Monopolies and Restrictive Trade Practices Act and Competition Act

Monopolies and Restrictive Trade Practices (MRTP) Act is an important piece of law
regulating industrial activities in India. Under this act, all application for licenses received
from the associates of monopoly houses and product monopoly companies are reviewed by
the central government which may refer any of these cases to the MRTP commission for
detailed scrutiny. The MRTP act, 1969 had its genesis in the Directive Principles of State
Policy embodied in the constitution of India. Clauses (b) and (c) of article 39 of the
constitution lay down that the state shall direct its policy towards ensuring: 1) the ownership
and control of material resources of the community are so distributed as to best serve the
common good; and 2) The operation of the economic system does not result in the
concentration of wealth and means. The underlying objective of the act is to prevent the
concentration of economic power as envisaged in the directive principles of state policy.

Modern day competition law is generally accepted to have had its foundations in the Sherman
Act (1890) and the Clayton Act (1914) - both instituted in the United States. The Sherman
Act was directed against the power and predations of the large trusts formed in the wake of
the industrial revolution where a small control group acquired and held the stock of
competitors, usually in asset, and controlled their business.

Since attaining independence in 1947, India for the better part of half a century there after
adopted and followed , policies of comprising what are known as ‘command- and –control
laws, rules, regulations and executive orders. The competition law of India, namely, the
MRTP act was one such. It was in 1991 that widespread economic reforms were undertaken
and consequently the march from command-and –control economy to one based more on free
market principles commence its stride.

Historical developments leading to the enactment of MRTP Act

India adopted the strategy of planned economic development since the 1950s. The Indian
Industrial Policy, since Independence in 1947, commenced with the industrial policy
resolution of 1948 which defined the broad contours of the industrial policy and delineated
the role of the state in industrial development, both as a business and as a regulator. The most
significant thrust of the 1956 resolution was making industrialization subject to government
intervention and regulation. In particular, the private sector was allowed limited licensed
capacity in the core sector and the public sector was given the mantle to achieve
‘commanding heights’ of the economy by being made responsible for the development and
growth of core areas like steel, coal, power etc.

Government intervention and control pervaded almost all areas of economic activity in the
country. For instance,

 There was no contestable market: - This meant there was neither an easy entry nor an
easy exit for enterprises. Government determined the plant sizes, their location, prices
in a number of important sectors, and allocation of scarce financial resources.
 High tariff walls
  Restrictions on foreign investments
 Quantitative restrictions

It may thus be seen that free competition in the market was under severe fetters, mainly
because of governmental policies and strategies.

The licensing policy of the government favored big business houses for they were in a better
position to raise large amount of capital and had the managerial skills to run the industry. The
business houses also had the advantage in securing financial assistance from the bankers and
financial institutions. With no proper system of allocating licenses in place, licensing
authorities were naturally inclined to prefer men who had proved their competence by
success in big industrial ventures in the past to men who had still to establish their ability.
Another reason why big business men succeeded in getting new licenses was their ability to
secure foreign collaboration.

Thus, the system of controls in the shape of industrial licensing restricted the freedom of
entry into industry and also led to concentration of economic power in a few individuals or
groups of business houses. This entrenchment of a few individuals led to the emergence of
monopolistic industries and consequently to their indulging in restrictive trade practices,
which were detrimental to the consumer and the economy.

Trigger cause

There were essentially 3 enquiries/studies, which acted as the lodestar for the enactment of
the MRTP Act.

First study: - By a committee chaired by Mr. Hazari studied the industrial licensing procedure
under the Industries (Development and regulation) Act, 1951. The report of this committee
concluded that the working of the licensing system had resulted in disproportionate growth of
some of the business houses in India.

Second study: - A committee set up in 1960 under the chairmanship of Pr. Mahalonobis to
study the distribution and levels of income in the country. The committee, in its report in
February1964, noted that the top 10% of the population of India cornered as much as 40% of
the income. The committee further noted that big business houses were emerging due to the
‘planned economy’ model practiced by the Government in the country.

Third study: - This was known as the Monopolies Inquiry Commission (MIC), which was
appointed by the Government in April, 1964 under the chairmanship of Mr. Das Gupta. It
was enjoined to enquire into the extent and effects of concentration of economic power in
private hands and the prevalence of monopolistic and restrictive trade practices in important
sectors of the economic activity (other than agriculture). The MIC presented its report in
October 1965, noting that there was concentration of economic power in the form of product-
wise and industry-wise concentration. The commission also noted that a few industrial houses
were controlling a large number of companies and there existed in the country large- scale
restrictive and monopolistic trade practices. A corollary to its findings the MIC drafted a bill
to provide for the operation of the economic system so as not to result in the concentration of
economic power to the common detriment. The bill provided for the control of monopolies
and prohibition of monopolistic and restrictive trade practices, when prejudicial to public
interest. The bill drafted by the MIC and amended by a committee of the parliament became
the MRTP Act, 1969 and was enforced from June 1st 1970.

The preamble

The preamble to the Act described it thus: “An act to provide that the operation of the
economic system does not result in the concentration of economic power to the common
detriment for the control of monopolies for the prohibition of monopolistic and restrictive
trade practices and matters connected there with or incidental there to”.

The objectives

The objectives of the legislation are:

i. To ensure that the functioning of the economic system does not result in
concentration of economic power to the common detriment.
ii. To control such monopolistic and restrictive trade practices as are injurious to the
public welfare. For counteracting the adverse effects of concentration of economic
powers, inter alia, to investigate and control to investigate and mergers as well as
expansion.

Thrust areas

 The prevention of concentration of economic power to the common detriment;

 The control of monopolies
 The prohibition of restrictive trade practices.
 The prohibition of monopolistic trade practices
 The prohibition of unfair trade practices.

MRTP Commission

One of the main goals of the MRTP Act is to encourage fair play and fair dealings in the
market, besides promoting healthy competition. Under the act a regulatory authority called
the MRTP commission has been set up to deal with offences falling under the statute. The
powers of the commission include the powers vested in a civil court and include further
powers:

i. T o direct an errant undertaking to discontinue a trade practice and not to repeat the
same.
ii. To pass a ‘cease and desist’ orders.
iii. To grant temporary injunction , restraining an errant undertaking from continuing an
alleged trade practice.
 iv. To award compensation for loss suffered or injury sustained on account of Restrictive
Trade Practices (RTP), Unfair Trade Practices (UTP) or Monopolistic Trade practices
(MTP)
v. To direct parties to agreements containing restrictive clauses to modify the same.
vi. To direct parties to issue corrective advertisements.
vii. To recommend to the central government division of undertakings, if their working is
prejudicial to public interest or has led or leading to MTP or RTP.
viii. The MRTP commission receives complaints both from registered consumer and trade
associations and also from individuals either directly or through various government
departments.
ix. The MRTP Act provides for the appointment of two officials, the director of
Investigation and the Registrar of Restrictive trade practices who will assist the
commission in its work. The function of the Director of Investigation is to carry out
preliminary investigations into the complaints of restrictive practices with a view to
establishing their veracity and importance. The registrar will mainly look after the
registration of restrictive trade agreements.
x. The MRTP commission can also order a preliminary investigation by the director
general of investigation and registration when a reference on a restrictive trade
practice is received from the central/ state government or when commission’s own
knowledge warrants a preliminary investigation.

Ambit and coverage of MRTP Act

The Indian statute, as most competition laws in the world, encompasses within its ambit
essentially three types of prohibited trade practices namely, restrictive, unfair and
monopolistic very briefly, the contours of such practices are enumerated below.

Restrictive Trade Practice: - Implies practices other than those by monopolists which
obstructs the free play of competitive forces or impede the free flow of capital or resources
into the stream of production or of the finished goods in the stream of distribution at any
point before they reach the hands of ultimate consumers. Certain common types of
Restrictive Trade Practices listed in MRTP Act are:

i. Refusal to deal.
ii. Tie-up sales.
iii. Full line forcing.
iv. Exclusive dealings.
v. Concerted practice.
vi. Price discrimination.
vii. Re-sale price maintenance.
viii. Area restriction
ix. Discriminatory pricing.

Unfair Trade Practice:- An unfair trade practice may be defined to mean a trade practice
indulged in by a producer of a good or services so that it causes loss or injury to the
consumer of such goods or services, whether by eliminating or restricting competition or
otherwise. Unfair trade practices fall under the following categories in the Indian law:

1) Misleading advertisements and false representations.

2) Bargain sales, bait and switch selling.
3) Offering of gifts or prizes with intention of not providing them and conducting
promotional contests.
4) Product safety standards.
5) Hoarding or destruction of goods.

Dominance: - In the MRTP Act, the basis of determining dominance is whether an

undertaking has a share of one-fourth (25%) or more in the production, supply, distribution or
control of goods and services.

Concentration of economic power: - Till the announcement of New Industrial Policy (NIP),
the MRTP Act applied to (a) an undertaking which together with its inter-connected
undertakings owned assets worth more than Rs.100 cr. (b) a dominant undertaking with
assets worth more than Rs.20 cr. Such undertakings to which MRTP Act applied were known
as MRTP companies. The MRTP companies were required to seek prior approval of the
central government for establishment of new undertakings, merger, amalgamation and
takeover and appointment of directors. With the growing complexity of industrial structure
and the need for achieving economies of scale for ensuring higher productivity and
competitive advantage in the international market, it was decided in the NIP to scrap, the
asset limits in respect of MRTP companies and dominant undertakings.

Inter-connected and Dominant Undertakings: - The MRTP Act covered two types of
undertakings, viz, national monopolies and product monopolies. National monopolies were
covered by section 20(a) of the Act and were either ‘single large undertakings’ or ‘groups
of inter- connected undertakings’ (i.e. large houses) which had limited assets of at least
Rs.100cr. (prior to 1985, this limit was 20 cr.). Product monopolies covered under section 20
(b) and called ‘Dominant undertakings’ were those which controlled at least one-fourth of
production or market of a product and had assets of at least Rs. 3cr. (earlier on, this limit was
Rs.1 cr.).

Applicability of MRTP Act

Indian Airlines, nationalized banks, Indian Railways, Posts and telegraphs and the tele-
communication undertakings, housing and urban development authorities, are all accountable
if they indulge in MTP, RTP or UTP. There are of course a few entities like defence
undertakings, which are outside the ambit of the MRTP Act.

The MRTP Act was enacted as noted earlier, at a time when India had the policy of
‘command-and-control’ paradigm for the administration of the economic activities of the
country. Most of the process attributes of competition, such as entry, price, scale, location etc
were regulated. Thus the MRTP Act had very little influence over these process attributes of
competition, as they were part of a separate set of decisions and policies of the government.
As the new paradigm of economic reforms, namely, LPG took root in the mid90s; the MRTP
Act was hardly adequate as a tool and a law to regulate the market and ensure the promotion
of competition there in.

The need for a new law particularly after 1991, in line with the new LPG paradigm led to the
enactment of Competition Act 2002.

COMPETITION ACT 2002

Since the adoption of the economic reforms programme in 1991, corporate have been
pressing for the scrapping of the MRTP Act. The argument is that the MRTP Act has lost its
relevance in the new liberalized and global competitive scenario. In fact, it is said that only
large companies can survive in the new competitive markets and therefore ‘size’ should
not be a constraint. Thus, there is a need to shift our focus from curbing monopolies to
promoting competition. In view of this, the government appointed an expert committee
headed by SVS Raghavan to examine the whole issue. The Raghavan Committee submitted
its Report to the Government on May 22, 2000 where in it proposed the adoption of a new
competition law and doing away with the MRTP Act. Accordingly, the government decided
to enact a law on competition. Competition Bill, 2001 was introduced in Parliament and
passed in December 2002. The Act Is called Competition Act, 2002. The Act was amended in
September 2007.

Competition Commission of India:

The Act provides for the establishment of the Competition Commission of India (CCI).
According to section 18, it shall be the duty of the Commission to eliminate practices having
adverse effects on competition, to promote and sustain competition in markets in India, to
protect the interests of consumers and to ensure freedom of trade carried on by other
participants in markets in India. Some protagonists of private sector have argued that there is
no requirement of CCI because all that is required is removal of licensing requirements and
knocking down of entry barriers. However, the fact of the matter is that the market does not
always guarantee competition. There will always be unfair and restrictive business practices.
Besides, mergers and acquisitions would need to be scrutinized. It is on account of this reason
that most countries ha competition or free trade commissions. This explains the rationale of
CCI in India.

Overall Scheme:

Competition Act, 2002 is designed for the following purposes;

1) Prohibition of Anti-Competitive Agreements:

Section 3 of the Act makes provisions for prohibition of anti-competitive agreements.
According to the section 3 (1) of the Act, “ no enterprise or association of persons
shall enter into any agreement in respect of production, supply, distribution, storage,
acquisitions or control of goods or provisions of services, which causes or is likely to
 cause an appreciable adverse effect on competition within India.” Section 3(2) states
that any agreement entered into in contravention of the provisions contained in section
3(1) shall be void.

2) Prohibition of Abuse of Dominant Position:

Section 4(1) of the Act states that “no enterprise shall abuse its dominant position.” It
may be noted that ‘dominant position’ itself is not prohibited. What is prohibited is its
misuse. ‘Dominant position’ means a position of strength, enjoyed by an enterprise, in the
relevant market, in India, which enable it to: i) operate independently of competitive
forces prevailing in the relevant market; or ii) affect its competitors or consumers or the
relevant market in its favor.

3) Regulation of combinations:
Section 5 of the Act defines combination while section 6 is concerned with regulation
of combinations. According to section 5, the acquisition of one or more enterprises by
one or more persons or merger or amalgamation of enterprises shall be treated as
‘combinations’ of such enterprises and persons or enterprise in the following cases:
(a) Acquisition by large enterprises
(b) Acquisition by group
(c) Acquisition of enterprises having similar goods/services
(d) Acquiring enterprises having similar goods/services by a group
(e) Mergers of enterprises
(f) Merger in Group Company

Section 6 of the Act relates to ‘regulation of combinations’. According to Section

6(1), no person or enterprise shall enter into a combination which causes or is
likely to cause an appreciable adverse effect on competition within the relevant
market in India and such a combination shall be void.

The definition and heading of the section, in itself means that it is ‘regulation
combination’. Thus, combination, in itself, is not prohibited. It will be held void
only if it adversely affects competition.

MRTP ACT, 1969 VERSUS COMPETITION ACT, 2002

While the focus of MRTP Act, 1969 was on controlling the concentration of
economic power, the focus of Competition Act, 2002 is on ensuring free and fair
competition in the markets. The spirit behind the Competition Act is that big is
no more bad, hurting competition and consumer interest is. For instance,
S.Chakravarthy (a member of Raghavan committee) has pointed out that”size is no
longer the issue. It could become only when consumer interest is compromised”.
Moreover, while the MRTP Act, 1969 frowned upon dominance. Thus ‘dominance’ is
not prohibited competition in Competition Act, 2002. Only abuse of dominance is
prohibited.
 COMPETITION (AMENDMENT) BILL, 2007
The Competition Amendment Bill 2007 was introduced and passed in August-
September 2007. The Bill, piloted by Corporate Affairs Minister P.C Gupta, said the
Competition Commission of India (CCI) would eventually replace the Monopolies
and Restrictive Trade Practices Commission (MRTPC). MRTPC would continue to
deal with pending cases even two years after the establishment of CCI and would be
dissolved thereafter. However, the MRTPC would not entertain any new cases after
the CCI is constituted.
The main feature of Competition amendment bill, 2007 are as follows:
1. The Supreme Court had held that if an expert body is to be created by the
government , it might be appropriate to create 2 separate bodies- one with
expertise for advisory and regulatory functions(CCI) and the other for
adjudicatory functions(Competition Appellate Tribunal or CAT). Accordingly,
the Competition Amendment Bill, 2007 provides for constitution of both CCI
and CAT. The CCI will be an expert body, which would function as a market
regulator to prevent and regulate anti-competitive practices in the country. It
would also have advisory and advocacy functions in its role as regulator. It would
have 4 members, with the chairman being the Chief Justice of India or his
nominee. The CCI will exercise its powers through various benches, including
those designated for mergers. CAT would be a three- member quasi-judicial body.
It would be headed by a person who is or has been a justice of the Supreme Court
or the Chief Justice of a High Court and would hear appeals against any direction
issued by the Commission.
2. The new law has sought to make mergers and acquisitions (M&A) deals
more e Companies could be penalized if they fail to do so.
3. If any agreement between companies results in a cartel, they might have to pay
hefty financial penalties upto thrice the value of profits earned. This has been done
to prevent corporations from building dominant market positions artificially.
4. The new law seeks to empower the CCI to impose penalty of upto Rs.25 crore or
upto three- year imprisonment or both in cases of continued contravention of its
orders if the Chief Metropolitan Magistrate deems fit.
5. While earlier it was voluntary for an enterprise proposing to enter into a
combination to intimate the Competition Commission, the new law makes such
intimation of the combination to the Commission mandatory. In fact, such a
coupling shall not take effect until 210 days from the date of notification or
approval from the Commission, whichever is earlier.

CRITICAL REVIEW

1. The new law focuses on the provisions of a domestic nexus (a nexus with assets
and operations in India) in connection with the limits applicable to acquisitions in
which a foreign entity and an Indian entity are involved. According to critics, this
would narrow the scope for an acquisition being covered under ‘combinations’ to
 be regulated by the Commission. Thus, if the acquirer is a foreign company
without any Indian presence, the Competition Act trigger will not apply due
to the provision of the Indian nexus.

2. As stated above, coupling shall not take into effect until 210 days from the date of
notification or approval from the Commission, whichever is earlier. This is likely
to result in a long gestation period of about seven to eight months from the date of
approval of the proposal. This long gestation period will add a significant element
of uncertainty and can be a drag on ‘big-ticket’ M&A activities in India.
According to Dalal, the uncertainty has several implications, including the
following:

 Perception among customers

 Uncertainty as regards the ‘identity’ of the enterprise could create reluctance
among customers who could choose to shift to a more ‘stable’ competitor.
 Inability to make strategic and operational decisions. Strategic and operational
business issues could remain in ‘limbo’.
 Human Resources: In any acquisition or merger, the human resources element
is crucial. This has dimensions relating to alignments of titles, roles and
responsibilities. A long period of uncertainty could seriously dent morale and
heighten attrition.
 Enterprise values: As a result of the uncertainty, including the above factors,
the market value of both enterprises could be severely dented due to the long
period of uncertainty.

The gains sought through competition law can only be realized with effective enforcement. A
weak enforcement of competition law is perhaps worse than the absence of competition law.
A weak enforcement often reflects a number of factors such as inadequate funding of the
enforcement authority. The government should provide the required infrastructure and funds
to make the Competition Commission of India an effective tribunal to prevent, if not
eliminate anti-competition practices also to play its role of competition advocacy. How well
the new regime will operate, and whether it will be an improvement over the MRTP regime it
has been designed to replace, remains to be seen.

References

1) Competition Act (2002), Competition Commission of India

2) Dr. Chakravarthy.S, Why India Adopted a new Competition Law, CUTS Centre for
Competition, Investment &Economic Regulation,2006
3) Datt Rudar,K.P.M Sundharam, Indian Economy
4) Dhingra I.C, Indian Economy
5) Dutt Srishti, Competition Law in India,U.S&U.K: A comparative Analysis, Internship
Report , National Law University, Delhi, November 2012
6) Misra S.K, V.K.Puri, Indian Economy, 30th edition

Kavitha.K and Sweety Thomas