Does India Need A Competition Policy?

After extended discussions, several trips abroad to study the workings of commissions on competition, and a two-month extension of the duration of its term, the Committee on Competition Policy (CCP) appears to be facing an existential crisis.

Although the committee has submitted its recommendations to the government, one third of its members (S Chakraverti, Rakesh Mohan and Pesi M Narielvala) believe the report they've helped to write, needs to be debated more.

At least one member (Sudhir Mulji of Great Eastern Shipping) believes there is no need for a policy on competition, while two (Rakesh Mohan, director general of think tank NCAER, and S Chakraverti, advisor, department of company affairs) feel that there must be an interim regime before the competition policy comes into place, during which the Competition Commission of India (CCI) should play a purely advocacy role.

 

Which brings us to the question: does India need a competition policy? To answer that, we need to go back into time a bit. When the government first thought of framing a competition law, the landscape was quite different. The Seattle round of the World Trade Organisation (WTO) hadn't yet taken place and the air was agog with the expectation that a working group on trade and competition policy was inevitable in the WTO because the European Union was pushing for it.

What was the logic for such a working group? Because the EU believes every market should be contestable by everyone. This can happen only if everyone has the fullest freedom to trade and competition is unfettered. Market access to the Indian markets was the unstated subtext.

At that time, in 1996 to be precise, India felt that it had no policy to govern even domestic competition, let alone international competition. So a working group was set up to decide what the contours of competition should be, what abuse of dominance meant in the Indian context and what India's policy should be on mergers and acquisitions (M&A).

There was a general expectation that this mattter would come up at Seattle and that India should be prepared for it. How much the US supported the collapse of the Seattle Round is debatable. But the office of the US Trade Representative (USTR) was less than enthusiastic about negotiations on trade and competition in WTO because its own systems were working just fine in calibrating competition. (One instance is the complaint by Indian steel manufacturers that the US was dumping steel in the international market and the US levied anti dumping duties on the Indians!) So a trade and competition round in WTO could erode its anti dumping leverage in international trade.

India recognised this but felt a domestic competition policy was badly needed. This was even more so when the realisation began to dawn that a large number of Indian companies were being taken over by foreign companies and there was nothing to correct or prevent this.

Dr Nagesh Kumar, Senior Fellow at the Research and Information System for Developing Countries (RISDC), has prepared a meticulous database on multinational enterprises and M&As in India. His study shows that during the period 1997-99, nearly 40 per cent of foreign direct investment or FDI flows into India have taken the form of M&As by multinationals of existing Indian enterprises (see table), rather than greenfield investments, as opposed to FDI till 1990, of which nearly 90 per cent was greenfield investment. He finds that multinational-related M&A deals are mainly horizontal, rather than vertical.

A typical pattern of entry followed by MNEs in India has been to set up a joint venture with an established local group that acquires assets, existing facilities and networks of the local partner. After a few years multinational partners start raising their stakes and often end up buying out the stake of the local partner. The latest example is the Dabur versus Nestle dispute over Excelcia Foods. Kumar cites the examples of Daewoo which had a joint venture with DCM, Ford with Mahindra and Mahindra, Fiat with Premier Automobiles, General Motors with Hindustan Motors and Mercedes Benz with Telco. Other cases are Electrolux, Whirlpool, Timex Watches, Yokogawa Cummins and Xerox, etc.

Kumar's study also reveals that bulk of the horizontal mergers by multinationals have been to augment their market presence. Hindustan Lever acquired Tomco and Lakme to strengthen their presence in edible oil, soap and personal care products. This also applies to Smithkline Beecham (which aquired Jagajit Industries' foods business to consolidate their market presence in the nutritional drinks segment) and Glaxo India which bought out three Biddle Sawyer pharma companies to strengthen their presence in the therapeutic market segment.

What does this mean? Has the pattern of M&As in India increased or curtailed competition?

In his dissent note, Pesi M Narielvala says there are many laws already in existence, like the Sebi Takeover code (1997), which regulate M&As. He argues (and on this there is consensus among the the other dissenters) that to be competitive, the size of Indian companies has to be increased and therefore, pre-notification of mergers (as required by the competition policy for companies above a certain size) will be a roadblock in the process of M&As and fostering competition.

At the heart of both arguments lies a fundamental question: should the competition policy subserve economic/market activity (Mulji)? Or should India's competition policy subserve national (read domestic) interest (Kumar)? It is hard to decide. And this is not the only debatable issue in the policy.

Rakesh Mohan says the Competition Policy speaks of preventing the abuse of dominance. "But how can you know there will be abuse of dominance until abuse actually takes place?" he says. He says deciding abuse of dominance (as defined in the draft policy) is highly discretionary. This worries him because one issue is absolutely clear: whether there is abuse of dominance or not, where there is discretion involved, there will always be the possibility of abuse.

There is another factor relating to the Abuse of Dominance, which makes dominance a tough to define. Though the economy has been opened up substantially, it is by no means completely open. In this environment, how can you decide dominance or its abuse ? Mohan says, "Don't you have to remove regulation (by the state) first and then talk of competition?"

The competition policy recommends scrapping several bodies like BIFR and MRTP, but does not suggest what should replace these. Mohan says there is a bankruptcy procedure and a debt recovery tribunal which is adequate to decide when a company has turned sick and allow it to die if it is beyond recovery. He says this is what real competition is all about. BIFR and MRTP were envisaged in a different era. If there is a competition law, they will not be needed.

But labour unions say that if you concede that mismanagement is most often the reason for the closing down of industries and resultant unemployment, what happens to workers' rights in a competitive economy? Shouldn't the rights of workers be factored into the competition policy ?

Law Minister Ram Jethmalani, who insisted that the Committee on Competition Policy submit its report without forcing a consensus, has said that he is happy to see more debate on it before the policy is adopted. Given the strong reservations about it, maybe that's the only way out.