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India – Government Extends Exemption For Shipping Liners.

7 February, 2014

 

Legal News & Analysis – Asia Pacific – India – Shipping Maritime & Aviation

 

The Indian shipping industry is critical for international trade and is responsible for the movement of approximately 95% of the volume of international trade through India.1 On December 11, 2013, in a targeted sector-specific move, the Ministry of Corporate Affairs (‘MCA’), issued a notification (‘2013 Notification’) exempting Vessel Sharing Agreements (‘VSA’) from the purview of Section 3 of the Act (anti-competitive agreements) for a period of one year from the date of the notification. The 2013 Notification allows shipping liners operating in India, both foreign and domestic, to enter into VSAs with each other, and is a limited extension of MCA’s earlier notification dated September 19, 2012 (‘2012 Notification’).

 
The Central Government is empowered to exempt any class of enterprise, the most recent being the liner shipping industry, from the application of the Act or any provision therein (Section 54 of the Act). ‘Liner shipping’ refers to the provision of scheduled services for the transport of cargo over a specified geographic range of ports within an established time schedule, including pre-determined regularity and frequencies.2 This means having to balance supply and demand at ports to ensure efficient usage and regularity.3 As a result, often a whole cargo ship has to be chartered for multiple small shipments. This creates a roadblock for those in the industry who are not carrying entire shiploads of a single cargo such as oil, grain, iron ore, or chemicals4, and increases fixed costs like voyage and operating costs. Not only does this tamper with the overall efficiency of the industry, it also causes loss to those who charter these services.

 
The 2013 Notification seems to emanate from this problem of demand and supply mismatch faced by the shipping industry globally. A VSA is an agreement entered into between shipping companies to share space on each other’s vessels, consolidate duplicative services and share terminals to improve productivity and lower costs. Thus, in order to balance demand and supply, and to maintain efficiency, shipping liners enter into VSAs with each other to share vessels to carry multiple small consignments.

 
MCA, in issuing the 2013 Notification, appears to have taken into consideration the submissions made by various shipping companies including the Shipping Corporation of India, which highlighted the importance of VSAs for the commercial viability of the liner shipping industry. Being a capital-intensive industry, shipping liners need the ability to provide shared services to offset their investments. Further, on account of recent rapid increases in oil prices, liner shipping is beginning to be seen as a loss-making business, thus reducing the incentive for private players to enter this sector. By allowing VSAs, MCA would in effect encourage greater participation, and hence increase competition in the liner shipping segment.5

 
The scope of the 2013 Notification is narrower than its 2012 avatar. The 2012 Notification exempted VSAs and Voluntary Discussions Agreements (‘VDA’) entered into by all shipping companies from the entirety of the Act. The 2013 Notification permits CCI to investigate allegations of abusive conduct by dominant liner shipping companies which is prohibited under Section 4 of the Act (abuse of dominant position). Additionally, by limiting the benefits of the exemption only to liner shipping companies, the Government of India may be recognising the relatively higher fixed costs associated with liner shipping due to large administrative overheads and the requirement to follow a fixed schedule, regardless of demand and supply requirements. Furthermore, the 2013 Notification only exempts VSAs and not VDAs. While a VSA facilitates the sharing of vessel space to promote efficiency, in comparison, a VDA is typically entered into between shipping companies to share market information, adopt common service standards and offer a single point of contact in discussions with government bodies and shipper organizations. A VDA, by definition, demands a certain level of cooperation between shipping companies that could have the effect of reducing competition.

 
Several jurisdictions such as Singapore, Malaysia, the European Union (‘EU’) and the United States of America (‘US’) have put in place similar exemptions. However, each of these jurisdictions couches their respective exemptions in qualitative requirements/controls to reduce the risk of anti-competitive behaviour. For instance, in the EU, any company that has a market share of 30% or more has to subject its agreements to strict scrutiny to examine their adaptability and consequences. Currently, the European Commission is examining a June, 2013 container alliance between shipping giants A.P. Moeller-Maersk, Mediterranean Shipping Co. and CMA CGM SA for potential competition concerns. Similarly, in the US, the Ocean Shipping Reform Act, 1998 grants immunity to liner shipping conferences, provided shippers and carriers negotiate liner service agreements and keep these terms confidential from other carriers and shippers, publish conference tariffs, and allow independent rate action for carriers so they can cover multiple trade lanes.

 

Experiences from various jurisdictions demonstrate that this exemption could be a pro-competitive measure for the shipping industry. However, the 2013 Notification poses a few challenges. First, it suggests that the exemption is automatic in nature without any of the controls or prerequisites put in place by other jurisdictions to ensure the VSAs do, in fact, lead to improvements in production, distribution and overall efficiency, and do not instead result in a substantial elimination of competition. Second, while the 2013 Notification provides for the Directorate General of Shipping (‘DG-S’) to ‘monitor’ VSAs, the scope and frequency of such monitoring to be carried out by DG-S remains ambiguous. Finally, although responsibility is cast upon liner companies to file existing or proposed VSAs with the DG-S within a prescribed time, neither CCI nor DG-S6 seem to have the power to penalise liners for non-compliance.

 
To date, the power to exempt certain sectors from the purview of the Act or its provisions has been used on two occasions. The first was to grant exemption to failing banks (forced bank mergers under Section 45 of the Banking Regulation Act, 1949) from the merger control provisions of the Act, for a limited period of five years. The shipping industry is the second to benefit from the power to exempt certain sectors from the provisions of the Act. Currently, there do not appear to be any cases filed before CCI alleging violations of Section 3 or Section 4 of the Act on account of VSAs and/or VDAs by shipping companies. However, with the limitation in scope of the 2013 Notification to the exemption of VSAs between liner shipping companies from Section 3 of the Act, CCI might turn its attention to other aspects of the shipping industry.

 

End Notes:

 

1 www.business.gov.in
2 Overview on The Proposed Block Exemption for Liner Shipping Agreements by the MyCC (available at http://www.mycc.gov.my)
3 ibid
4 ibid
5 TERI. 2008, Competition issues in regulated industries: Case of the Indian Transport Sector, New Delhi: The Energy and Resources Institute. 149 pp. [Project Report No. 2007CP21]

6 Merchant Shipping Act, 1958, empowers DG-S to deal with matters affecting merchant shipping and navigation and administration of the merchant shipping laws and also development of Indian shipping.

 

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

 
Shipping Maritime & Aviation Law Firms in India

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