Leniency Plus: Incentivization in Dearth of Enough Deterrence

[By  Akash Gulati & Ashutosh Yadav]

The author are students of Dr. Ram Manohar Lohiya National Law University.

 

Introduction

The Competition (Amendment) Act of 2023 (hereinafter “amendment”) has introduced an addition to the existing leniency mechanism popularly called “Leniency Plus.” The new provision aims to enhance cartel detection and cooperation with antitrust authorities by incentivizing cartels to disclose the existence of another cartel during the original leniency proceedings. However, the true efficacy of the mechanism will depend on the uniform application of leniency principles, the imposition of aggravated penalties, and the potential introduction of criminal provisions for cartels. This article puts forth the case that a greater deterrence for cartels making disclosures related to selective cartels is missing from the framework to fully utilize the increased incentives.

What is leniency plus?

The amended provision purports to provide an extra layer of leniency to the cartel cooperating with the anti-trust authorities by providing information about the existence of another cartel during the original leniency proceedings resulting in an additional reduction in the penalties.

According to the amended Section 46 (4), any producer, seller, distributor, trader, buyer, or service provider who discloses the existence of another cartel violative of Sec. 3 of the act would be rewarded with further reduction in the penalty. This leniency not be provided concerning the newly disclosed article, but also reduced penalty would be levied on the original case of a cartel, therefore justifying the word “plus”.

The need behind the introduction of a “plus” mechanism can be construed by the arduous task of cartel detection, which through the added incentive in this mechanism in the form of extra leniency, the Competition Commission of India (hereinafter “CCI”) might detect and penalize more cases.

Efficacy of existing leniency mechanism

The leniency mechanism was originally introduced in the year 2009 with the objective of ramping up cartel detection in the market. To achieve this, it resorted to the means of providing a lesser penalty as an incentive where the cartels themselves disclose their violations of the act. However, a total of only 21 leniency application cases emerged during the period of 2009-2022, with the majority of them being reported in the period 2021-2022 whereas the first application was filed way in 2017, also known as the Brushless DC fan cartel case.

The reason for such low turnout of the leniency application though being a remedial policy, can be, firstly, because the advantages from it are minimal in comparison to the gains from future collusion with the same associations, i.e., the monetary relief granted on the penalty levied is less than the profits made under the continued cartelization. Secondly, in cartel enforcement, the cartels often carry the thought they will not be detected or in the case of being detected, the penalty levied on them can outweigh the profits gained from cooperation, preventing them from self-report under the leniency mechanism.

Furthermore, according to the “leniency principle” the amount of leniency to be granted must be proportionate to the “relevance of the information” shared by the leniency applicant with the authorities. In contrast to that, it has been observed that CCI often acted vaguely without providing the rationale for granted leniency based on the “relevancy” of the information disclosed, which raised scepticism on the application of the leniency mechanism as happened in the Brushless Case, where a 75% leniency was awarded without providing any rationale.

The Competition Law Review Committee, in its report published in 2019, acknowledged these reasons and recommended the need to inculcate the “leniency plus” with the reasoning that the promise of added reward for reporting another cartel would encourage more enterprises to come forward with disclosures about anticompetitive agreements, making it considerably easier for the Competition Commission of India (“CCI”) to uncover and prosecute cartels. The view was also upheld by the CCI as highlighted in the case of Chief Materials Manager, North Western Railway v. Moulded Fibreglass Products.

How good is the amendment equipped to ramp up whistleblowing

The newly added Section 46(4) now formally incentivizes whistleblowing for the cartel participants to disclose another existing cartel either connected or unconnected to the existing one.

The quantum of the further reduction in the penalty will be decided by the CCI and regulations regarding the same would be added to the existing lesser penalty regulations. Currently, the regulations provide for a reduced penalty of up to or equal to 100% to the first applicant, while the second applicant gets a reduction of up to 50% and the subsequent ones are eligible for a reduction of up to 30%, which now coupled with the reduction for a subsequent cartel disclosure, would yield greater reductions.

To understand the magnitude of the effect that such further reductions can cause we look at the case of the Beer Cartel which was initiated upon the lesser penalty application by Crown Beer & SAB Miller. In this case, the CCI levied penalties computed upon 2% of relevant turnover or 0.5 per cent of relevant profit, whichever was higher. The penalties were to the approximate tune of 1253 Cr, 317 Cr, and 151 Cr for United Breweries Limited, Anheuser Busch InBev, and Carlsberg India Private Limited respectively. Wherein Anheuser was granted a hundred per cent reduction in penalty for being the first applicant, fifty per cent for United Breweries, and twenty per cent to Carlsberg. Even after the reduction by the CCI, the penalties are still cumbersome enough for the companies to look for more ways to do away with them, herein, the incentive of disclosing a new cartel, and then achieving more reduction in the current fines and the new cartel-related fines, would be a good enough incentive. This would now be possible post the application of the amendment and will strengthen enforcement via incentivized whistleblowing.

The increased scope of availing reduced penalty also gets coupled with the increased scope of penalties as the amendment also pegs up the quantum of the penalties by introducing the provision of using the global turnover, as provided in Explanation 2 to Section 27 of the amendment, as a means for calculating the penalty, which earlier was the domestic turnover which too was narrowed down to the “relevant turnover” by the judiciary in the Excel Crop Case. Therefore, now that the violators are at more of a pecuniary loss by being susceptible to higher penalties than before, in cases of multi-national companies specifically, reporting cartels to the CCI is more incentivized than ever before.

Is the carrot enough in the absence of a strong stick?

In many jurisdictions such as the US and Germany, the offence of cartel is also a criminal one wherein the US criminalizes all sorts of cartels Germany only criminalizes the offence of bid-rigging, which is supposed to act as a deterrent, hence the term stick wherein the incentive to report is the carrot. This is not the case in India, as there is no provision that criminalizes the formation or operation of any sort of cartel.

This absence of a strong deterrent raises doubts about the efficacy of the increased incentives in their standalone manner. A well-developed competition law jurisprudence should have the ability to criminally sanction the most perverse forms of cartels such as that of bid rigging, wherein the sentencing factor should be the level of aggravation of the cartel. The use of sentencing should be rare, but nevertheless, a power that’s statutorily available.

Moreover, the absence of omnibus questions to the leniency applicants is another chance at better enforcement unutilized in India, as in the US where an applicant is made to provide sworn testimony regarding their knowledge of any other existing cartel, and if later on any such cartel with the participation of the previous applicant is found, the afresh penalties and criminal sanctions are aggravated and heftier. Hence nudging the applicants into making all possible disclosures at the very first instance.

Conclusion

From the first-ever leniency application in 2017, to now a total of 21 leniency applications having been entertained by the CCI, we see that even though the Indian jurisdiction hasn’t been able to make the most of its leniency program, the trend saw a noticeable shift post the year 2021, wherein we saw a substantially increased number of leniency related to the disposition of cases.

While the amendment by introducing the “leniency plus” intends to ramp up cartel enforcement, it will only bring in the intended outcome, if the approach towards leniency is uniform and aggravated penalties are levied on applicants disclosing selective cartels while being part of more than one cartel. Lastly, statutory reforms such as criminalizing the aggravated form of cartels would also go a long way in the game of deterrence and the eventual utility of seeking leniency.

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