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Breaking The Cartel Code: The Role Of Leniency In India’s Quest For Fair Competition

Ananya Dash and B.R. Garima Rao
21bba009@nluo.ac.in

There existed a house in which lived an old man and to his misery lived a bunch of rabbits too. He wanted the rabbits out but whenever he showed his old stick to them, they were nowhere to be found, So, one day he set a trap. He threw some carrots around. To the misery of the rabbits, one of them defected and caught on the carrot. The others howled at it, exposing themselves in the frenzy. The man caught them all in his trap and lived happily ever after. And well this is how the leniency regime unfolded its story of success across jurisdictions.

INTRODUCTION

The Competition Commission of India (“CCI”) enacted the Competition Commission of India (Lesser Penalty) Regulations 2009 to introduce specified procedures for leniency in conjunction with Section 46 of Indian Competition Act 2002 (“Act”). On February 20, 2024 CCI notified the CCI (Lesser Penalty) Regulations, 2024 thereby unveiling the framework for leniency plus as an additional tool for cartel detection within the country. This is a welcome move to further incentivize cartelists to blow the whistle on a second cartel. However, there are many loopholes within the practical enforcement of the existing leniency regime which need urgent redressal to ensure the complete efficacy of the Leniency Plus regime.

The article seeks to critically analyze the functioning of the leniency regime within the country. In doing so, the authors firstly trace and underscore the pitfalls in various decisions by CCI in leniency cases which if not resolved can have a delirious impact on the enforcement of Leniency Plus. Secondly, they attempt to identify the potential gaps within the leniency plus framework to suggest changes in this regard. Lastly, they analyze best practices from various jurisdictions to make suggestions for strengthening the functioning of the leniency regime within the country.

THE DIFFERENT WAVES OF CCI’S LENIENCY PROGRAMME

The First wave of leniency: Bar too low?

CCI made its first decision on leniency in the case of Brushless DC Fans. The cartelists had reported the cartel to CCI when the prima facie opinion had already been formed by the CCI. However, the information was crucial for the DG to formulate the investigation report. In this case the cartelist was rewarded with 100% leniency simply for reporting the cartel although CCI had already come up with a prima facie opinion, implying CCI already had considerable evidence against the cartelists prior to the leniency application. Other ingredients such as cooperating with CCI’s investigation, ceasing to be a part of the cartel, not taking any steps to coerce the other participants were overwhelming mitigating factors to not impose any form of penalty on the applicant.

The Second wave of leniency: Hitching the wagon to the Star

Furthermore, in the case of Pune Municipal Corporation the cartelists by the one of the leniency applications had contributed to the prima facie opinion of the CCI, thereby implying that CCI did not already have considerable evidence to establish a strong case. But, CCI had already started the investigation for the prima facie opinion and just had data regarding contact of other key personnel who were involved. OP - 1 had given valuable addition by providing information regarding the modus operandi of the cartel. Despite such integral addition to CCI’s prima facie opinion, CCI gave only 50% reduction in penalty to OP -1. No reduction in penalty was allowed for the other cartelists. As we see the bar was set very high in this case compared to the one in the previous section.

The Third wave of leniency: Striking the right balance

There was a balance struck in a few cases as in the case of Essel Shyam Communication, Eveready Industries India Ltd (Dry battery cell case), moulded fiber glass and Eveready Industries India Ltd. where CCI has clearly rewarded the entities with reduction in penalties in proportion to the timing (maximum for the one reporting earlier), stage of investigation (on whether CCI had initiated the investigation, or formed a prima facie opinion or was awaiting the DG report) and the quality of the evidence presented (what addition was made by the cartelists). These are the actual parameters on which the CCI must base the decision on as per sub regulation 4 of regulation 3 of the Leniency Regulation 2009 (currently sub regulation 9 of regulation 3 of leniency regulation 2024). Vital disclosure made timely is the highlight of the given orders and has proportionately rewarded the said applicants by different markers.

The Fourth wave of leniency: Pangs from the Pandemic

But this balance faded with the onset of the pandemic. Events like the pandemic make collusion more conducive resulting in an uptick of crisis cartels. In cases like the Paper manufacturing industry and Mr. Rakesh Khare v. Krishna Engineering Works & Ors. the pandemic was considered as a supervening factor to grant a waiver in penalty to the entities. CCI reasoned that imposition of harsh penalties in the present cases would result in financial hardship for companies reeling under the pandemic. Moreover, in the case of Polyest plastics and ors, the fact that the entities were Micro, Small and Medium Enterprises (“MSME”) had been taken into account to desist from imposing a penalty on them. Thirdly, in the case of Rakesh Khare recidivism by the same cartelist was not considered as an aggravating factor. These cases are testament to the notion that a wrong committed in poverty can be forgiven thus legitimizing the conducive circumstances. These are classic case(s) where the peripheral factors that had overshadowed the main elements for timely reporting and quality of disclosure were not considered. It is evident that with this we are back to the drawing board of setting the bar too low in the first wave.

LESSONS FROM THE PAST FOR CCI

As highlighted above, there are obvious differences in how the CCI has granted lesser penalties. This leaves a trace of wide margin of discretion for the CCI to decide, which leads to arbitrary decisions. If not remedied, the same will be reflected in the leniency plus program. Arbitrary decisions coupled with lack of uniformity in decisions do not serve the purpose of leniency as enterprises and individuals will not have a concrete law to follow and regulate their behavior. This becomes even more relevant when the entire leniency regime is solely dependent on voluntary reporting by the cartelists. While it is one thing to have a concrete law, it is completely another to interpret and have public enforcement for the same. This lack of uniformity in percentage of lesser penalty granted and different factors considered while granting leniency.

CCI further needs to devise policies and rules for peculiar circumstances existing in India. In many cases, it is observed that there was collusion because the circumstances were very conducive for collusion. There was collusion as a Key Managerial Person (“KMP”) in one enterprise also occupied a similar role of a KMP in another enterprise involved in the same market. This led to the free flow of commercially sensitive information, especially in the case of bid-rigging. CCI needs to come up with parallel laws regarding the number of positions as a KMP any person can occupy. Although Section 203 of Companies Act, 2013 only allows for a person to be a KMP of one company, the same is not applicable to a private company. Such laws must be further looked into to holistically strengthen the leniency regime.

UNVEILING THE LENIENCY PLUS FRAMEWORK IN INDIA

As per the leniency program in India, anything is a vital disclosure under Section 2(k) of the new regulations if it helps CCI to come up with a prima facie opinion or helps the DG come up with a report. Further to incentivize the cartelsits to blow the whistle first, there are ‘markers of priority’ of the cartelists who get in line for obtaining a lesser penalty. A cartelist is marked first in priority if i) it is the first to blow the whistle ii) the disclosure enables CCI to form a prima facie opinion and will benefit from 100% waiver of penalties. In the recent version of the rules, it also establishes that if the cartelist is the first one to blow the whistle and gives such evidence which the DG does not possess, then too, the first marker is eligible for 100% leniency. The subsequent cartelists are marked as second in priority who would be eligible for 50% reduction and third in priority would be getting 30% reduction.

The lesser penalty plus is a mechanism to incentivize an existing Lesser Penalty Applicant to provide full, true and vital disclosure with respect to another cartel which may not be in the knowledge of the CCI. This shall entitle the applicant to a significant reduction of 30% in the initial leniency application apart from complete immunity in the second case.

However, the effectiveness of leniency plus as a tool for cartel prohibition has been subject to debate in many countries. Jurisdictions including those of the European Union (“EU”) have steered clear from incorporating the mechanism within their competition law framework. Portugal did away with the framework after recognizing its adverse effects in 2012. The programme has arguably been successful only in the USA. Therefore, it is pertinent to understand the functioning of the framework in the USA to be able to replicate the results within India.

Amnesty Plus functions in conjunction with the Penalty Plus framework in the USA. Under the penalty plus framework, if a company that has pleaded guilty to an antitrust offense fails to report about an additional violation, it shall forgo any form of leniency to be potentially rewarded to it in the earlier case. Furthermore, the Department of Justice (“DoJ”) shall treat this as an aggravating factor to enhance its sentence.

The current regulations fail to clarify the repercussions of a non-disclosure on part of a company with respect to additional cartel conduct and appear to make the disclosure optional in nature. South Korea has an optional leniency plus programme which has been subject to misuse by cartelists. Therefore, CCI must incorporate the penalty plus framework to be able to strengthen the application of leniency plus within the regime.

SUGGESTIONS FOR INDIAN LENIENCY REGIME: BEST PRACTICES FROM OTHER JURISDICTIONS

International experience from multiple jurisdictions including the United States of America (“USA”), European Union, Japan, South Korea & Canada demonstrate the efficacy of leniency programmes as a tool to deter cartel formation and enable their detection for the benefit of the enforcement authorities. The USA leniency programme has seen significant results with 59% decrease in cartel formation and an increased detection by 69%.

However, the story has unfolded quite differently in the Indian context with only 21 leniency applications received to date. Therefore, it becomes pertinent to juxtapose the best practices from other jurisdictions with the lacunae within the Indian leniency programme to strengthen the same.

Too much carrot but too little stick?

The antitrust regime of the USA operates on the model of deterrence by the use of criminal sanctions and punishments for any anti-competitive behavior by corporations with significant jail terms. Moreover, other countries with effective leniency regimes including Brazil, UK and Canada have also incorporated criminal sanctions to strengthen their quest against cartel prohibition.

Contrarily the Indian competition law merely mandates civil liabilities for entities and individuals involved in antitrust violations. This coupled with the heavily relaxed/ lenient approach adopted by the CCI in granting leniency to applicants has only acted as a further disincentive for potential applicants to avail the benefits of the programme. As is reflected in the Dry Battery Cell case, the mere application of leniency by a company has often been treated as the ground to grant significant reductions to the parties without any detailed enquiry into whether the entity satisfies the requisite threshold of making a “significant value addition” within the investigation, to avail the waiver in penalty. Therefore, there is a greater need to incorporate criminal sanctions within the antitrust framework for better enforcement against cartels within the country.

Private Enforcement

Penalties against anti-competitive behavior by cartels within the USA are often accompanied by private enforcement demanding treble damages along with criminal sanctions for individuals involved within the conduct. There have been arguments to facilitate private damages claims even within the Damages Directive in the EU. The Indian competition framework, under Section 53N of the Act permits private damage actions. However, there is no specific regulation to enable private parties to seek compensation against cartel conduct by companies making the mechanism toothless in effect.

Categorization of Leniency Policy

As highlighted above, in the case of brushless DC Fans and the law on leniency regulations an entity contributing to the prima facie opinion of the CCI and an entity who contributes towards the DG investigation are placed at the same footing, if they are the first to blow the whistle. This similarly implies equal treatment in the form of immunity for both the cartelists who are contributing evidence having different standards of proof.

However, in the United States there is a clear demarcation of Type A and Type B leniency applications. In Type A, the DoJ has no prior knowledge whatsoever about the existence of a cartel. Therefore, the entity’s top executives are exempted from criminal charges. All other cases fall under Type B where immunity from criminal prosecution is as per the discretion of the DoJ. This distinction in rewards is proportional to the quality of contribution made towards cartel detection. India must incorporate a similar categorization within its leniency policy.

Recidivism: An Inevitable Evil?

As highlighted above, in the case of Mr. Rakesh Khare, the concerned entities had indulged in cartel conduct on two occasions. However, the entities claimed relief from penalty on the ground that they had immediately stopped the conduct after investigation was initiated in the previous matter. This submission was accepted by CCI as a mitigating factor to desist from imposing a monetary penalty on the entities in the later infringement. Moreover, repeating conduct was not considered as an instance of recidivism.

Contrastingly, the European Union (“EU”) considers recidivist conduct as an aggravating factor for awarding fines in cartel cases. CCI can adopt a similar approach in its decision-making process and take recidivist conduct as an aggravating factor while deciding on the question of granting leniency to applicants.

Diverse Toolkit for Cartel Prohibition

The success of the Brazilian Competition Authority (“CADE”) against cartel prohibition can be attributed to the use of multiple proactive and reactive tools to prosecute, prevent and detect cartels. Furthermore, It has developed a state of art tool Projeto Cerebro which uses screening, data mining and algorithms to detect cartels. These tools strengthen the investigative power of the enforcement authority while acting as a stronger incentive for parties to seek leniency in the fear of penalties via independent investigation. CCI should further strengthen its existing mechanisms for investigation to incentivize potential applicants to seek leniency.

CONCLUSION

The benign intent of the legislature to strengthen the framework for leniency by way of leniency plus and allied mechanisms is laudable. However, the authors believe that the following suggestions would further remedy the loopholes within the existing regime. Firstly, there is a greater need to incorporate criminal sanctions within the existing lesser penalty regulations and penalize non-disclosure by entities in cases of leniency plus applications. Secondly, there should be specific regulations to better enable private enforcement. Lastly, CCI must formulate uniform standards in its adjudication on leniency applications.