Jurisdiction - India
Reports and Analysis
India – Antitrust Violations By Subsidiaries & Joint Ventures.

12 November, 2013

 

 

In 2002, when the Indian Parliament approved the passage of comprehensive competition legislation, they ensured that the regulatory body tasked with its implementation would be sufficiently armed to guarantee its enforcement. The Act empowers CCI to impose significant penalties for contravention of its provisions.


The entry into anti-competitive agreements, or in the case of a dominant enterprise, engaging in abusive conduct, could earn fines up to 10% of the assets or average turnover for the three financial years preceding the violation, whichever is higher, on each enterprise, association of enterprises or person that is party to the infringing activity. In the case of cartels, the penalty could be as harsh as three times the profit earned during the period of cartelization or 10% of turnover for each year of continuance of the agreement (Section 27). Our experience till date has shown that, rather than being shy about using these powers of enforcement under the Act, CCI has levied massive penalties on erring enterprises. For instance, CCI imposed a fine of INR 63 billion on eleven cement manufacturers on findings of cartelization (50% of the profits generated during the cartel period).
It is evident that the framework of the Act has paved the way for CCI to be an aggressive regulator that can take stringent enforcement measures. However, if the existing provisions were broadened to allow CCI to attribute liability for the actions of a subsidiary or joint venture (‘JV’) to its parent company(ies), penalty amounts could be calculated based on the significantly higher asset/ turnover figures of the parent company.


A strict reading of the Act gives the impression that CCI can impose a penalty only on the enterprise or person found to have contravened the provisions of the Act. The term ‘enterprise’ as defined in the Act encompasses subsidiary companies but does not warrant going higher up the chain to include the parent company(ies). The proviso to Section 27 does extend to members of a group but the wording of this section implies that such extension would be conditional upon such members also being responsible for, or having contributed to, the contravention of the Act.


Based on a literal interpretation of the current scheme of the Act, it seems unlikely that CCI would be able to impose fines on parent companies for the actions of their JVs or subsidiaries, without first having established some sort of link between the parent companies and the offending conduct. The question came up for consideration in Kapoor Glass v. Schott Glass1, where the Director General of CCI (‘DG’) recommended Schott AG, the parent company, be held accountable for the anti-competitive discounts offered by its Indian subsidiary, Schott Glass India Private Limited (‘Schott India’). This was based on DG’s finding that a single strategy governed the operations of Schott India and Schott AG, leading to joint decision making on pricing, discounts, investments, branding, production, and quality. While CCI did not single out this point for discussion, it rejected DG’s recommendation and limited the penalty to the contravening enterprise, i.e. Schott India.


To take a more recent example, albeit in a separate and independent domain of merger review, CCI imposed a penalty of INR 5 million on Temasek Holdings Private Limited2 for failure to file timely notice in relation to a proposed acquisition. The Act contemplates a mandatory system of pre-notification of combinations (mergers, acquisitions and amalgamations) of a certain size and Section 43A empowers CCI to penalize the person or enterprise that fails to give notice, which would ordinarily mean the acquirers. CCI chose to levy the fine on the parent company despite the actual acquirers being its subsidiaries, Zulia Investments Pte Limited and Kinder Investments Pte. Limited, two shell companies that had no assets or turnover in the relevant period.

 

The principle of attribution of liability to the parent company for antitrust breaches committed by its subsidiaries has been the subject of some discussion in the European Union (‘EU’). Under the Treaty for the Functioning of the European Union, the liability for competition law violations is borne by an ‘undertaking’, i.e. an entity or group of entities that function as a single economic unit, which in-principle, allows the European Commission (‘EC’) to rope in parent companies. EC, over a string of cases, establishes the principle of attribution of liability based on a rebuttable presumption of ‘decisive influence’ by a parent company over a wholly-owned or almost wholly-owned subsidiary. This is based on the premise that a company holding all or almost all of the share capital in its subsidiary can, by virtue of its shareholding alone, exercise ‘decisive influence’. In such situations, EC does not have to establish the personal involvement of the parent company before imposing any penalty.


This presumption of ‘decisive influence’ does not exist in a vacuum. It also means weighing the anti-competitive conduct and the repetition of such conduct against general principles of EU laws, such as the presumption of innocence, rightful application of penalties solely to the offender, and the rights to legal certainty, defence, and of equality of arms3.


In Akzo Nobel v. Commission of the European Communities4, the Court of the Third Chamber (‘Court’) attributed the liability of four subsidiary companies to their parent company, Akzo Nobel BV. The Court thought it sufficient for EC to show that the subsidiary is whollyowned by the parent in order for the presumption of ‘decisive influence’ to arise. To rebut such a presumption, the parent company must demonstrate that the economic, organizational and legal links tying it to the subsidiary are such that the two undertakings do not constitute a single economic entity and in fact, the acts of the subsidiary are independent of its parent5. More recent judgments of the Court of Justice of the European Union serve to widen the scope of the presumption of ‘decisive influence’ to include parent companies in a 50:50 joint venture. In such cases, EC must establish that the parent companies did, in fact, exercise ‘decisive influence’ over the JV as opposed to merely having the ability to do so6.


However, laws in the United States of America do not permit the attribution of liability for the acts of a JV or subsidiary to the parent company. In United States v. Best Foods7, a case aimed at directing the clean up of industrial waste, the Supreme Court (of the United States) (‘US Supreme Court’) rejected the principle of culpability of the parent company for the acts of waste generation by its subsidiary. The US Supreme Court went on to hold that the ‘corporate veil’ can only be pierced when the corporate form is being misused to accomplish certain wrongful actions such as fraud.


The Act does provide a ready statutory mechanism for CCI to reach up to the parent company (or other members of the group) when determining the liability for the acts of a subsidiary or JV. However, a strict reading of the Act limits this attribution of liability to those circumstances where other members of the group participate in the contravention, either by being responsible for, or contributing to it. In the absence of explicit statutory sanction, CCI is forced to adopt a case-by-case approach, leaving it susceptible to challenge at the appellate level.


CCI’s decision in Temasek, although in the context of merger review, seems to extend the reach of the existing statutory language in Section 43A, which currently makes no mention of parent/sister companies. The potential for clash between statutory parameters and decisional practice highlights the need for guiding principles on the application and computation of penalties that will reduce the uncertainties associated with CCI’s enforcement measures.

 

End Notes:

 

1 Case no. 22 of 2010
2 Combination registration no. C-2013/06/124

3 Elf Aquatine SA v. European Commission, Judgment of the Court (Second Chamber) in Case no. 521/ 09 P
4 Case C-07/ 08 P
5 Stora Koppenberg v. Commission, [2008] ECR I-9925
6 El du Pont de Nemour v. Commission, Judgment of the Court (Ninth Chamber) in case no. C-172/12 P and Dow
Chemicals v. Commission, Judgment of the Court (Ninth Chamber) in, case no. C-179/12 P
7 524 U.S. 51 (1998)

 

 

AZB

 

For further information, please contact:

 

Zia Mody, AZB & Partners
zia.mody@azbpartners.com

 

Abhijit Joshi, AZB & Partners 
abhijit.joshi@azbpartners.com


Shuva Mandal, AZB & Partners 
shuva.mandal@azbpartners.com

 

Samir Gandhi, AZB & Partners
samir.gandhi@azbpartners.com


Percy Billimoria, AZB & Partners 
percy.billimoria@azbpartners.com

 

Aditya Bhat, AZB & Partners 
aditya.bhat@azbpartners.com

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