[Aditya Danturty is a student at National Law University Odisha]
Introduction
The Competition Commission of India (CCI) notified the CCI (Lesser Penalty) Regulations (Lesser Penalty Regulations) on February 20th, 2024. These regulations are rooted in Section 46 of the Competition Act (the Act) which provides for lesser penalty to be imposed in certain circumstances. The Act and the regulations set up a leniency plus regime in India for incentivising whistleblowers to disclose information regarding cartels. This not only helps in pro-competitive practices but also reduces expenditure by the regulators in investigations.
The author in the present blog compares the Lesser Penalty Regulations to similar antitrust regulations in countries that have implemented leniency plus regimes. The author also makes suggestions to improve the present leniency mechanism by gaining insight from global legislations, regulations, and jurisprudence on cartel whistleblowing.
The Lesser Penalty Regulations
The Lesser Penalty Regulations incentivise disclosure of information and evidence pertaining to cartels involving those under investigation for engaging in cartelisation. The incentive to disclose information on cartels is reduction of penalties imposed on such whistleblowers. It does so by setting up two tiers of leniency in the imposition of penalties- lesser penalty and lesser penalty plus. An applicant for leniency who discloses a cartel to the CCI by submitting evidence which establishes contravention of Section 3 of the Act by such cartel is eligible for leniency in penalty. The first discloser of such information is eligible for a reduction in penalty up to 100 per cent. Subsequent whistleblowers are eligible for lesser amounts of leniency in penalties. If the applicant discloses the existence of a second cartel unknown to the CCI, it is eligible for leniency plus benefits which further reduces the penalty by 30 per cent of that provided under the lesser penalty provisions.
Leniency v. Amnesty
The Lesser Penalty Plus formulation is based on ‘Amnesty Plus’ mechanisms adopted by various countries such as the United States and South Korea. However, the major distinction between the two formulations is the degree to which penalties can be reduced. Most foreign regulations, such as the United States Department of Justice Antitrust Division Leniency Policy, completely waive off any penalty associated with the disclosure of the second cartel that the applicant is a member of and that was previously unknown to the regulators, thus in effect granting amnesty for actions pertaining to the second cartel.
However, the Indian regulation makes the grant of amnesty the discretion of the CCI. The provision of lesser penalty ‘up to 100 per cent’ allows for the grant of amnesty but does not make it mandatory. This significantly reduces the incentive to disclose a second cartel that an applicant may be party to. Thus, the determination of a floor value should be undertaken to sufficiently incentivise disclosure of the second cartel.
In the United States, the amnesty plus formulation has been complemented by the penalty plus provision. Under the penalty plus provision, if an entity under investigation in the first cartel is a party to another cartel but withholds such information, it is liable to pay an added amount of fine if discovered to be a member of the second cartel. Such a provision further incentivises an applicant to take the lesser penalty plus route instead of risking discovery of the second cartel. Therefore, an amnesty provision paired with a penalising provision for non-disclosure of the second cartel if found on investigation is required to compel disclosure. However, it is important to note that amnesty plus formulations work best when complemented by appropriate fines.
Fines and Penalties
The premise of leniency plus or amnesty plus falls apart in a situation where the fines corresponding to cartelisation are low. Under Section 27 of the Act, the CCI is empowered to impose a penalty of either three times the profit garnered by a cartelising agreement or 10 per cent of the turnover, whichever is higher. Thus, the imputation of fines for cartelisation does not have a floor value, nor does it specify structured guidelines for the calculation of turnover. Indian regulations thus allow too much discretion to the CCI in levying penalties. A leniency plus regime cannot function in the absence of effective penalties that are greater than the revenue generated by entities in second cartels.
Further, the reduction in penalties should also be systematic in nature. They cannot go beyond compensation for successful prosecution and increased detection. Various countries have erred in this regard while implementing their leniency regimes. The European Union has often reduced penalties in an over-generous manner by forty-five per cent. This can lead to weakened deterrence as contravening entities are liable to pay lesser fines.
Thus, a floor value must be set when imputing the fines payable by cartelising entities. Further, a systematic approach to levying penalties and granting leniency is required, considering the profitability of second cartels and the cost of prosecution needed for the same. Only with an accurately structured penalty system can a leniency plus regime operate without disincentivising disclosure of anti-competitive practices. However, an important decision to be made before structuring the regulations is the degree of choice afforded to applicants in availing the ‘plus’ option. Only then can the quantum of fines be determined accurately.
Obligation vs. Option
International jurisprudence holds divided viewpoints on the degree of choice afforded in disclosing membership or evidence of a second cartel. Antitrust regulations in the United States and Canada combine amnesty plus formulations with penalty plus and omnibus questions features that result in the mandatory obligation to disclose membership in cartels other than the cartel under investigation. Thus, this system of rewards and penalties compels the applicant applying for leniency to disclose membership in other cartels.
European countries implementing ‘plus’ formulations operate in contrast to the above-mentioned system. The United Kingdom and Switzerland also have provisions similar to amnesty plus regulations referred to as leniency plus and bonus plan respectively. However, no mandatory obligation is imposed on a contravening applicant to disclose membership in other cartels. This is not to say that they are non-functional, as the United Kingdoms has given waivers up to 25 per cent on occasion.
According to the Lesser Penalty Regulations in their present form, India has chosen the optional route over the mandatory route. However, adopting the mandatory route is beneficial for a country such as India, where economic inequality necessitates cartels being nipped in the bud.
Repeat Offenders
Economic inequality could also result in entities having resources misusing the leniency system. The lack of a mandatory requirement for full disclosure may have the consequence of incentivising cartelising activities and be anti-competitive in effect. Repeat cartelists may prefer to create bogus cartels to diversify risk of prosecution and penalising. They may do so by repeatedly availing the benefit under the Lesser Penalty Regulations, which are silent on the number of times the ‘plus’ option can be availed by applicants. Allowing repeated use of the option is detrimental to the competition landscape as it incentivises cartelisation more than in the absence of the Lesser Penalty Regulations.
Such a system will incentivise decentralised cartelisation, which may prove harder to detect. This is especially true for multi-market conglomerates that can hedge their risk by disclosing irrelevant cartels in small industries to further more profitable cartels. Lessons in this regard must be learnt from the dealings of the South Korean Fair-Trade Commission with the chaebols, or the biggest business conglomerates in South Korea, due to their presence in multiple sectors of the economy. In contrast to this, Greece has successfully implemented a framework where repeat offenders are denied amnesty from penalties for cartelisation, thereby disincentivising decentralised cartelisation. Thus, the Lesser Penalty Regulations must contain provisions barring repeat offenders from availing the benefits of the ‘lesser penalty plus’ regime.
Conclusion
This blog delves into the limitations of the Lesser Penalty Regulations keeping in mind learned experience from foreign jurisprudence on the same formulation. The said regulations fail to sufficiently incentivise disclosure of cartels by making leniency and amnesty discretionary in the hands of the CCI. The United States and Canada have successfully implemented leniency plus models by providing amnesty with regards to disclosure of second cartel membership.
Further, the lack of structure in penalties could result in excessive discretion being granted to the CCI for over or under penalising, resulting in ambiguity of the effect of disclosing membership in a second cartel. This not only disincentivises disclosure of information on cartels but also allows contravening entities to misuse the leniency framework. A floor value for leniency and penalties must be set in line with the provisions of the European Union on the same. A systematic approach to granting lesser penalties is required to incentivise disclosure.
A mandatory requirement for the disclosure of cartelising activities should be adopted in line with the United States that calls for complete disclosure in all cartelising activities to avail the benefits under any ‘plus’ regime. This prevents applicants, especially repeat offenders, from misusing the leniency provisions. Further, declared repeat cartelists must be explicitly precluded from availing the benefits of any leniency or leniency plus regime. Special attention must be paid in this regard to multi market conglomerates with greater power to abuse such provisions using their presence in multiple sectors to dampen the effect of any penalty levied.