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Competition Law in Automobile Sector

We always fear competition; it appears to be something which brings a lot of tension, stress and anxiety. But this is not the case when we look at the market. The competition is good for both the producers and the consumers as well. Competition promotes innovative thinking, allows quality services, and increases the consumption and thereby improving the sales of the goods. All this benefits the producers.

At the same time, the competition entails manifold advantages to the consumers. For example, by providing excellent quality at lower price, regulates the prices of the market and bestows with a range of variety to them. The government recognizes the importance of it and promotes it. This is evident from the Competition Act 2002[1] (Hereinafter ref. as The Act).

Competition Act of 2002

Before delving into the Competition Act, it is crucial to delve into the precedent of it, i.e. the MRTP Act.[2] Based on the recommendation of Dutt Committee, MRTP Act was enacted in 1969 to prevent the concentration of economic power in the hands of few rich.

The act aimed at restricting unfair trade practice and to curb monopolistic markets. Due to certain limitations, redundancies it got repealed and replaced by the Competition act. Some of the layoffs are that in MRTP act the definition of the consumers and that of unfair trade practices were not defined in it which was resulting in MRTP act having ambiguous interpretation.

Also the MRTP act was in restriction of the monopolies which is not inherently wrong or illegal. In contrast to it the Competition act allows for monopolies but restricts the misuse of such dominance, apart from all this, the act was ineffective in promoting competition because of it being a reformative act instead of a punitive one. These were few of the shortcomings of the MRTP Act.

How the MRTP act was bad for the automobile sector will be demonstrated at a later point. Due to the above-mentioned shortcomings in the MRTP act, the Competition Act was enacted with the intent of establishing the Competition Commission of India (CCI), sustain the completion and benefit the consumers. The highlighting feature of the act is that it does not penalize the monopoly itself as it is inevitable it rather restricts the misuse of dominance. The act aims at restricting abusive contracts and regulate amalgamation and mergers as well.

Introduction to the research sector
Indian automobile sector is the fourth largest automobile market in the world, largest in two and three wheeler and 2nd largest in passenger car segment. The automotive se-ctor has always been demanding the attention of the legislators owing to its economic vastness, vitality and competitive behavior. As unlike before 1991, the government instead of focusing on socialist hue now looks for the rivalry for allocation of market. Catering to these needs the GOI constituted the Mahalnobis Committee which led to formation of the Monopolies Inquiry Commission in the year 1967[3]

Culminating to the MRTP act. It was not capable of promoting the competition in the market due to the reasons mentioned earlier, apart from those reasons, MRTP act along with the FERA act[4] led many firms to:
  1. operate below the minimum efficiency scale
  2. under-utilize capacity and,
  3. use outdated technology.[5]
Due to these effects, economic effect led to New Economic Policies 1975.

And ultimately the Competition act replaced the MRTP act in 2009. Maruti Suzuki enjoys a dominant position in the market of the passenger vehicles and Honda dominates the two wheeler market. However, we will not delve into the studies of the primary market and the trade practices there, but rather we will focus on the after sales market or the secondary market where each OEM might be enjoying a monopolistic position and how Competition act deals with it. For study of the after-sale market we shall see the vertical contracts[6] in depth.

Automobile dealers are the main point for getting the end services for consumers, they play an important role in the after-sale market, but they are subjected to arbitrary conditions by the OEMs. Arbitrariness can be assessed with the fact that out of 104 enquiry by the CCI, a majority was against the arbitrary vertical contracts constrains imposed by OEMs.

Vertical agreements and Competition Law

Some of the anti-competitive practices pertaining to the automobile sectors are-
Compulsory orders to procure the complimentary goods
When the section 3(4)(b)[7] of the act read with 3(1), it forbids the contracts stopping the buyers from procuring the goods from the third parties, compelling the buyers to buy the equipment, insurance, additional goods such as pads, tires, guards etc. from a fixed place is against the spirit of the competition as it stops them from getting the same at cheaper price. In the Hero Honda Case,[8] the CCI while annulling such contract held that such a practice, increases the price, restricts the entry of new comers and ultimately harms the final consumer. Additionally, such agreements result in the tie-up agreements, going against the section 3(4)(a)[9] if the act. The tie-up between the primary products should not be associated with secondary product market. The relevant case is discussed later.

Limitation of the geographic operation limit

Section 3(4)(c)[10] read together with the 3(1) prohibits the contracts that restricts or allocate a particular territory of market for the supply of a particular commodity. If the Original Equipment Manufacturer signs a contract with his dealer to supply a car at a particular place only then it is a violation as it has an adversarial effect on the prices and also creates a dominant position in the market against the section 4 of the act itself.

Prohibition on dealers from acquiring the competitor’s dealership.

In a majority of the cases the automobile dealership operates on the principles of the single franchise, where a particular dealer is required to sell cars/bikes from a particular manufacturer. Such restrictions are also expanded to the after-sell services including insurances etc. One such case in this regard is that of Automobile Dealers Association, Hathras (UP) v. Global Automobiles Ltd &Anr [11]

So far we have discussed the anti-competitive vertical agreements in that regard a landmark case need to be discussed at large. The case is of Shamsher Kataria vs. Honda Siel Cars India Ltd. & Ors[12] where Volkswagen India Ltd and Fiat India Ltd along with the Honda Siel Cars India Ltd was sued under the following charges.
  1. Placing the burden on the dealers, service stations by restricting their procurement and sell of spare parts of one manufacturer only. Thereby violating 3(4)(b) of the act. i.e. exclusive supply agreement and tie-in agreements.
  2. By not releasing the important software and hardware knowledge to the independent workshops.

The CCI while holding the companies liable for the 3(4)(b), 3(4)(c) 3(4)(d)[13] also went on to say that each OEM is 100% dominant in their after-sale market since consumers get locked-in after buying a car of a particular brand and cannot change it. Each OEM is enjoying a dominant position in after-sale market as the goods are limited to the selected dealers completely violating competition. Thus the CCI held the OEM in violation of the Section 4(2)[14] of the act.

This ruling bridged the gap between the bad vertical contracts and abuse of the dominant market position. Relieving the consumers and the dealers.

Conclusion
Horizontal agreements i.e. the agreement between the manufacturer at the same level is indeed very harmful for the market and the competition as well as it leads to the malpractices like bid rigging, output restriction, price fixing etc. for reference we might refer to the case of All India Tyre Dealers Federation v. Tyre Manufacturers[15]. But the vertical agreements which do not appear so harsh are actually very harmful.

As we have seen such agreements have placed unjustified burdens on the dealers to match with these, they resort to many foul practices such as booking cars under fictional names. The Act is equipped to deal with these venomous vertical contracts under section 3(4) and they can also be scrutinized under the section 4 of the Act as discussed in the landmark case. The punishment are also very deterrent as it can go up to 10% of the total turnover of the company.

To conclude I would say that the automobile sector is very important in the Economy and it should be checked for any anti-competitive actions and they must be stopped.

End-Notes:
  1. The Competition act, 2002, No. 12 Act of Parliament, 2003 (India).
  2. Monopolies And Restrictive Trade Practices Act, 1969, No. 54 Act of Parliament, 1969 (India).
  3. Raghvan Committee reports, 1999 http://theindiancompetitionlaw.files.wordpress.com/2013/02/report_of_high_level_committee_on_competition_policy_law_svs_raghavan_committee.pdf
  4. Foreign Exchange Regulation Act, 1974 No. 13 Act of Parliament , 1973 (India)
  5. Government of India. 1980. Sixth Five Year Plan (1980-85). New Delhi: Planning Commission
  6. Vertical contracts are the contracts between the Manufacturer and the dealer/distributerin after-sales market
  7. The Competition Act, 2002, s 3 ss 4 cls. b
  8. Case Bo. 17 of 2017
  9. The Competition Act, 2002, s 3 ss 4 cls. a
  10. The Competition Act, 2002, s 3 ss 4 cls. c
  11. Automobile Dealers Association, Hathras (UP) v. Global Automobiles Ltd &Anr [11]CCI Case No 33 of 2011
  12. Shamsher Kataria vs. Honda Siel Cars India Ltd. & Ors CCI Case No. 03/2011
  13. The Competition Act, 2002, s 3 ss 4 cls. d
  14. The Competition Act, 2002, s 4 ss 2
  15. All India Tyre Dealers Federation v. Tyre Manufacturers, case No.RTPE 20 of 2008

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