great deal in providing the emergency liquidity needs of a company, keeping it afloat in the market. Although it does not completely negate the ill-effects of overcapacity, it helps maintain the competition by ensuring that small businesses are not forced to exit the market.
However, before considering state aid as a solution to overcapacity in the Indian industries, it is important to keep in mind that developing countries often lack the resources to offer subsidies from the state budget.[vi] This is especially relevant now because India’s resources are already overburdened due to the pandemic. Moreover, the economy had not been doing particularly well even before the pandemic. It is hard to tell whether state aid alone can suffice when dealing with an economic crisis as severe as the current one.
The pandemic has aroused the need for a much more pragmatic and economic approach to crisis cartels. The per se restriction that the Indian law applies to horizontal agreements puts the burden of proof on the opposite party. It means that if the opposite party is able to convince the CCI that the positive impacts of the cartel outweigh the negative ones, it may be condoned. However, in the absence of any Indian precedent or a specific provision that governs crisis cartels, it becomes difficult for businesses to determine what constitutes acceptable behaviour. Therefore, the need is of a provision that delineates the boundaries between restructuring cartels, and cartels that are simply formed for profit maximization. However, as a short-term measure, temporary exemptions should be given for sectors where it is most necessary. It is important to acknowledge the role that a restructuring cartel can play in driving out surplus capacity, thus maintaining healthy competition. The CCI must take prompt action and address the alarming situation.
* Sheena Verma is a third year student at the Rajiv Gandhi National University of Law, Punjab. She would like to thank Mr. Prashant Meherchandani and the editors of NLSIR for their help in improving this article.
[i]‘Policy Roundtables: Crisis Cartels’ (Organisation for Economic Co-operation and Development 2011) <http://www.oecd.org/daf/competition/cartels/48948847.pdf> accessed 17 November 2020.
[ii]Builders Association of India v Cement Manufacturers’ Association & OrsCase No 29 of 2010 (Competition Commission of India).
[iii]Express Industry Council of India v Jet Airways (India) Ltd, Indigo Airlines, SpiceJet Ltd, Air India Ltd, Go Airlines (India) LtdCase No 30 of 2013 (Competition Commission of India).
[iv]Crisis Cartels (n 1).