Disproportionate, Unenforceable Penalties Undermine Competition Law Enforcement & Reform Efforts
Reports indicate that through last-minute revisions to the Competition (Amendment) Bill, the Government proposes to revise the penalty ceiling under the Competition Act 2002 to 10% of an enterprise’s global turnover. Not only that, the amendment seeks to invalidate established precedent on “relevant market turnover”, as set forth in the Supreme Court’s decision in Excel Crop Care, by levying the penalty on the entire turnover of an enterprise, even where the contravening conduct relates to one or few of many product lines offered by an enterprise.
No Gap in Deterrence
The Competition Act, like similar legislation elsewhere, enables the CCI to adopt a mix of remedial and punitive measures. The former aims to discontinue the adverse effects of an enterprise’s actions and remedy resultant market distortions. The latter, functions both as a means to cover the welfare losses caused by an enterprise’s conduct, as well as a deterrent against future anti-competitive conduct.
One possible reason for the change could be to enhance the deterrent impact of penalties. However, a look at CCI’s past enforcement actions fails to reveal a gap in its ability to impose penalties with deterrent penalties (e.g., the recent penalty of INR 2301 Crores (USD 278 million) on Google). If these fail to deter future anti-competitive conduct, there is little guarantee that revising the penalty provisions upwards and discarding established guardrails for proportionality will have any incremental impact.
To the contrary, disproportionate and unenforceable penalties, are likely to be challenged before courts – as they indeed are. A look at the penalty recovery figures for the CCI indicates that out of the penalties imposed by the CCI in the first seven years of enforcement, only 0.58 per cent were recovered. The situation only marginally improved in subsequent years, with reports indicating that this number stood at 4.5 per cent for penalties imposed between 2017 and 2022, primarily due to appeal pendency.
A Misdirected Approach
The Government’s approach appears misdirected since revising the penalty ceiling is likely to amplify non-compliance, rather than deter it. Consider a company, where a significant portion of the turnover is directed towards working capital requirements. Faced with disproportionate penalty demands, the company would have an insufficient runway, and will likely appeal the decision, especially if alternate avenues for settlement are unavailable. While undoubtedly deterrent in nature, such steep demands would undermine the regulator’s efforts at market correction, and signal the unenforceability of competition laws at large.
In fact, the decade and half of competition enforcement that precedes us, clearly indicates that proactive compliance with competition laws cannot be ensured through deterrent penalties alone. The Competition Law Review Committee’s deliberations, gave due credence to such “deterrence plus” factors, which aid in increasing overall compliance. It therefore recommended formalising the “relevant market turnover” rule and recommended amending the Act to enable the CCI to offer alternate resolution routes (e.g. settlements and commitments), issue structured and binding guidance on both interpretation of the Act (similar to the EC’s Guidance on Horizontal and Vertical Restraints), as well as on other procedural issues such as determining the quantum of penalties compliance (similar to the EC’s Guidelines on Fines).
While the Government as well as the CCI have invested significant resources in enforcement and advocacy, a hasty edit to the Bill can undermine the CCI’s efforts at promoting compliance, as well as the Government’s overall efforts to revamp the competition law and policy framework. Instead of amplifying the potential deterrent effect of available instruments, the Government should adopt a pragmatic approach and prioritize enforceability and engendering overall compliance with the law and norms of fair market conduct.
