Imposition of Penalty by the CCI: Is it Justified?

[The following guest post is contributed by Tarun Mathur, who is a Manager at Ernst & Young, LLP (Mumbai) and has earlier worked with the Competition Commission of India in its Combination Division. Views are personal.]Recently in an order(Notice given by Piramal Enterprises Limited (PEL) (C-2015/02/249)) dated May 2, 2016, the Competition Commission of India (CCI) imposed a penalty of INR 50 Million on PEL for:(a)        not filing the combination notification for its pre-approval; and (b)       consummating the combinations transaction without its approval as required under the the Competition Act, 2002 (Competition Act) and the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (Combination Regulations).The PEL order is an interesting read on various aspects of competition laws as is applicable and as understood by the CCI.  Unless challenged before the Competition Appellate Tribunal (COMPAT) by PEL, this interpretation will remain the law of the land. In my view, the issues and finding contained in this order need further clarification as they go to the root of the basic nuances of competition law in India. It is not clear if PEL has preferred (or will be preferring) an appeal against this order.BackgroundPEL acquired (a) 9.96 % stake in Shriram Transport Finance Company in May 2013 from the stock exchange by way of a contract note (STFC Transaction); (b) 20% equity stake (directly and indirectly) in Shriram Capital Limited (SCL), pursuant to the execution of an agreement in April 2014 (SCL Transaction); and (c) 9.99 % stake in Shriram City Union Finance Limited in June 2014, pursuant to a preferential allotment (SCUF Transaction).The CCI took suo moto cognizance of the above three transactions and asked PEL to explain why no combination notification was filed with the CCI for its approval. In a turn of events, PEL filed the Form II combination notification with the CCI and the CCI approved of the combination vide its order dated May 26, 2015, while simultaneously initiating the proceeding for levying of penalty under Section 43A of the Competition Act (which deals with the power of the CCI to impose penalty for non-furnishing of information on combinations). This post discusses in brief the penalty levying order by the CCI.The CCI Order in briefI have briefly highlighted the important aspects discussed in the PEL order below:1.   Wrongful interpretation of ‘control’ by the Parties: Since the conception of Combination Regulations in 2011, competition law practitioners are being constantly plagued by the possible interpretation of expressions ‘control’, ‘ordinarily not likely’,  ‘acquisition of sole or joint control’, ‘solely as an investment’ etc., by the CCI. However, much clarity (I must say at the expense of various parties to a combination transaction) have come from the decisions / orders of the CCI over a period of five years and for the time being has been laid to rest by the recent amendment (in January 2016) of  the Combination Regulations. In the instant case, PEL had admitted that it had committed an error and had wrongfully interpreted the definition of ‘control’ and it ought to have filed the combination notification, which it failed to do so. However, there was no mala fide intent to evade the compliances required under the Competition Act.  The acquisition of 20% stake in SCL, including some affirmative rights such as: (a) approval of the appointment of the chief executive officer and the chief financial officer of SCL; (b) alteration of charter documents; (c) determining the business plan and annual budget; (d) appointment or removal of auditors; and (e) commencement of any new business line by SCL tantamount to acquisition of ‘control’ and therefore becomes a notifiable transaction (although the transaction does not hit the limit of 25% shares/ voting rights as prescribed under item 1 of Schedule I of Combination Regulations (categories of transactions not likely to have appreciable adverse effect on competition in India). However, according to the CCI, the presence of certain affirmative rights such as those listed above gives rise to the presumption that the acquirer has de facto control over the target enterprise (a stand that the CCI has adopted in several previous orders). Therefore, such transactions are not eligible for exemption under Regulation 4 read with Schedule I of the Combination Regulations).2.   What an enterprise writes in its annual reports / other reports and speaks through its representatives is important: Seemingly, it appears that each of the STFC Transaction and the SCUF Transactions are separate stand-alone transactions and are independent of the SCL Transaction. The statements made in the annual reports about these three transactions give the impression that, somehow in the overall scheme of things, these transactions are inter-connected and strategic in nature. In my humble submission, howsoever the word ‘strategic’ is interpreted or viewed in the context of facts and circumstances, the core essence remains that these three transactions are independent of each other and have almost nothing in common and are completely different in terms of transaction documents, rationale, mode of transfer, business and entities involved and timing of each transaction. 3.   EU concept of inter—connectedness incorporated into Indian competition laws: Another interesting feature of PEL order is the acceptance of European Union laws, namely here, European Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings (2008/C 95/01)  (EU Merger Control Rules) for interpretation of competition laws in India. In terms of EU Merger Control Rules (at para 50):“If two or more transactions (each of them bringing about an acquisition of control) take place within a two-year period between the same persons or undertakings, they shall be qualified as a single concentration, irrespective of whether or not those transactions relate to parts of the same business or concern the same sector… It is sufficient if the transactions, although not carried out between the same companies, are carried out between companies belonging to the same respective groups.”By this logic, three acquisitions by PEL of equity shares of companies belonging to the Shriram Group, carried out within a two year period, were considered as inter-related transactions.4.   Time-limit before the CCI can initiate suo-moto inquiry: Proviso to Section 20(1) of the Competition Act provides that the CCI does not have any suo moto power to inquire into a combination transaction in which one year has passed since the transaction was given effect to. In the instant case, according to the CCI, STFC Transaction, SCL Transaction and SCUF Transaction are inter-connected transactions and since the SCUF Transaction was given effect to in June 2014 and the CCI inquired about these transactions in October 2014, the CCI is well within its power to inquire into such transactions.  If this logic is followed, then any further acquisition of any other Shriram Group entity in future by PEL (howsoever unconnected to the first three transactions (by June 2016)) will prolong the jurisdiction/ power of the CCI to inquire in to transaction and leaves the question open as to whether the parties will be required to file a new combination notification or not (even if the new transaction is in itself a non-notifiable transaction). 5.   Mitigation factors for imposition of penalty: In terms of Section 43A of the Competition Act, the CCI can levy a maximum penalty of one per cent of the combined value of worldwide assets of the combination. However, while determining the quantum of penalty, among other things, the CCI undertakes an analysis of certain mitigating factors. In the PEL order, while penalizing PEL INR 50 Million, it took into consideration, mitigating factors such as (a) lack of any mala fides intent; (b) no prior competition law violation; and (c) continuous co-operation with CCI through the process (from combination notification filing to this order) on part of PEL. However, there is no specific list / guidelines for the enterprises to ascertain what mitigating factors CCI will consider for quantification of penalty amount.Further, what made it penalize PEL for INR 50 Million and  not INR 1 or for that matter INR 1.025 Billion (maximum penalty of 1 % of the combined value of worldwide assets of the combination) is not altogether clear. I believe now is the right time for CCI to fulfil the demand of the business community of coming up with some sort of guidelines / notification for calculation of penalties for antitrust violations. It can even do so by medium of its decisional practice.EpilogueOn the basis of reading of several orders passed by the CCI, in my view it is rather clear that further contribution is desirable in the field (especially in its interpretation, analysis and appreciable adverse effect assessment of transactions) as to the predictability of the provisions of competition laws. CCI’s orders (including the PEL order) leave wide gaps as to the interpretation of competition laws, which give rise to a great deal of uncertainty. CCI in its formative years ought to strive to create world-class standards and a body of competition law jurisprudence, which stands the test of time and scrutiny by the appellate courts. – Tarun Mathur

Source: Corporate

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