Behind The Scenes: CCI's Methodology For Penalty Determination

1. Introduction

The Competition Act, 2002 ("Act") is the central statute which, through various provisions, aims to curb practices that affect competition adversely. Specifically, it prohibits anti-competitive agreements (section 3), prevents abuse of dominance (section 4) and regulates combinations (sections 5 and 6). The regulator and watchdog, Competition Commission of India ("CCI") is empowered to impose monetary penalties for findings of violations under the Act. Over time, there have been frequent requests for guidance on how penalties are calculated and imposed. The CLRC Report 2019¹ had emphasized the importance of establishing a clear basis for determining penalties. On March 6, 2024, CCI notified the CCI (Determination of Monetary Penalty) Guidelines, 2024 ("Guidelines") which provide a methodology for calculation of penalties for various violations. The Guidelines are short, contain eight provisions which explain the method of penalty determination under specific sections. The expectation is that the Guidelines will make the regulatory framework transparent, predictable and ensure the penalties imposed are just and equitable.

This newsletter analyses the aforesaid Guidelines.

2. Section 27 and 48 methodologies for enterprises and individuals

As noted above, once the CCI conducts an inquiry and finds agreements which violate section 3 or where an enterprise abuses its dominant position it can pass several types of orders under section 27 of the Act and 27(b) allows it to impose penalties for contraventions of these two sections.

2.1 Section 27 of the Guidelines: The method for calculating penalties under section 27 is elaborated in Chapter II of the Guidelines and is as follows. CCI will consider a base price that may extend up to 30% of the average relevant turnover or income. Base price may be determined considering the nature and gravity of contravention, the nature of the industry or sector affected, its implications on the economy and other relevant factors. Then, such base price may be adjusted up to 30% considering any or all the following ten factors stated in section 3(2) of the Guidelines:

• duration of the contravention and/or duration of involvement of the enterprise in the contravention
• role of the enterprise in orchestrating the contravening conduct
• use of coercive or retaliatory measures on other enterprises to participate or enforce conduct or practices constituting the contravention
• repeated pattern of violations
• admission of contravention (if any) and stage at which it is made
• furnishing cogent evidence of limited participation in contravening conduct
• cooperation extended by the enterprise during investigations
• volitional termination of alleged anti-competitive conduct and notifying to the CCI
• implementation of an internal competition compliance program; and
• any other factor CCI may deem appropriate.

For calculating the average relevant turnover or income of enterprises, CCI may consider the relevant turnover or income of three years preceding the year when Director General's investigation report is provided or sometimes depending upon facts, in the three years preceding the contravention. This turnover or income or relevant turnover shall be based on audited financial statements² certified by a statutory auditor, or in his absence, a Chartered Accountant, accompanied by an affidavit from an authorized enterprise representative. In cases where relevant turnover cannot be calculated, the Guidelines require global turnover to be factored. This was possibly introduced to account for challenges confronted where relevant turnover could not be calculated or would lead to a penalty disproportionate to the alleged anti-competitive activity. This happened in the case of Matrimony.com v Google.³ In this case, the CCI observed that the application ofrelevant turnoverwas insufficient as technology-based platforms employ a two-sided market. In the case of Google, while the search side is free, the other side is monetized through advertisements. Therefore, if no penalty is levied on the basis that search is free, it would stultify the very object of the Act. This was proposed to be remedied through the inclusion of "total turnover" but given the scale of activity conducted by multinationals has now been increased to global.

Additionally, if CCI believes there is not enough deterrence, it may exercise its discretion and further increase the determined amount to the legal maximum. Of course, time will tell the extent to which such discretionary power will be exercised and with what considerations, if any.

If cartels contravene section 3, the potential penalty under section 27 of the Act could be up to three times of profit after tax or 10% for each year of the continuance of the cartel, whichever is higher. Such penalty may be imposed on each producer, seller, distributor, trader or service provider of the cartel. The determining and guiding facts will be those listed above.

2.2 Section 48 methodology: Section 48 of the Act permits CCI to impose penalties on individuals (directors, officers, secretary, manager and anyone responsible for conducting company's business) who consent or connive and thereby contribute to the occurrence of the contravention by a company. Here, even neglect by the relevant individual(s) can lead to imposition of penalties.

In such instances, section 5(1) of the Guidelines stipulates the penalty can be up to 10% of the individual's income for the preceding 3 years. For cartels, it can be up to 10% for every year during which the agreement subsists.⁴ Section 5(3) of the Guidelines provides that calculation of average income shall be based on the gross total income filed in the tax returns of such person, excluding capital gains and property income. The CCI will evaluate the income of the individual for the same period as that of the company. For instance, if the period in question relates to FY 2016, 2017 and 2018, then the individual's income for the same period shall be considered. In the path to its determination, CCI will also evaluate varied factors, including mitigation. Here following assumes relevance

• Nature and gravity of the violation by the company
• Role, extent and duration of involvement of the individual(s)
• Cooperation extended by alleged perpetrators
• If it is a repeated contravention
• Evidence which demonstrates role and involvement of the person was limited
• Admission of the contravention
• Other factors, in the regulator's discretion.

3. Factors for combinations under section 43A

Section 43A of the Act permits CCI to impose penalties on individuals or enterprises that fail to notify it about any "combination" which causes or is likely to cause an appreciable adverse effect on competition. Under section 5 of the Act, acquisition of one or more enterprises or merger or amalgamation of enterprises, which exceed the prescribed thresholds is a combination unless it comes within the exemptions. In such instances, the acquirer must notify the acquisition or a hostile takeover; for a merger or amalgamation, a joint notice is to be filed by the parties. In case joint venture formation, all parties will be obligated to file a notice. Such notice(s) must be filed prior to consummation of the transactions. If a combination causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India, it can be modified or prohibited by the regulator. If parties violate the applicable substantive provisions and fail to give the necessary notice for combinations stipulated under section 6 of the Act, CCI will impose penalties. Additionally, parties must ensure they respond and furnish all information sought by the CCI else it may lead to penalties. In such instances, Chapter V of the Guidelines stipulates the penalty can be up to 1% of the total turnover or assets or value of the transaction, whichever is higher. The following factors shall be relevant in the determination:

• the consummation or part consummation of a combination
• if the violation was of a standstill obligation
• failure to furnish information in the inquiry of combination by CCI
• voluntary filing of notice
• conduct of parties in making discourse, furnishing required documents, and cooperation extended in inquiry
• any other factor CCI may deem fit.

4. Other potential penalty provisions

CCI may also impose other penalties on individuals for contravention of its orders (section 42), non-compliance with directions of the Director General and CCI (section 43), making false statements, or omission of material facts (section 44), and failing to furnish information (section 45). In such cases, the penalties shall depend upon the amounts specified under the relevant provision of the Act. Section 7(2) of the Guidelines mentions the following factors that may be considered by CCI:

• extent and reasons of non-compliance or non-cooperation
• nature of misleading information
• knowledge of the person furnishing untrue or incomplete information
• if it is a repeated contravention
• any other factor CCI may deem fit.

5. Conclusion

The Guidelines, although not binding on the CCI clarify and amplify the aggregating and mitigating factors that will be considered for determination of penalties. Businesses can expect fairer and more predictable outcomes in the event of a violation, with penalties tailored to the specific circumstances of each case. By adhering to these principles, CCI can successfully promote competition, safeguard consumer welfare and foster a vibrant and competitive market environment in India. Hopefully, the business ecosystem will understand the necessity to ensure adherence with the prescribed statutory mandates, mitigate any potential violations and minimize future financial loss.

Footnotes

1 Report of Competition Law Review Committee July 2019, Ministry of Corporate Affairs, https://www.ies.gov.in/pdfs/Report-Competition-CLRC.pdf, last assessed on July 23, 2024

2 Where audited financial information is not available, an amount certified by the statutory auditor or, in his absence, the Chartered Accountant, accompanied by an affidavit from an authorized enterprise representative shall be considered

3 Case No.07 of 2012

4 This is reflected in the proviso to section 48 (3) of the Act

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.