Validity of Horizontal Agreements and Cartels in the FMCG Sector- The Covid-19 Exigencies

[By Srishti Suresh]

The author is a third year student of NALSAR, Hyderabad.

Introduction

The outbreak of COVID-19 has disrupted markets and economies over the world. India too, is facing its fair share of disruption and apprehension, owing to the uncertainty that surrounds the pandemic. Businesses and large scale enterprises facing significant losses due to reduced revenues, might seek to palliate the commercial damage caused, by resorting to collaboration and cooperation with their competitors. But the question that ensues, is whether,

  1. Horizontal agreements and cartels by manufacturers and enterprises in the FMCG sector are restricted by Section 3(3) of the Competition Act?
  2. Such an agreement to collaborate has the potential to cause an Appreciable Adverse Effect on the Competition (“AAEC”) regime?
  3. Section 54(a) of the Competition Act gets attracted owing to the unanticipated circumstances?

For the sake of clarity, the difficulty is deposed in the given factual scenario. The difficulties faced by enterprises engaged in the FMCG sector, relates to the decrease in the procurement and supply of essential goods to the markets, owing to various relevant factors such as significantly reduced work force, shutting down of factories due to inaccessible transportation and logistical support, and the difficulty in obtaining approvals and permissions to allow workers to oversee plants, in creating buffer stocks of inventory.[i] Consequently, in the non-essential sector, both demand and supply have plummeted, as opposed to the essential sector, where the demand for FMCG is steadily increasing, with the supply decreasing exponentially.

Under the Competition Act 2002 (“the Act”), a general prohibition is imposed under Section 3(1) of the Act, when an agreement creates a direct AAEC, as envisaged by Section 19 of the Act. Accordingly, while determining the appreciable adverse effects on competition, any or all of the factors enumerated from clause 19(3)(a)-(f) can be considered by the Competition Commission of India (“CCI”) while adjudging its impact on the market. This includes an agreement to improve production or distribution of goods or provision of services. It also specifies certain important criteria to be met such as creation of barriers for new entrants, driving out existing and operating competitors within the same field etc.[ii] The conception of ‘Appreciable Adverse Effect’ is not an objective stand-alone yardstick, which can effectively oust players in the market for anti-competitive practices. It necessarily involves a case by case analysis, within a given economic and social contexture. CCI, in the case of Builders Association of India v. Cement Manufacturers’ Association had categorically held that the presumption of anti-competitive agreements can be inferred from the intention or conduct of parties, by virtue of any circumstantial evidence.[iii] This would include evidence of parallel changes in price fixing and information sharing with other similar enterprises, without an explicit agreement, thereby creating an anti-competitive cartel.

The AAEC test is coded within the Act and is relied on judiciously as a robust test to discern any anti-competitive behaviour, as most cartels or price fixing correspondences are meticulously hidden or destroyed, to escape the plausible consequences of legal infringement.

But in the present case, the uncertainty and gravity of the spread of the pandemic has led to a further extension of the national lockdown. Consequently, a few classes of citizens are able to procure and cache the earlier stock inventory stored in the warehouses. Most essential goods are getting exhausted at an unprecedented rate, making accessibility almost impossible for the larger part of the community. With workers reasonably fearing their safety, manufacturing and distribution of FMCG has almost come to a standstill. Enterprises, having already run into deep losses, are facing an arduous situation in distributing essential goods to the markets, for the common benefit. As a result, prices of various essential goods have increased manifold, even up to 30% in the local markets. This has further increased the burden on the end consumer in procuring essential goods, just as a consequence of the play of forces of demand and supply.[iv]

As of March 31st 2020, the notification issued by CCI requires all filings related to anti-competitive agreements and abuse of dominant position to be suspended until further notice. Moreover, any submission or proceeding under the Act, is to remain in abeyance until notified.[v]

The main concern is whether in light of the exigent situations, and with the operations of the CCI remaining in suspension, can the FMCG sector enterprises enter into bona fide Horizontal Agreements for the purposes of sharing markets and sources of production and effective utilization of resources, in order to effectively percolate into the market in providing essential goods?

Section 4 of the Act prohibits companies from abusing their dominant position in the market, which might adversely affect its competitors and end consumers. In essence, enterprises that possess the resources can exercise an overarching power on smaller and less equipped competitors without the competitive force restraint, in driving their rivals out of the market- this is envisioned as the abuse of the dominant position.

But under Section 54(a) of the Act, such a dominant position, if utilized by enterprises for the purposes of public interest, in the form of horizontal agreements and cartels, cannot be deemed anti-competitive under the Act. A Tie-Up and Distribution Agreement within a group of competent companies, for ensuring the disbursal of essential goods at a reasonable price, accessible to citizens at large cannot be construed as an unethical price-fixing correspondence or deal. Moreover the scale of competition and the number of competitors has reduced owing to the dearth of demand and supply for goods and services. Therefore, the ‘driving out of rivals’ is a result of natural economic forces in light of the pandemic, as opposed to an active participation by dominant players in ousting the rivals.

As the CCI has abstained from issuing any notice or statement with respect to such tie up agreements with private dominant enterprises in the FMCG sector, in the growing disarray of the market, the only recourse would be for the Central Govt to issue an exemption notice to such acts, provided they fulfil the needs warranted by the ‘public interest’ and provide circumstantial evidence to show that no parallel agreements have been entered into, for creating artificial markets and price distortion.

Conclusion

While the competition law regime is robust and exhaustive to a great extent, the outbreak of the pandemic has raised concerns of serious implications. The validity of cartels and horizontal agreements between dominant players in an essential sector can have incidental effects on other small players and competitors. A change in pricing strategy, geographical distribution and price fixation can quite plausibly occur, in light of the current dearth of accessibility to essential goods in the market. But it is incumbent on the CCI and the Central Govt alike, to assess the situation in light of the surrounding societal factors and circumstantial evidence produced by the parties, before adjudging the validity of such agreements. However, viewing the same as an abuse under s4 or unethical and anti-competitive under s3, would belittle the larger picture. With the CCI operations and proceedings saying in suspension, it is necessary for the Central Govt to give a green light to the big layers in catering to the needs of the public, by the virtue of Section 54(a) of the Act.

Endnotes

[i] Viveat Susan Pinto & TE Narasimhan, Coronavirus Impact: FMCGs On Toes To Keep Manufacturing On Track, The Business Standard, (Mar. 24, 2020, 5:39PM), https://www.business-standard.com/article/companies/coronavirus-impact-fmcg-firms-struggle-to-keep-production-running-120032301769_1.html.

[ii] Section 19 of the Competition Act, 2002.

[iii] Builders Association of India v. Cement Manufacturers’ Association, 2016 CCI 46.

[iv] Aparna Banerjea, Coronavirus: PM Modi appeals to citizens to stop panic-buying, Live Mint, (Mar. 19, 2020, 8:56PM), https://www.livemint.com/news/india/coronavirus-pm-modi-appeals-to-citizens-to-stop-panic-buying-11584631214288.html.

[v] Measures in view of threat of COVID-19, The Competition Commission of India.

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