THE LEGISLATIVE HISTORY OF THE COMPETITION ACT IN INDIA
1.1 MARKET ECONOMY
A market economy is an economic system in which individuals own most of the resources – land, labour, and capital – and control their use through voluntary decisions made in the marketplace. It is a system in which the government plays a minor role.
In this type of economy, two forces play a vital role.
• Self-interest
• Competition
These forces were first described in Adam Smith’s book Wealth of Nations. The central thesis of Smith’s The Wealth of Nations is that our individual need to fulfil self-interest results in societal benefit, in what is known as his “Invisible Hand” and the interaction of buyers and sellers – motivated by self-interest and regulated by competition, is a phenomenon called “The Invisible Hand Of The Marketplace.”
For example, he asked us to ponder – why does a baker bake?
The simple answer is Self-interest, i.e., the baker wants to earn enough money to feed his family and buy the things he wants, and the most effective way he has found to do that is to bake bread for you. His bread has to be good enough and the service friendly enough that you are willing to give up your money freely in exchange for his bread.
Now, as soon as a baker decides to bake for his interest, competition plays the role of a regulator, a check on self-interest in the following ways:
1. A baker will need to find a method to make cheaper and convenient bread so that the price of the bread is not costly and the customers won’t be intrigued to buy the same from his competitors.
2. The baker will provide the customer with high-quality goods and services so that the customers won’t consider changing their baker.
Thus, competition is the regulator, a check on self-interest because it restrains the ability of the baker to take advantage of his customers and, while serving his self-interest, has produced a good that is very valuable to you.
The miracle of a market system is that self-interest produces behaviour that benefits others.
Therefore, competition is a behavioural process where each firm or person will play to their advantage to defeat rivals while pursuing self-interest to gain profit. Due to the invisible hands of the market, the sum of these selfish individual behaviours naturally results in a reasonable price close to the production costs. As a self-regulating system, a free-market economy is efficient. Because competition encourages innovation, free markets encourage growth.
Types of competition
Perfect competition Imperfect competition
| • It is considered a state of UTOPIA. Modelled on or aiming for a state in which everything is perfect and idealistic. • Identical products sold by companies • An environment in which prices are determined by supply and demand, meaning companies cannot control the market prices of their products • Equal market share between companies • Complete information about prices and products available to all buyers • An industry with low or no barriers to entry. • The entry and exit in perfect market competition are not regulated, meaning the government has no control over the players in any industry. • Companies typically make just enough profit to stay in business. No one in the industry is more profitable than the next. | • Imperfect competition occurs when one of the conditions in a perfectly competitive market is left unmet. • Different products and services • Prices that are not set by supply and demand, competition for market share • Buyers who may not have complete information about products and prices • High barriers to entry and exit. • Imperfect competition can be found in the following types of market structures: o Monopolies o Oligopolies o Monopolistic competition |
| That’s the dynamics that cause them to operate on an equal playing field, cancelling any possible edge one may have over another. |
MONOPOLY MARKET – There is only one (dominant) seller, a company that offers a product to the market that has no substitute. Monopolies have high barriers to entry, and a single seller is a price maker. That means the firm sets the price at which its product will be sold regardless of supply or demand. Finally, the firm can change the price anytime without notice to consumers.
OGLIOPOLISTIC MARKET – There are many buyers but only a few sellers. Because a few players control the market, they may bar others from entering the industry. The firms in this market structure set prices for products and services collectively, or, in the case of a cartel, they may do so if one takes the lead.
MONOPOLISTIC MARKET – This occurs when many sellers offersimilar products that aren’t necessarily. Although the barriers to entry are relatively low and the companies in this structure are price makers, the overall business decisions of one company do not affect its competition.
SITUATION IN INDIA
1.2 POST-INDEPENDENCE
Industrial policy tended towards protectionism, strongly emphasising import substitution industrialisation. State intervention at the micro level in all businesses, especially in labour and financial markets, a large public sector, business regulation, and central planning.
A vast public sector emerged, allowing state-owned enterprises to incur record losses without being shut down. Controls on business creation also led to poor infrastructure development.
The Indian economy revolved around the following four systems:
1. Mixed Economy Model/ Command control economy – Both private and public sectors coexisted but with more restriction, control and supervision on the private sector.
2. Nehruvian Mahalanobis Model / Closed and Planned Economy – Protective barriers against foreign competition to enable Indian companies to develop domestically produced alternatives for imported goods and to reduce India’s reliance on foreign capital. A sizeable public sector is active in vital areas of the economy, including atomic energy and rail transport.
3. License Raj (Indian model of Socialism) – Licenses were required to start new companies, produce new products, or expand production capacities. Businesses had to have government approval to lay off workers and shut down. They virtually shut off imports with high tariffs and low import quotas and outright ban the import of certain products.
4. Indian Socialistic Charter – Socialism is a political and economic theory of social organisation that advocates that the means of production, distribution, and exchange should be owned or regulated by the community.
Competition Law for India was triggered by Articles 38 and 39 of the Constitution of India, which established socialist democracy and egalitarianism. These Articles are a part of the Directive Principles of State Policy.
Article 38 provides for the State to secure a social order to promote the welfare of the people, and Article 39 provides for principles to be followed by the state.
1.3 MRTP ACT
Three studies primarily influenced the shaping of the MRTP Act.
1. Hazari Committee Report on Industrial Licensing Procedure, 1955- This study stated that the States have been biased in granting Industrial Licenses only to wealthy and influential entrepreneurs, resulting in an uneven/disproportionate growth of the industries.
2. Mahalanobis Committee Report on Distribution and Levels of Income, 1964- This study reported that the planned economic model supported the successful industrialists, and a handful of influential groups controlled a massive chunk of income. The top 10% accumulated 40% of the revenue.
3. Monopolies Inquiry Commission Report of Das Gupta, 1965- According to this study, the economic power was in the hands of a few commercial houses and restrictive and monopolistic trade practices were widespread.
Dutta Committee, or “Industrial Licensing Policy Inquiry Committee”, was set up under the chairmanship of Mr Subimal Dutt as a follow-up to the reports of the Monopolies Inquiry Commission and Hazari Committee. This committee’s mandate was to inquire into the workings of the licensing system in India. The committee submitted its report in July 1969.
The committee recognised that industrial licensing was a negative was a negative instrument and could play only a limited role in industrial development. However, the committee favoured the continuance of the licensing system to make it a positive agent of industrial growth. The other recommendations were:
• A monopolies commission with the necessary teeth should be established to deal with the problems of concentration of economic power or product monopolies.
• Industries should be classified into Core, Non-Core, reserved, etc. Large industrial houses should be included in the core sectors.
• The committee observed that due to the license raj, a consequential nexus had been developed between the industrial houses, politicians and bureaucrats, and there was a need to harmonise the social interest with private interest.
Therefore, based on the recommendation of the Dutt Committee, the MRTP Act was enacted in 1969. One of the main goals of the MRTP Act was to encourage fair play and fair deals in the market besides promoting healthy competition.
The main objectives were
• Prevention of concentration of economic power to the common detriment
Preventing concentration of economic power by making compulsory the registration of all enterprises of a specific size and those with more than a particular market share. The idea behind registration is that this makes it possible for registered concerns to expand further with the Central Government’s permission.
• Control of monopolies
Here, monopoly meant the ability to dictate the price and control the market without being materially influenced by other competing concerns. Such an undertaking has the power to dictate the cost of the commodity to services and to regulate the volume of production in such a manner as to maximise its profit.
• Prohibition of the following practices
1. The Monopolistic Trade Practice (MTP) is a result of:
unreasonable pricing
limiting or restricting competition or no free market
limiting development (technical and economic development by limiting production and supply)
making unreasonable profits.
2. The Restrictive Trade Practice (RTP) is a result of:
Refusal to deal with the consumers
Selective dealings
Discrimination in the pricing scheme
Restriction of area
Tying up the sales
3. The Unfair Trade Practice (UTP) was incorporated into the statute after the act was amended in 1984. This trade practice is a result of the following:
Hoarding or destruction of goods
Promoting false and misleading promotional contests Bargain sale
Misleading Advertisement and False Representation
Free Riding over someone else’s reputation
One of the most critical cases regarding RTP is Tata Engineering And Locomotive Co. Ltd V. Registrar Of Restrictive Trade Practices Agreement (1977)
Does the agreement between the appellant, TELCO, and its dealers allocating territories to its dealers within which only the dealers can sell bus and truck chassis, referred to as the vehicles produced by the company, constitute a “restrictive trade practice”?
Clauses (1) and (3) of the agreement between TELCO and its dealers provide for territorial restriction or allocation of the area or market. Clauses 6 and 13 provide for resale price maintenance, and clause 14 provides for the exclusive dealership.
The Supreme Court of India, after considering and hearing all the facts and points of debate, held that the agreement in the present case was not within the realm of restrictive trade practices and, in a given topic, the sale of commodities being confined to a territory amounted to a prohibitive trade practice.
However, in the special features, facts and circumstances of the exclusive dealership agreement between TELCO and the dealers, the territorial restriction imposed on the sellers not to sell vehicles outside their territories is not a restrictive trade practice.
1.4 ECONOMIC REFORMS
As a result of adopting liberalisation, India accepted and agreed to two critical agreements of the World Trade Organization, namely the General Agreement on Tariffs and Trade (GATT) and Trade Related Aspects of Intellectual Property Rights (TRIPS).
It led to the capability of multinational companies to enter the Indian market, which made the MRTP Act less essential and influential. MRTP Commission, under the MRTP Act, realised that a new legislation was needed.
The 1991 policy made ‘License, Permit and Quota Raj’ a thing of the past. Some of its features are:
• It attempted to liberalise the economy by removing bureaucratic hurdles in industrial growth.
• The limited role of the Public sector reduced the burden of the Government. • The policy provided easier entry for multinational companies, privatisation, removal of • asset limits on MRTP companies, and liberal licensing.
• All this resulted in increased competition, leading to lower prices for many goods, such as electronics. This brought domestic and foreign investment in almost every sector opened to the private sector.
• The policy was followed by special efforts to increase exports.
The origin of a much-needed new law lies in the budget speech in February 1999. The Govt. of India constituted a High-Level Committee on Competition Policy and Competition Law, chaired by Mr SVS Raghavan, a retired senior Central Govt. officer (popularly known as ‘Raghavan Committee’) in October 1999 to advise a new and effective contemporary competition law to cope up with the international economic developments and to recommend a suitable legislative framework, which may imply a new law relating to competition law for necessary amendments in the MRTP Act,1969. The Committee presented its competition policy report to the government on May 22, 2000.
The significant recommendations and suggestions submitted to the government were:
• To repeal the MRTP Act and enact a new Competition Act to regulate Anti-competitive agreements and to prevent the abuse of dominance and combinations, including mergers. • To divest the shares and assets of the government in state monopolies and privatise them. • To bring all private and public sector industries within the proposed legislation.
The competition law was drafted and presented to the government in November 2000. The Competition Act of India (“Act”) was enacted in 2002 due to India’s pursuit of globalisation and liberalisation of the economy. The introduction of the Act was a crucial step in India’s march towards facing competition – both from within the country and from international players.
