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Anti-Competitive Agreements and State Owned Entities(SOEs)
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Anti-Competitive Agreements and State Owned Entities(SOEs)
Manish Lodha
Introduction
Introduction
State owned entities (SOEs) have always been harbinger of growth of the Modern India. After the implementation of Competition Law in India, there have been many cases of conflict of SOEs and the Competition Law . This is due to the fact that major previledges have been provided to SOEs as they have been an important part of growth story of our country. This presentation attempts to analyse the relationship between SOEs and Anti-Competitive Agreements, one of the main pillar of the Competition Law in India.
What are SOEs and Anti Competitive Agreements
Definitions
State Owned Entities (SOEs)
State Owned Entitities
- In India, SOEs are referred to as Public Sector Undertakings and are entities that have majority stake from the Government.
- Section 2(45) of Companies Act ,2013 defines a “Government company” as any company in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company.
Characteristics of SOEs
Characteristics
Of SOEs
- Government Control
- Majority stake from the Government
- Distinction between departmental enterprises and non-departmental enterprise.
- Account for about more than 25% of the GDP of India
- Plays a vital role in ensuring the supply of various essential goods, such as railways, health services and postal services at a price suitable to the lower income groups.
Role and Contribution of SOEs.
Role and
Contribution
- Played a very crucial role in Indian economy
- By and large delivered the purpose for which established.
- Domination of critical sectors such as railways, post and telegraph, petroleum, ports, airports, power, mining,shipping , banking, insurance etc.
- Significant contribution to GDP and gross domestic capital formation as well as to exchequer through dividend payment, interest payment on government loans and payment of taxes & duties, foreign exchange earning.
Anti Competitive Agreements
Anti-Competitive Agreements
Section 3 of the Competition Act ,2002
(1)No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on
competition (AAEC) within India.
(2) Any agreement entered into in contravention of the provisions contained in subsection (1) shall be void.
Horizontal Agreements
- Agreements between enterprises or persons engaged in identical or similar trade .
- Horizontal Agreements having AAEC is prohibited under Sec. 3(3) of Competition Act,2002.
Following agreements are anti-competitive
- Agreements which directly or indirectly determines purchase or sale prices.
- Limits or controls production, supply, markets, technical development, investment or provision of services.
- Shares the market or source of production or provision of services by way of allocation of geographical area of market or type of goods or services, or number of customers in the market or any other similar way.
- Directly or indirectly results in bid rigging or collusive bidding.
Vertical Agreements
- Agreements between enterprises or persons at different stages or levels of the production chain .
- Vertical Agreements having AAEC is prohibited under Sec. 3(4) of Competition Act,2002.
Following agreements are anti-competitive:
- Tie-in arrangement
- Exclusive supply agreement
- Exclusive distribution agreement
- Refusal to deal
- Resale price maintenance
Competition Law and SOEs
Analysis
Competition Act and SOEs
Competition Act
- “Competitive neutrality’ enshrined under Competition law
- No distinction between SOEs and Private Enterprise
- Competition Act , 2022 defines an "enterprise" as " a person or a department of Government.... but deos not include any activity of the Government relatable to the sovereign functions of the Government including all activities carried on by the departments of the Central Government dealing with atomic energy, currency, defence and space”
- Central Govt. may exempt SOEs only regarding sovereign functions.
Competitive Advantages to the SOEs
- Outright subsidisation.
- Concessionary financing and guarantees.
- Other preferential treatment by government.
- Monopolies and advantages of incumbency.
- Captive equity.
- Exemption from bankruptcy rules and information advantages.
Competitive Advantage to SOEs.
Reasons for Goverment Favouring SOEs
- Maintaining public service obligations.
- SOEs as a tool for industrial policy.
- Protecting fiscal revenues.
Examples of Cases against SOEs
Recent Cases
The CCI has taken several major decisions against state-owned enterprises (SOEs) in recent years, some are discussed as follows
These decisions demonstrate the CCI's commitment to enforcing competition law in India and promoting fair competition in all sectors of the economy, regardless of whether the businesses involved are state-owned or private.
Coal India
Case-1
In 2013, the CCI imposed a penalty of Rs. 1,773 crore ($264 million) on Coal India, a state-owned coal mining company, for abusing its dominant position by imposing unfair and discriminatory conditions on fuel supply agreements with power producers. Coal India was found to have used its dominant position to impose arbitrary and discriminatory clauses in its fuel supply agreements, resulting in an adverse impact on competition in the power sector.
Indian Railway
Case-2
In 2018, the CCI imposed a penalty of Rs. 1,258 crore ($188 million) on Indian Railways, a state-owned railway company, for imposing unfair conditions on freight transport services. Indian Railways was found to have abused its dominant position by imposing discriminatory freight rates and providing preferential treatment to certain customers, resulting in an adverse impact on competition in the logistics sector.
Gail India
Case-3
In 2021, the CCI imposed a penalty of Rs. 1,000 crore ($136 million) on GAIL India, a state-owned natural gas company, for abusing its dominant position in the supply of natural gas to customers. GAIL India was found to have imposed unfair and discriminatory conditions in its gas supply agreements with customers, resulting in an adverse impact on competition in the natural gas sector.
Suggestions and Conclusion
Conclusion
Suggestions to improve competitiveness of SOEs
Suggestions
- Shift needed from state controlled economy to market driven economy to make SOEs more competitive and ensuring level playing feild.
- Some other measures like privatisation, effective governance, improving independence, accountability and disclosure to be implemented in SOEs
- Implementation of Competitive neutrality in effective manner.
- SOEs need to develop robust competition compliance programs to comply with the Competition Act, 2002
- CCI may consider the feasibility of bringing out guidelines suggesting a framework within which SOEs may do competition assessment on their own.
Conclusion
Conclusion
- India’s competition law and policy plays an important role in reforming SOEs by keeping a check and balance and providing operational ground rules. Anti-competitive behaviour is reprimanded and advocacy efforts are carried out to install a competition culture.
- Though Competition Law has provided neutrality to all kind of enterprises , the SOEs have some inherent competitive advantages which act as an incentive to act anti-competitive.
- Some measures as suggested and active role of CCI with awareness of competition law can improve the competitiveness of SOEs.
- A balance is needed between competitive neutrality and public service obligations of SOEs for ensuring proper implementation of their social obligations.
Credits
Credits
- Faculties and staff of "Advance Course on Competition Law and Market Regulation" - 7th Batch.
- Competition Act, 2002.
- Module 8 of the course study material on "Public Sector and Competition Law" provided by IICA .
- Presentation given by Ms. Ginny Jaitley Rautray on "PSE and Anti- Competitive Agreements " during the course study.
- Presentation on " Research project on Competative Neutrality in India" by Ms. Seema Gaur at UNCTAD,2012
- OECD Corporate Governance Working Paper on Competitive Neutrality and State-Owned Enterprises by Antonio Capobianco, Hans Christiansen.