The MRTP Act.

& The New Competition Law

Growth of Monopoly and Concentration

Monopolies Inquiry Commission was set up in April, 1964 to enquire into the prevalence of monopolistic and restrictive trade practices followed by the large business houses. In the case of 810 products out of 1,380 (i.e.62%) the top three enterprises accounted for over 75% of the output in the organized sector One producer in 425 products (Monopoly) Two producers in 225 products (Duopoly) Three producers in 160 products (Oligopoly)

Large Industrial Houses

As on March 31, 1990, the 78 large industrial houses of the country had aggregate assets worth Rs.49,254 crores. Of these, the 20 top industrial houses accounted for assets worth Rs.33,919 crores constituting 68.9% of the assets of the 78 large industrial houses

No. of Companies under Top Ten Industrial Houses (2001)

30 28

25

20

15

11 10 8 6 5 3 2 1 0 Tata Ambani A.V.Bir la Unilever Lar sen &Toubr o ITC Mac Gr oup R.P.Goenka O.P.Jindal Videocon 6 4 8

Sales Turnover of Top Ten Industrial Houses (2001)

30,000 27,159 25,510 25,000

20,000

15,179 15,000 11,897

10,000 7,379 5,920 5,000 5,397 5,322 4,936 4,746

0 Tata Ambani A.V.Bir la Unilever Lar sen &Toubr o ITC Mac Gr oup R.P.Goenka O.P.Jindal Videocon

Private Sector Corporate Giants

The policy of industrial liberalisation since 1991 has resulted in an expansion of large scale private sector units Top 10 corporate giants accounted for about one-fifth of the total assets of 500 corporate giants in 1994-95

Sales Turnover of Top Ten Private Sector Companies (2001)

30,000

25,422 25,000

20,000

15,000

10,604 10,000 7,379 6,839 6,804 4,822 5,000 4,204

3,521

3,360

3,175

0 Reliance Industr ies Hindustan Lever Lar sen &Toubr o Tata Steel Telco Gr asimIndustr ies ITC Mahindr a & Mahindr a Tata Power Her o Honda

Assets of Top Ten Private Sector Companies (2001)

35,000

29,875 30,000

25,000

20,000

15,000 12,385 10,864 10,000 5,735 5,000 8,712 7,467 5,808 5,995 4,080 1,131 0 Reliance Industr ies Hindustan Lever Lar sen &Toubr o Tata Steel Telco Gr asimIndustr ies ITC Mahindr a & Mahindr a Tata Power Her o Honda

Causes of Growth of Monopolies and Concentration of Economic Power

Protected market Licensing policy and procedures [In 1966, large industrial sector accounted for only 8% of the total public and private limited companies, but its share in total licences was 38% in the total corporate sector] Credit policy (Between 1956 and 1966, 42% of credit went to 73 large industrial houses) Taxation policy

Government Measures to Combat the Growth of Monopolies

Restriction on the entry of large business houses in a number of industries The MRTP Act and the MRTP Commission Expansion of the public sector and the joint sector Encouragement to small and medium industries

The MRTP (Monopolies and Restrictive Trade Practices) Act.

Objectives : Prevention of concentration of economic power Prohibition of monopolistic and restrictive and unfair trade practices

Inter-connected and Dominant Undertakings

The MRTP Act. covered two types of undertakings: National monopolies (single large undertakings/ large houses with assets of at least Rs.100 crores) Product monopolies (dominant undertakings with at least one-fourth of market share and having assets of Rs.3 crores)

By March1990, 1,854 undertakings were registered under the MRTP Act. Of these 1,787 belonged to large industrial houses and the remaining 67 were dominant undertakings

Purview of the MRTP Act

Registered undertakings were subject to the following control: Issuing fresh capital, installation of new machinery etc. were subject to approval of the Central Government Permission of the Central Government was required to establish a new undertaking To acquire or merge or amalgamate with another undertaking the sanction of the Central Government was required

Monopolistic Trade Practices

Maintaining prices of goods or charges at unreasonably high levels Unreasonably preventing or lessening competition Allowing the quality of goods produced to deteriorate Increasing unreasonably the cost of production of any goods Increasing unreasonably the charges for maintenance of any services Increasing unreasonably the profits from goods produced or from services provided Using unfair methods for preventing competition

Restrictive Trade Practice

A restrictive trade practice -tends to obstruct the flow of capital or resources into the stream of production -tends to bring about manipulation of prices or to affect the flow of supplies in the market

Unfair Trade Practice

A trade practice that causes loss or injury to the consumers Misleading advertisement regarding the goods or services Creating the impression that something is being given free of charge whereas it is fully or partly covered in the cost Selling or supplying sub-standard, unsafe or hazardous products Hoarding,destroying or refusing to sell in order to push up the price level

Gradual Dilution of the MRTP Act.

1973 : The industrial policy statement opened up a large number of industries to the large houses 1982 : In all the 100% export-oriented units established under free trade zones exempted from the Act. 1983 : Companies registered under the Act. allowed adding new production capacity in areas of national priority, import substitution and high technology 1985 : Unrestricted entry of large industrial houses and companies into another 21 high-technology items of manufacture 1988 : Dominant undertakings are freed from industrial licensing policy restrictions applicable under the MRTP Act. 1991 : Asset limit for MRTP companies scrapped

The Process of Liberalisation

Industrialists felt that the MRTP Act. is highly restrictive and is stifling industrial growth The government initiated a number of steps to liberalise and dilute the provisions of the MRTP Act. It is felt that only large companies can survive in the new competitive markets Size should not be a constraint In 2000, Raghavan Committee proposed the adoption of a new competition law and doing away with MRTP Act.

New Competition Act.

New Competition Act. was passed by the Parliament in the year 2002 Objectives : Encourage competition Prevent use of dominant position Protect the consumer Ensure a level playing field to participate in the Indian economy

Competition Commission of India (CCI)

CCI is a regulatory body CCI is to consist of a Chairman, who is to be assisted by 2-10 members The administration and the enforcement of the Competition Act. will be carried out by CCI CCI is not merely a law enforcement agency, but would be actively involved in the formulation of the economic policies, advise the government on competition policy

Competition Act. : Focus Areas

Agreement Amongst Enterprises : The Act. deals with those agreements between enterprises, which have an appreciable adverse effect on competition [ To determine this, CCI will consider the structure of the market and will also enquire into cartels of foreign origin] Abuse of Dominance : Abuse includes charging unfair prices, restriction of quantities, markets and technical development leading to distortion of competition

Competition Act. : Focus Areas

Mergers or Combinations among Enterprises : To regulate all mergers which create a position of dominance post-merger
Deemed approval of a merger in the absence of a response from CCI,within a period of 90 days Mandatory for financial institutions, foreign institutional investors and venture capitalists to file the details of acquisition with the CCI, within a week of entering into an agreement CCI will have power to make an investigation into a merger even after one year of the pre-merger notification, either suo moto or in a complaint The Bill rules out any post-merger review for individual company mergers which have a combined turnover of less than Rs.3,000 crores or a combined asset size of upto Rs.1,000 crores

Factors Considered in Determining Dominant Position

A company is considered to be enjoying dominant position in the following cases: Market share of the enterprise Size and resources of the enterprise vis--vis its competitors Vertical integration of the enterprises (sale or service network) Economic power of the enterprise including commercial advantages over competitors

Abuse of Dominant Position

Cases are regarded as an abuse of dominant position: An enterprise imposes unfair/discriminatory condition in purchase/sale of goods/service Practices predatory pricing Restricts production of goods/provision of services Restricts technical or scientific development relating to goods or services Indulges in practice resulting in denial of market access Uses its dominant position in one relevant market to enter into other relevant market

Regulation of Anti-Competitive Agreements and Abuse of Dominance

In such cases, CCI can pass the following orders : Direct the party/company involved to discontinue Impose penalty (not more than 10% of the average of the turnover for the last 3 years) Direct to modify the agreements as specified by the CCI Recommend to the Central Government for the division of an enterprise enjoying dominant position

Factors Considered in Determining Adverse Effect of an Agreement

Creation of barriers to new entrants in the market Driving existing competitors out of the market Non-accrual of benefits to consumers Formation of cartels

Cartel

A Cartel is an agreement between firms not to compete with each other. The agreement is usually secret, verbal and often informal

Cartel members may agree on :

Prices Output levels Discounts Which consumers they will supply Which areas they will supply Who should win a contract (bid rigging)

The Graphite Electrodes Cartel, 1992-97

Graphite electrodes are used primarily in the production of steel in electric arc furnaces. In a highly concentrated world market, two firms (German & American) had a combined market share of roughly twothirds at the beginning of 1990s. Rest of the market was divided among the producers from Japan, India and China. In 1999, all seven major producers of graphite electrodes pleaded guilty to price-fixing between 1992 and 1997, following an investigation by the United States Department of Justice.

Cartel in the Cement Industry Major players jointly decided in November,2000 to shut down their plants for 35 days to control supplies artificially in order to reverse the trend of declining prices As a result of this move the cement producers were able to effect a series of price hikes within a short span of two months The Builders Association of India (BAI) threatened boycott of all further cement purchases until the manufacturers scaled down artificially rigged prices The government also announced a reduction of import duty on cement from 35% to 25% acceding to the demand made by the BAI Many of the smaller producers resorted to undercutting their prices in a weak market As a result, the producers deferred further price hike

MRTP & Competition Acts.

Under the MRTP Act. dominance per se is considered bad Under the Competition Act. the abuse of dominance is considered bad Registration of agreements are compulsory under MRTP Act. but it is not required under the Competition Act.