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  An estimated 7-minute read

COMPAT penalizes insurance companies and automobile manufacturers

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Contents:

1. COMPAT penalizes automobile manufacturers for anti-competitive practices

2. COMPAT penalizes public sector insurance companies for bid rigging

COMPAT penalizes automobile manufacturers for anti-competitive practices

Facts of the case
 
In August 2014, the Competition Commission of India (CCI) had found international automobile manufacturers (OEMs) including Ford, Toyota, Hyundai, Honda and Maruti, guilty of contravening Section 3 (prohibiting anti-competition agreements) and Section 4 (prohibiting abuse of dominant position) of the Competition Act, 2002 (Competition Act).
 
According to the CCI, these manufacturers were involved in a number of anti-competitive practices including:

- Restricting authorised services providers from selling spare parts over the counter to independent services providers;
- Restricting authorised spare parts manufacturers/ original equipment suppliers (OESs) from selling spare parts directly in the market;
- Cancellation of warranty in case the vehicle is repaired by an independent mechanic;
- Restricting availability of diagnostic tools in the open market; and
- Increasing prices of spare parts in an unfair manner.
 
CCI's order
 
Based on the facts of the case and the provisions of the Competition Act which prohibit the abuse of dominant position and anti-competitive agreements, the CCI concluded that all the OEMs involved in the case, were monopolists in the relevant market, with respect to their own spare parts and after-sale services.
 
It was observed that the OEMs, by preventing the authorised service providers from undertaking over-the counter sale of spare parts and restricting their OESs from selling spare parts in the open market, were preventing independent services providers from competing with their authorised services providers.  The CCI also concluded that the pricing and profit margin on the spare parts was unfairly high and reflective of the abusive conduct of the OEMs.  Accordingly, a penalty of 2% on the average annual turnover of the OEMs in pursuance of Section 27(b) of the Competition Act, was imposed.
 
COMPAT's order
 
The automobile manufacturer filed an appeal before the COMPAT, which upheld the decision of the CCI and found the automobile manufacturers guilty of abusing their dominant position and entering into anti-competitive agreements with their OES and authorized service providers.
 
In its order dated 9 December 2016, the COMPAT has detailed the evolution of the automobile sector in India and its projected growth, and examined the lack of regulatory control of the after-sale services market and spare parts market in the auto-mobile sector in India.
 
In view of the market practices of the automobile industry, the COMPAT acknowledged that there are certain valid concerns that exist for the OEMs.  Due to the lack of technical expertise amongst the independent service providers and presence of counterfeit spare parts in the open market, it was possible for consumers to be provided with sub-standard quality of services or parts under the brand name of OEMs.  Accordingly the COMPAT has opined that, to deal with such malpractices, the CCI's directions requires some modification.  The modified directions that are to be implemented within a period of one year are:
 
- OEM's to remove all restrictions imposed through agreements and practices on OESs for selling spare parts including diagnostic tools etc., in the aftermarket or to authorised service providers;
- If the intellectual property rights belong to OESs, OEMs shall not restrict the OESs from selling spare parts in the aftermarket with the trademarks of the OESs;
- OEMs to open additional distribution network for sale of spare parts in open markets;
- OEMs to remove all restrictions on OESs, authorised services providers and authorised distribution channels for sale of spare parts to independent repairers;
- Ministry of Road Transport and Highways to develop voluntary standards for certification of garages/independent repairers;
- OEMs to modify their warranty condition and cancel the warranty only to the extent that damage has been caused because of faulty repair work outside their authorized network;
- OEMs to develop extensive information system with the objective of removing asymmetry in information;
- OEMs to make available in the public domain, and also host on their websites, information regarding spare parts, their MRPs, arrangements for availability over the counter, and details of matching quality alternatives, maintenance costs, provisions regarding warranty and any such other information which may be relevant for full exercise of consumer choice and facilitate fair competition in the market; and
- Ministry of Road Transport and Highways in consultation with other relevant Government Departments/Agencies/Industry Organizations to take up a program for standardization of automobile spare parts.
 
The COMPAT reduced the penalty imposed by the CCI by directing the OEMs to pay 2% on the average annual turnover of spare parts in the aftermarket, for the period immediately preceding three years before the year of enquiry by the CCI.

COMPAT penalizes public sector insurance companies for bid rigging

Facts of the case
 
The Government of Kerala initiated a bidding process for the purpose of selecting insurance service providers for the Rashtriya Swasthya Bima Yojna / Comprehensive Health Insurance Scheme for the years 2010- 11, 2011-12 and 2012-13.  In July 2015, the CCI found certain insurance companies - National Insurance Company Limited, New India Assurance Company Limited, United India Insurance Company Limited, and Oriental Insurance Company Limited, guilty of manipulating this bidding process.  Based on its findings, the CCI had imposed a total penalty of INR 671.05 crores on these insurance companies.
 
The principal argument of the insurance companies before the CCI and the COMPAT was based on Section 3 of the Competition Act, 2002 (Competition Act).  Under this Section, an agreement between 'enterprises' engaged in the provision of identical or substitutable services, which directly or indirectly results in bid rigging or collusive bidding is presumed to cause an appreciable adverse effect on competition.  The insurance companies argued that they constituted a 'single economic entity' and therefore any agreement between them was not between two 'enterprises' as envisaged under the Competition Act.  This argument was inter alia made on the basis that all the four insurance companies were operated and controlled by the insurance division of the Department of Financial Services (DFS), Government of India and the Central Government held 100% shares in each company.
 
The COMPAT rejected the argument of the insurance companies by relying on the provisions and legislative intent of the General Insurance Business (Nationalisation) Act, 1972 (GIBNA Act), under which the four insurance companies were created.  The COMPAT held that in terms of the GIBNA Act, the four companies were created in order to encourage competition and function as per business principles.  The COMPAT further held that the influence of the DFS does not detract from the independent, commercially and economically separate status of each of the four companies, which as per the GIBNA Act have been created as independent entities for competing with each other in the interest of efficiency.  Accordingly, the four insurance companies would not be considered as a 'single economic entity'.
 
Regarding the conduct of the insurance companies, the COMPAT held that it was an admitted fact that the senior officials of the insurance companies met and agreed that United India Insurance would be the lowest bidder in the tender floated by the Government of Kerala for the year 2010-11.  Subsequently, United India Insurance did emerge as the lowest bidder for 2010-11 and in subsequent tenders, thereby establishing the culpability of the insurance companies in rigging the bid process.
 
In response to this contention, the insurance companies argued that United India Insurance had incurred huge losses since the introduction of the Comprehensive Health Insurance Scheme, and therefore, it was decided by the insurance companies to share the burden of the losses and take risk mitigation measures.  They also argued that United India Insurance did in fact reduce its losses with the cooperation of the other insurance companies and the intention of the agreement was not to make supernormal profit.
 
COMPAT's order
 
Dismissing the arguments of the insurance companies, the COMPAT, in its order dated 9 December 2016, agreed with the CCI that the intention of the parties for manipulating the bids was irrelevant.  The act of bid rigging itself is prohibited under the Competition Act, and is presumed to cause appreciable adverse effect on competition in India.  The COMPAT also held that presumption in substantive law is irrefutable and conclusive – once a conclusion of bid rigging is reached, the contravention of the Competition Act is also established.
 
On the issue of quantum of penalty, while the CCI had imposed a penalty of 2% (of the maximum 10%) on the turnover of the insurance companies for the previous three years, the COMPAT reduced the penalty amount.  The COMPAT applied its earlier precedents on imposing penalty only on the relevant turnover and reduced the quantum of penalty to 1% of the relevant turnover for the previous three years.  Therefore, the penalty imposed on the four companies was reduced from INR 671.05 crores to INR 1.6 crores.

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