Applicability Of The "Single Economic Entity" Concept To Cartels

Applicability Of The "Single Economic Entity" Concept To Cartels

An issue that remains unsettled between the CCI and parties defending allegations of anti-competitive conduct is whether agreements between a corporation and its "group"¹ entities can be investigated and enquired into under Section 3 of the Act…

Section 3 of the Competition Act, 2002 (as amended) ("Act") prohibits agreements that cause an appreciable adverse effect on competition in India. The CCI's jurisprudence on Section 3, and specifically cartels, has become quite nuanced and mature. However, an issue that remains unsettled between the CCI and parties defending allegations of anti-competitive conduct is whether agreements between a corporation and its "group"² entities can be investigated and enquired into under Section 3 of the Act.

It is often argued that entities falling within the same group are essentially part of a single economic entity ("SEE"), and hence, agreements among group entities cannot be scrutinized under Section 3 of the Act. The SEE defense emanates from the principle that a corporation cannot collude or conspire with its own group enterprises, as a result of common interests, joint functioning, and lack of independence of such enterprises. The SEE concept has been previously considered by the CCI in several cases, but with divergent interpretations.

CCI's Decisional Practice so far

In the Exclusive Motors³ case, the CCI examined allegations of an anti-competitive agreement under Section 3 of the Act between Automobili Lamborghini S.P.A. ("Lamborghini") and Volkswagen Group Sales Private Limited ("Volkswagen") and observed that agreements between entities constituting one enterprise could not be assessed under the Act. The CCI noted that as long as Lamborghini and Volkswagen formed part of the same group, they would be a SEE and an internal agreement between them would not be considered as an agreement for the purposes of Section 3 of the Act. Notably, the erstwhile Competition Appellate Tribunal ("COMPAT") upheld the CCI's findings on SEE after highlighting the parent company's significant shareholding in the subsidiary.

Similarly, in the Shamsher Kataria⁴ matter, the COMPAT concurred with the CCI's observations on certain automobile manufacturers' overseas agreements with their parent companies / affiliates abroad. It concluded that the respective manufacturers and their parent / affiliates could be termed to be part of a SEE since they belonged to the same group where the affiliate's decision-making was largely influenced by the parent's policy. On this basis, the COMPAT determined that the internal overseas arrangements between the parent companies and their affiliates were excluded from scrutiny under Section 3(4) of the Act.

Keeping up with this trend, the CCI assessed claims of contravention of Section 3 of the Act in Kansan News⁵, but refused to hold the entities, which were part of the same group, liable under Section 3(3) of the Act. It opined that they could not form a cartel.

The CCI further clarified its views in the Public Sector Insurance Cartel⁶ case. Bid rigging in a tender floated by the Government of Kerala was alleged against certain public sector insurance companies ("PSICs"). The PSICs asserted that they constituted a SEE as the Government of India, through the Ministry of Finance ("MoF"), held 100% shareholding in them and controlled their management and affairs. Nevertheless, the CCI rejected their claims while observing that (i) the PSICs placed separate bids in response to the tender, and (ii) the PSICs participated in the tender independent of the MoF, through independent decision-making and strategies. After establishing these facts, the CCI noted that the MoF did not exercise any de facto or de jure control over the PSICs' business decisions in submitting the tender bids. The CCI observed that the PSICs were separately incorporated, competing entities with separate balance sheets and concluded that they could not constitute a SEE.

Comparably, in the Delhi Jal Board⁷ case, while countering bid rigging allegations, Grasim Industries Limited ("GIL") and Aditya Birla Chemicals (India) Limited ("ABCIL") contended that, as part of the same group, they constituted a SEE, with common decision makers, management / employees, promoters, directors, customers, logo, central marketing team, etc. and could therefore not be held liable for cartelization. The CCI highlighted that despite being part of the same group, GIL and ABCIL bid as separate entities and behaved like competing companies in the market as well as before the procurer. The CCI ascertained that, GIL and ABCIL, by submitting different bids, consciously decided to represent themselves as independent decision-making centers to the procurer and accordingly refused their SEE claims. The CCI, in addition to its factual analysis, went a step further and distinguished bid rigging cases in public procurement from previous cases that dealt with SEE. It highlighted that the definition of "group" under Section 5 was applicable only to merger control and could not be applied to proceedings under Section 3 of the Act. CCI's distinction of the SEE concept in bid rigging matters can also be seen in a subsequent order⁸, where the CCI dismissed claims of bid rigging against entities of the same group, primarily because the procurer was specifically informed that the bidding entities were related.

The CCI, however, switched its position in its recent decision in the Shipping Lines Cartel⁹ case. Inconsistent with its previous orders, the CCI explicitly held that the concept of group or SEE is inherently unknown and inapplicable to cartel proceedings.

Aftermath

The shift in the CCI's standpoint in the Shipping Lines Cartel order has resulted in significant ambiguity in the applicability of the SEE defense to proceedings under Section 3 of the Act. If the CCI decides to adopt such a view in future cases, agreements between subsidiaries and their parent enterprises could become subject to antitrust scrutiny. This may adversely impact the ease of doing business in the country, with corporations being required to reassess their internal group arrangements from a competition perspective. The Shipping Lines Cartel decision can potentially expose corporations to motivated and frivolous complaints before the CCI, with the unforeseen scrutiny of agreements within a group.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.