Unearthing cartels by invoking applicant confidence: Lesser penalty regulations, 2009

INTRODUCTION

Cartels, if not the biggest, are arguably one of the biggest barriers against competition in India. Cartels are formed and operate in conspicuous conditions and thus, are difficult to trace. Unearthing cartels is nearly impossible if conventional practices are resorted to, therefore, members/enterprises engaged in such anti-competitive agreements are lured into disclosing significant information as to the existence of such cartels, to avail the benefits of reduced penalties as per section 46 of the Competition Act, 2002 (hereinafter referred to as “The Act”) The said provision applies as per the Lesser Penalty Regulations, 2009.However, due to reasons like excessive discretion by the Competition Commission of India (hereinafter referred to as “CCI”) and unpredictability of decisions of CCI, applicant confidence is affected in the negative and can act to the detriment of the efficacy of the leniency provisions in all likeliness.

THE LENIENCY REGIME IN INDIA

The CCI via section 46 of The Act, 2002 reserves the power to impose a “lesser penalty” than leviable under the act on such producer, seller, trader, distributor or service provider who is included in a cartel, upon such person making a “vital disclosure” as to the existence of such cartel. However, if after making such disclosure, the concerned person does not comply with the conditions on which lesser penalty was imposed or had given false evidence in the first place or made a disclosure that is not vital, such reduction in penalty may be rolled back the CCI and the beneficiary would then be made liable as if no reduction in penalty had been granted by the CCI.

Section 46 has been subject to amendments over the years and the leniency regime has attained greater clarity in terms of operation. It was by the amendment of 2007 that certain clarificatory provisions were added to section 46:

1. Lesser penalty provisions shall not be imposed by the CCI where the report of investigation directed under section 26 has been received by it before making of such disclosure.
2. For a lesser penalty to be imposed, the disclosure need not necessarily be made by the first applicant, but such applicant making a disclosure should make a disclosure which is full, true and vital.
3. Lesser penalty shall not be imposed by the CCI if person making the disclosure does not cooperate with the CCI till the completion of the proceedings before the Commission.

Later, in 2009, The CCI (Lesser Penalty) Regulations was introduced to provide for certain requirements and procedures to be adhered to while granting leniency to concerned whistle-blowers.

Regulation 3, 4 and 5 provide for conditions, magnitude and procedure respectively of lesser penalty to be granted to applicants (defined in Section 2(h) of The Act)

“CONTENTIOUS CONFIDENTIALITY”

By way of Amendment in 2017, changes were brought about in regulation 6 of The Competition Commission of India (Lesser Penalty) Regulations. Regulation 6 talks about confidentiality of information/evidence provided to the commission by the applicant for grant of leniency to him by way of “lesser penalty”. Prior to the amendment of 2017, a disclosure under regulation 6 could only be made for three reasons:

1. When such disclosure is required by law; or
2. When the applicant has agreed to such disclosure in writing; or
3. When there has been a public disclosure by the applicant.

The 2017 Amendment provided further that where the Director General (hereinafter referred to as DG) deems it necessary to disclose the information, documents and evidence furnished under Regulation 5 to any party for the purposes of investigation and the applicant has not agreed to such disclosure, the DG may disclose such information, documents and evidence to such party for reasons to be recorded in writing and after taking prior approval of the Commission.

The abovementioned addition to the regulations may prove to be beneficial for unearthing vital information about cartels, but is a big blow to applicant confidence and can potentially act to the detriment of the object of deriving information about cartels via people involved in/ associated with such cartels.

APPLICANT CONFIDENCE

EXCESSIVE DISCRETION

In re Nagrik Chetna Manch case, the parties against whom action had been brought also raised an argument that by disclosing the contents of their leniency applications, both the DG and the CCI had violated regulation 6 of the Leniency Regulations that accords confidentiality. This argument was negated by the CCI on the ground that the information under contention was collected during investigation and was disclosed rightfully, such information is governed by regulation 5 of the General Regulations, which gives discretionary power to the DG to accord the status of ‘confidential’ to any information received during investigation. In other words, the CCI held that keeping such information confidential, which is found by the DG during investigation, irrespective of whether such information is also disclosed to the commission in the leniency application, is at the discretion of the DG, and thus, of the CCI.

The 2017 Amendment to The Competition Commission of India (Lesser Penalty) Regulations added fuel to fire by expanding the scope of discretion to be exercised by the Commission while handling evidence/information provided to it by an applicant in expectation of being granted a lesser penalty. Discretion to maintain confidentiality; now also extends to such information which is solely provided by the applicant, such information being found in the course of investigation by the DG is no more necessary. The addition is made to regulation 6, which provides that where the DG deems it necessary to disclose the information, documents and evidence furnished under Regulation 5 to any party for the purposes of investigation and the applicant has not agreed to such disclosure, the DG may still disclose such information, documents and evidence to such party for reasons to be recorded in writing and after taking prior approval of the CCI.

Regulation 6 now gives the power to the CCI to disclose information even against the consent of the applicant providing such information if CCI decides that such disclosure is to be made, and a law mandating such disclosure also is not required. This leaves room for arbitrariness to operate at the end of the Commission. It is specifically provided in section 36 of The Competition Act, 2002, that functions of the Commission shall be carried out in adherence to the principles of natural justice. However, natural justice’s violation cannot be objectively defined and mechanical infringement of it is not possible. Natural Justice needs to be construed on a case to case basis, considering the facts and circumstances of the case, the principles being applied in a flexible fashion as held in the case of Natwar Singh v. Directorate of Enforcement. Theoretically, discretionary powers do not violate natural justice, but the provision to form a prima facie opinion under section 26(1) of the act as to the existence of the cartel and discretion under regulations as aforementioned shakes applicant confidence, leaving applicants at the mercy of the Commission, in absence of any law to which the applicants could align their actions strategically.

UNPREDITABILITY OF DECISIONS

The cooperation of the applicants who act as whistle-blowers is premised on the confidence that they put into CCI while disclosing information/evidence in anticipation of being granted a lesser penalty. However, unpredictability of decisions of CCI while granting lesser penalty shakes the confidence of the applicant making a disclosure, and might make such applicant not resort to this approach at all. An array of decisions involving lesser penalty by the CCI has led to this air of unpredictability.

AMBIGUITY OF ‘VALUE ADDITION’

The CCI received the first leniency application related to cartelization of electronic companies in respect of tenders floated by Indian Railways. M/S Pyramid Electronics became an applicant for leniency during the investigation, as a result of which, leniency was granted by CCI, but the order also stated that co-operation by itself would do little to earn leniency and ‘value addition’ was the primary factor. Resultantly, Pyramid was granted only a 75 per cent, and not complete reduction in penalty as the commission opined that it didn’t make a disclosure significant enough in terms of value addition, to be granted complete reduction in penalty. The ambiguity of the term ‘value addition’ and its wavering application by the CCI on a case to case basis makes it less likely for cartel whistle-blowers to confide in the CCI, with reduced penalty as a reward for such evidence provided where such evidence has no fixed ‘value’.

BASIS OF PRIORITY: ILL FOUNDED

In re Nagrik Chetna Manch, the CCI granted 50 per cent reduction in penalty to the first and third applicant. The CCI opined that the evidence and co-operation extended by the first applicant helped concluding the existence of a cartel pertaining to two tenders. Consequently, the commission reduced the penalty of three more subsequent applicants due to the value addition of their evidence, priority status and co-operation. The second applicant provided such information, the value added by which was nil and yet was granted reduction in penalty due to its priority marker. The fifth and sixth leniency applicants, however, were not granted any leniency/reduction in penalty as they made “minimal” value addition to the material already available with the CCI. This order suffered from two major irregularities: Firstly, the second applicant was extended a reduction in penalty even though the value added by such disclosure was nil. Secondly, as admitted by CCI itself that at least “minimal value addition” was made by the information given to it by the fifth applicant and yet the applicant is not afforded any leniency. The basis of granting leniency as per this order emphasises more on chronology of disclosure and disregards substance in the same, which is prima facie devoid of prudence. Orders like this impact applicant confidence in the negative and may compel them to keep vital information regarding cartels to themselves and defeat the object of the leniency provisions.

CONCLUSION

The Lesser Penalty Regulations serve the cause of disclosing cartels efficiently in the ways stated aforesaid, however, invoking applicant confidence by providing for reduced discretion of CCI, predictable deciding criteria of the CCI is the way forward for unearthing cartels and thus, towards a fair & competitive market.