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Why COMPAT order establishes a compelling ground for non-imposition of penalty on TCISIL

Pragati Tiwari

In an order dated August 26, 2015 Competition Appellate Tribunal (COMPAT) set aside the order by Competition Commission of India(CCI) where it decided to levy a penalty of INR one crore on the (appellants) Thomas Cook Insurance Services (India) Limited (TCISIL) and Sterling Holiday Resorts (India) Limited (SHRIL) under section 43A of the Competition Act, 2002 (Act). The order issued by COMPAT lays a compelling ground for CCI's order to be set aside as there are major gaps in the reasoning used by CCI for justifying violation of section 6(2) of the Competition Act 2002.

CCI observed that the scheme of combination and market purchases are interconnected and interdependent, thereby the appellants were under an obligation to file separate application in respect of the market purchases under section 6(2), which they failed to do so. The CCI also held that under regulation 9(4) of the CCI Regulations, 2011 (combination regulations), a business transaction could be achieved by way of a series of steps which are either interconnected or interdependent, and by implementing the market purchases, the parties had consummated a part of a “composite combination” without notifying the CCI. CCI agreed that the appellants made full disclosure of all the transactions including the market purchase and no effort was made to conceal any information. Therefore CCI was of the opinion that since the conduct of the party did not attract a severe penalty, it is appropriate to impose a nominal penalty of INR one crore on the parties.

The order of the CCI and their justification of imposing a penalty was challenged in COMPAT on several grounds. The appellants submitted that the market purchases were an unrelated transaction from the proposed combination and were exempted from notification by the CCI as per the de-minimis exemption granted by the Central Government. Therefore, the transaction conducted under the said exemption do not qualify as combination within the meaning of Section 5 of the Act and hence do not require notification to the commission before its consummation. As SHRIL’s turnover is below the threshold as prescribed in the target based exemption, market purchases do not qualify as a combination within the meaning of section 5, therefore no violation of section 6(2) can be observed.

CCI considered that the market purchases in the present case were part of a ‘composite combination’ and hence could not be consummated before approval by the CCI. The appellants challenged this by stating that neither the Act, nor the combination regulation use the prefix ‘composite’ before the term ‘regulation’, they only refer to the term 'combinations'.

It was also observed that regulation 9(4) of the Combination Regulations does not mandate or require that the parties file a notification if there are inter-connected transactions. The said regulation clearly uses the words ‘may file’. Thus, it is clear that it does not impose an obligation to file a composite notice but is merely an enabling provision, to allow the parties to file a single notice where they were required to file multiple notices.

It is further argued by COMPAT that market purchases and notified transactions are not a part of a series of steps or smaller individual transactions which are interconnected or dependent on each other and hence should not fall under the ambit of the phrase ‘composite combination’. Market purchase is viewed as a separate and distinct transaction and proposed scheme of demerger, amalgamation has nothing to do with it. Even if the commission insists upon considering market purchases as inter-related/interdependent, violation of section 6(2) is not justified due to specific disclosure of the transaction being mentioned by the appellants in their notice to CCI.

Also, violation if any, of Section 6(2) was purely technical and the same did not warrant imposition of penalty under Section 43A because the market purchase of equity shares of SHRIL by TCISIL did not adversely affect competition. Adding onto this Section 5 of the Act maintains distinction between each type of the transaction and therefore different transactions cannot be intermingled merely as they take place simultaneously. While it may not be appropriate to consider two distinct and unrelated transactions as one combination, there is no explicit bar under the Act to consider different steps of a composite transaction as one combination particularly when all those steps are envisaged and authorised by the appellants on the same day.

COMPAT noted that the market purchases are separate from the proposed combination in so far the notified transaction would still have taken place irrespective of the market purchase. The violation, even if one is assumed, would only be technical as stated earlier. Even if the parties had filed a notification for the market purchases the same would, in all probability, have been approved by the CCI.

The order passed by Supreme Court also agreed with COMPAT stating that no violation was observed on the part of the respondents. Notification filed by the respondents  to the CCI did   contain   information about   the   market   purchases under the heading “Exempt Transactions”. Thus, imposing a penalty   on   the   respondents   for   not   having   specifically   identifying   the market purchases as "Notifiable Transaction" is nothing more than a mere technicality.  The respondent was under a bona fide and   genuine   belief   that   market   purchases   were unconnected and moreover, exempt. Market purchases would not result in an appreciable adverse effect on competition in the market and hence, penalty ought not to have been imposed by CCI. COMPAT rightly set it aside. The SC re-imposed the penalty under section 43A, but that was on account of the breach of civil obligation.

The CCI's stand with regard to composite combination would certainly establish more clarity. The COMPAT steered away from laying down a clear objective test on the meaning of “composite combination”, the order seems to suggest that regulation 9(4) of the combination regulations is merely an enabling procedural rule that allows parties to file a single notice (and avoid multiple notices) in case of a series of steps or smaller individual transactions which are interconnected or interdependent on each other. This would be converse to the CCI’s stand on “gun jumping” in many cases where a series of steps or transactions are involved, i.e. the notice to the CCI should be made at the first step, even if individually exempt.