Although India’s competition law framework is in its early stages, the Competition Commission has reviewed several cases where the ‘single economic entity’ defence has been raised. Ritika Ganju and Ankur Verma of Phoenix Legal analyse the precedent.
The argument of ‘single economic entity’ is a defence often raised to combat a complaint of anti-competitive dealing. The mature jurisdictions of the EU and US have had many occasions to examine and develop the contours of this common defence. Although the Indian competition regulator has had limited occasions to deal with the concept of ‘single economic entity’, while formulating the country’s competition law, the Indian legislators had the benefit of integrating the recognition conferred by its peers to the principles of an economic unit or single economic entity in the Competition Act, 2002 (Competition Act).
Thus, not as a surprise, we see this fundamental principle to be well imbibed in the definition of the term ‘enterprise’ as defined in Section 2(h) of the Competition Act. The Act applies to the activities carried on by an ‘enterprise’. The definition of the term ‘enterprise’ is wide, to include holding or parent company and its subsidiaries.
The framework of the Competition Act was largely suggested by the high level committee (Raghavan Committee) appointed by the Government of India to advise a modern competition law that is in line with international developments. The Raghavan Committee noted that agreements are considered to be illegal only if they result in unreasonable restrictions on competition and that the parties to the agreement are engaged in rival or potentially rival activities. Section 3 of the Competition Act, which deals with anti-competitive agreements, is based on the foundation that such agreements can be between rivals or potentially rival parties where a potential rival is understood to be one who could be capable of engaging in the same type of activity. As in mature jurisdictions where the principle of ‘single economic entity’ has evolved through case laws, the Competition Act has been framed with the thought that firms or enterprises that are under common ownership or controls are not considered as “rival” or “potentially rival” parties.
Given the nascent stage of competition law in India, the precedents so far on the concept of ‘single economic entity’ are extremely limited. However, the Competition Commission of India (CCI) has analysed certain cases in this aspect.
The Lamborghini case
In the case of Exclusive Motors Pvt Limited v Automobili Lamborghini SPA (Case no. 52 of 2012), Exclusive Motors, a business involved in importing and selling sports cars in Delhi, alleged to have been appointed as the importer and dealer of cars manufactured by Lamborghini in 2005 by way of a dealership agreement. Thereafter, Exclusive Motors invested substantial time to develop the Indian market for Lamborghini cars, which was negligible prior to the agreement. In 2011, Lamborghini appointed its own group company, Volkswagen India, as the exclusive importer of Lamborghini cars in India. Exclusive Motors was requested to terminate the existing dealership agreement and to bring in place a fresh dealership agreement with Volkswagen India. Exclusive Motors did not agree to the new arrangement and in response, Lamborghini withdrew the new arrangement and served a notice for terminating the existing dealership agreement entered between them in 2005. It was alleged that during the notice period Lamborghini had offered its products to Exclusive Motors at a much higher price than Volkswagen India, thereby, among other things, adopting discriminatory pricing policy and formulating anti-competitive agreements in violation of Section 3 of the Competition Act.
The CCI passed an order in favour of Automobili Lamborghini, placing its reliance on the internationally accepted doctrine of ‘single economic entity’ and deriving support from the judgment of the Court (Sixth Chamber) in the matter of Viho Europe BV, Commission of European Communities and Parker Pen Ltd, and the judgment of the Supreme Court of the United States in American Needle Inc v National Football League et al.
In the aforesaid two rulings, the adjudicating authorities have well explained that joint conduct by a parent corporation and its subsidiaries, when controlled by a single centre of decision making, does not deprive the marketplace of independent centres of decision making and thus, an agreement between such two entities does not constitute a contract, combination or conspiracy. Extending the principle to the Indian competition setup, the CCI held that to establish a contravention under section 3 of the Competition Act, an agreement has to be proved between “two or more enterprises”. An internal agreement between entities constituting one enterprise cannot be assessed under the Competition Act. This implied that the dealership agreement between Automobili Lamborghini and Volkswagen India was outside the ambit of the Act since both these entities were part of the Volkswagen group. The CCI concluded that for Section 3 to trigger, the agreement has to be between two or more unrelated “enterprises”.
Exclusive Motors appealed against the CCI order before the Competition Appellate Tribunal (COMPAT), which was denied. The COMPAT concurred with the CCI on its observations and upheld that an internal agreement between subsidiaries, which are a part of the same group, cannot be considered as an agreement for the purpose of Section 3 of the Competition Act. The decision in Exclusive Motors is suggestive of the fact that an intra-group agreement cannot fall within the confines of the Act.
 The National Insurance case Unlike in the case of Lamborghini, the CCI thrashed the defence of ‘single economic entity’ in the case of In Re: National Insurance Co Ltd (Case no. 02 of 2014). The case was taken up on its own initiative by the CCI against the public sector insurance companies, namely the National Insurance Co Ltd, New India Assurance Co Ltd, Oriental Insurance Co Ltd and United India Insurance Co Ltd upon receiving anonymous information alleging cartelisation by the insurance companies and rigging of the bidding procedure pursuant to a tender invitation notified by a state government and higher premiums were being sought by them for insurance services.The facts of the case involved an invitation from the Government of the State of Kerala for tenders to take up the implementation of certain health insurance schemes. Pursuant to the invitation, several insurance companies approached the government with tender offers. Among the bidders, the bid submitted by United India Insurance was accepted.The CCI directed the Director General (DG) to investigate the allegations made by the anonymous informant. The DG found evidence that the insurance companies had pre-decided the winner of the bid and had taken decisions among themselves on business sharing. Thus, it was concluded by the CCI that the insurance companies rigged the bidding process and entered into an anti-competitive agreement to manipulate the tendering process. The insurance companies vehemently opposed the DG’s findings on the basis that they constituted a ‘single economic entity’. The insurance companies claimed that until 2002, all the companies were owned by the General Insurance Company. It was also submitted that pursuant to the enactment of the General Insurance Business (Nationalisation) Amendment Act, 2002, the Government of India held 100% shares of each of the insurance companies and controlled the management and affairs of the companies. However, CCI held that since the insurance companies had placed separate bids in response to the tenders and that there was no defacto or dejure control of the Government of India over the insurance companies, thus these companies could not constitute a single economic entity. CCI held that the insurance companies have entered into agreements in contravention of Section 3 of the Competition Act and imposed a penalty of Rs6.71 billion (US$99.97m) Shamsher Kataria case In the said case, a complaint was filed against Honda Siel Cars India, Volkswagen India Pvt Ltd and Fiat India Automobiles Ltd, alleging anti-competitive practices on the part of these three car manufacturers, whereby the genuine spare parts of automobiles manufactured by them were not made freely available in the open market. The CCI considered the matter and on perusal of the material on record directed the DG to conduct an investigation into the matter and submit the investigation report. From the preliminary enquiries made during the investigations, the DG opined that other automobile manufacturers (other than the three car manufacturers mentioned above) might also be indulging in similar restrictive trade practices with respect to after sales service, procurement and sale of spare parts from the original equipment suppliers, setting up of dealerships, etc. The case involved a larger issue relating to the prevalence of anti-competitive conduct by the automobile players in the Indian automobile sector and its implications on the consumers at large. Consequently, the CCI ordered that the investigation should not be restricted to the three car manufacturers alone and it should be expanded to examine the alleged anti-competitive trade practices of all car manufacturers in India, as per the list maintained by the Society of Indian Automobile Manufacturers. During the ongoing investigation, Hyundai Motor India Limited sought exemption for agreements with its overseas supplier based on the established principle of ‘single economic entity’ as such agreements were between the Hyundai Group companies. However, the CCI rejecting the plea of Hyundai observed that “an internal agreement/arrangement between an enterprise and its group/parent company is not within the purview of the mischief of Section 3(4) of the Competition Act. At the same time, the Commission would like to emphasise that the exemption of ‘single economic entity’ stems from the inseparability of the economic interest of the parties to the agreement. Generally, entities belonging to the same group, eg holding-subsidiaries, are presumed to be part of a ‘single economic entity’ incapable of entering into an anti-competitive agreement, the presumption is not irrebuttable.” |
 Conclusion Universally, the competition regulators have often got the opportunity to recognise that enterprises constituting ‘single economic entity’ do not affect competition and thus, could not be looked at as entering into anti-competitive arrangements when they work together. The factors considered to examine a case of ‘single economic entity’ have been shareholding, the control of the board of directors, approach on how strategic or commercial decisions are taken, whether the entities operate as a single economic unit and who bears the financial risks of the commercial activities undertaken.It is evident from the limited judicial precedent relevant to the subject matter that the CCI has been able to appreciate the principle of ‘single economic entity’ and thus, respected the business arrangements between parents and subsidiaries or group companies when operating as a single economic entity. This reinforces confidence in the Indian regulator that it has been able to adjudicate and deliver justice in line with the sound principles of competition law without interfering or obstructing the business operations of companies.––––––––––––––– E: ritika.ganju@phoenixlegal.in ankur.verma@phoenixlegal.in W: www.phoenixlegal.in |