Aaryan Dhasmana and Shreya Sethi*
Introduction
The Competition Commission of India (CCI) has promulgated the draft Competition Commission of India (Lesser Penalty) Regulations, 2023,[1] to operationalize operationalize the ‘Leniency-Plus Regime’ stipulated in the 2023 amendment[2] to the Competition Act.
Building on the existing anti-cartel regime, Leniency-Plus provides further incentives to enterprises under cartel investigations to expose other cartels by allowing them to compound the penalty reduction availed by giving information concerning one cartel by aiding the CCI in exposing a second cartel.
This introduction purports to be an attempt by the CCI to remedy the abysmal number of leniency applications by increasing the incentives given to the cartel members. This incentivization, however, fails to fix the structural problems underlying this dearth of leniency applications, casting doubts on the potential success of the Leniency-Plus framework in the Indian context.
This article will showcase the proposed leniency-Plus framework’s failure to address the flaws plaguing the existing leniency framework by highlighting how both the prevailing as well as the proposed regimes deviate from the economic considerations that serve as the cornerstone of antitrust frameworks.
I. The Economic Foundations of Leniency
The prevalence of leniency regimes in competition law regimes across the globe[3] evinces that authorities face significant obstacles in detecting often unapparent cartels. Penalty rebates under leniency programs are the metaphorical carrot that lures cartel members to defect, as opposed to the stick that is traditionally embodied in fines imposed on cartel members. They leverage the suspicion-induced instability inherent in cartels.
From a game theory perspective, a cartel can be seen as a cooperation game in which members cooperate to limit the supply and fix prices way above the natural market equilibrium.[4] While allowing members to gain profits greater than what they would have gotten in a perfectly competitive market, cartelization also exposes members to the risk of defection by others. A member who cheats on the cartel by charging a price lower than that agreed upon by the cartel can earn monopoly profits and attract all consumers, creating distrust.[5]
Leniency programs further cement this suspicion by increasing the payoffs that a defecting member avails while simultaneously increasing the uniform risk that every cartel member bears. Cartel members in a leniency jurisdiction, thus, not only have to worry about the economic consequences of a defection but also the penal consequences that follow if any of the members, induced by the incentive of a penalty reduction, chooses to act as a whistleblower.[6]
This increased suspicion transforms the cooperation game into a ‘prisoner’s dilemma’[7] by undermining the trust necessary for the cooperation that serves as the foundation of a cartel. Thus, a leniency regime aids not only in incentivizing members to defect but also hinders the formation of a cartel.
II. Leniency-Plus in the Indian Context
The original leniency regime was introduced by the CCI through the Competition Commission of India (Lesser Penalty) Regulations 2009[8] (CCI Regulations 2009) to give effect to the leniency provision of the Competition Act 2002.[9]
Section 46 of the Act provides that leniency applicants are entitled to a reduction in penalty if they provide a “full, true and vital disclosure” adding a “significant value” to the evidence already in the possession of the CCI or the Director-General.[10] The CCI Regulations 2009 further specify the quantum of the rebate by providing a hierarchical framework.[11] The first leniency applicant can be granted up to a 100% reduction in penalty, the second, a maximum of 50%, and all subsequent applicants a maximum of 30%. The 2017 amendment to the regulations further clarified that not only enterprises but even individuals were entitled to benefit from the leniency program’s penalty reduction.[12]
The draft regulations of 2023 build upon this framework by increasing the incentives for cartel disclosure. Regulation 5 of the draft regulations allows an applicant who has earlier made a “full, true and vital disclosure” with respect to a cartel to avail additional reduction of a maximum of 30% of the penalty with regard to the first cartel on making another such disclosure of the existence of a second cartel.[13] This is in addition to the standard reduction of up to 100, 50, or 30% that it can avail on the penalty for its anti-competitive conduct in the second cartel.
Therefore, the introduction of the Leniency-Plus regime showcases that the CCI is increasing the size of the carrot it dangles in front of cartels to incentivize disclosure of other cartels that members are a part of.
III. Underperformance of the Indian Leniency Program
The Indian leniency program has met with very limited success, with only 21 orders having been passed under the leniency program since its inception in 2009.[14] In contrast, other jurisdictions had higher success rates, such as the UK, which received 23 leniency applications just in 2023.[15] Similarly, the US anti-cartel Amnesty Plus framework, which is also reflected in India’s Leniency Plus framework, witnessed more than 20 applications per year since its introduction in 1993.[16]
Thus, it is evident that the existing Indian leniency regime needs an overhaul. The fact that cartels are formed and maintained despite the risks involved showcases that the benefits of continued cartelization outweigh the deterrence materialized through the law. Consequently, the law must tip the balance against the benefits of staying, in favour of the potential harm that can be caused by staying, i.e., a cumulative of the possibility of getting caught as well as the penalty levied afterwards, factoring in the quantum of leniency on defection. Both these factors are necessary to provide, what has been called by Richard Thayler as ‘the Nudge’ for cartel members to choose defection over coordination.[17]
However, an analysis of the leniency as well as the penal enforcement by the CCI makes it apparent that its approach has failed to maintain consistency or efficiency in either of the two aforementioned factors.
A. Stick too short
As per Gary Becker, the deterrence against doing any act depends on the likelihood of getting caught and the quantum of the fine that would be levied as a consequence.[18] In the context of leniency, this makes the stick, i.e. investigation and enforcement mechanism of the competition authority and the penalties levied by it, an important aspect to browbeat cartel members into choosing the carrot.
While CCI’s investigative wing certainly requires further capacity building, it is primarily the inconsistent and nominal punishment that nullifies the deterrent effect being sought. CCI, by prescribing nominal penalties more often than not, has not taken advantage of the fact that the Competition Act allows it to impose much harsher penalties than other jurisdictions.[19] This was seen in cases like Auto-bearings[20] as well as CBB,[21] where the CCI directed a mere “cease and desist” with no fines being levied on the cartel. This is only aggravated by the inconsistency and irrationality in penalties meted, something that was censured by the COMPAT in ECP Industries v. CCI.[22]
Leniency-Plus compounds this by lacking any repercussions for a member’s non-disclosure of its involvement in a second cartel. In contrast, the US Penalty-Plus framework allows the Department of Justice to consider the non-disclosure of a cooperating member’s involvement in another cartel as an aggravating factor in deciding the penalties, providing a proper deterrent against non-disclosures.[23]
B. Inconsistent Carrots
Penalty reduction is provided only when a “full, true and vital disclosure” that adds “significant value” to CCI’s evidence is made, the act of whistleblowing being no guarantee of leniency. The CCI demonstrated this in the Nagrik Chetna Manch case[24] by not providing any penalty reduction to two of the six applicants, believing that their evidence did not provide any “significant value addition” despite their cooperation. This can be contrasted with the Zinc-Carbon Dry Cell Manufacturers’ Cartel case[25] where CCI provided the second and third leniency applicant with a 30% and 20% penalty reduction respectively as a recognition of their cooperative behaviour, despite its acknowledgement that the evidence provided by them provided did not add any major value to the investigation.
This inconsistent approach is most likely to be carried forward into the Leniency-Plus framework which, instead of remedying the wide discretion afforded to the CCI by introducing fixed standards, relies on the same “full, true and vital disclosure” and “substantial value addition” prerequisites for availing leniency.[26]
IV. Conclusion
Thus, Leniency-Plus fails to holistically address the lacunae in the existing leniency regime, relying unwisely on the flawed assumption that bigger carrots would automatically lead to better results. It fails to focus on the stick required to lead a cartel member to choose the carrot or the consistency in which the carrots are to be meted out. This makes it difficult for cartel members to do a cost-benefit analysis, a fundamental step in ‘Nudge’-ing them to choose leniency over continued cooperation.
Thus, in the absence of any policy-based regulation of the discretionary penal and leniency powers of the CCI, it is unlikely that the leniency-Plus regime by itself would bring about any drastic change in the effectiveness of the leniency regime in India.
* The authors are students of NALSAR University of Law, Hyderabad.
[1]Draft Competition Commission of India (Lesser Penalty) Regulations 2023 at <https://cci.gov.in/images/stakeholderstopicsconsultations/en/draft-lesser-penalty-regulations1697431514.pdf>. (hereinafter “Lesser Penalty Regulations 2023”)
[2]Competition (Amendment) Act 2023 (9 of 2023).
[3]‘THE FUTURE OF EFFECTIVE LENIENCY PROGRAMMES: ADVANCING DETECTION AND DETERRENCE OF CARTELS’ (OECD Competition Roundtable Background Note) <https://www.oecd.org/daf/competition/the-future-of-effective-leniency-programmes-2023.pdf> accessed 13 December 2023.
[4]Zhu Han, Zhu Ji, K.J. Ray Liu, ‘A Cartel Maintenance Framework to Enforce Cooperation in Wireless Networks with Selfish Users’ (2008) 7(5) IEEE Trans. Wirel. Commun. 1889, 1890-1891
[5]Alberto Heimler, ‘Cartels in Public Procurement’ (2012) 8(4) J. Compet. Law Econ. 849, 855.
[6]Giancarlo Spagnolo, ‘Leniency and Whistleblowers in Antitrust’ (Handbook of Antitrust Economics) <https://edisciplinas.usp.br/pluginfile.php/4395738/mod_resource/content/1/SPAGNOLO%20-%20Leniency%20and%20Whistleblowers%20in%20Antitrust%20%28full%29.pdf> accessed 12 December 2023
[7]‘How competition works: Transforming a cartel coordination game into a competitive prisoners’ dilemma’ (CORE Econ) <https://www.core-econ.org/the-economy/microeconomics/08-supply-demand-09-how-competition-works.html> accessed 10 December 2023.
[8]Competition Commission of India (Lesser Penalty) Regulations 2009.
[9]Competition Act 2002 (12 of 2003), s 46.
[10]Ibid.
[11]Competition Commission of India (Lesser Penalty) Regulations 2009, reg 4.
[12]Competition Commission of India (Lesser Penalty) Amendment Regulations, 2017.
[13]Lesser Penalty Regulations 2023, reg 5.
[14]Anik Bhaduri, ‘Sweeter Carrots, Same Stick: Transplanting Leniency Plus into Indian Competition Law’ (2022) 7(1) Indian L. Rev., 26, 29.
[15]‘Antitrust damages risk and leniency’ (Norton Rose Fullbright) <https://www.nortonrosefulbright.com/en-gb/knowledge/publications/0e011773/antitrust-damages-risk-and-leniency> accessed 9 December 2023.
[16]‘Using Leniency to Fight Hard Core Cartels’ (OECD Policy Brief) <https://www.oecd.org/daf/ca/1890449.pdf> accessed 13 December 2023.
[17]‘What is Nudge Theory?’ (Imperial College London) <https://www.imperial.ac.uk/nudgeomics/about/what-is-nudge-theory/#:~:text=Nudge%20Theory%20is%20based%20upon,chosen%20over%20another%20by%20individuals.> accessed 13 December 2023.
[18]Gary S. Becker “Crime and punishment: An economic approach”, Journal of Political Economy, (1968) 76, 169, 171.
[19]Vincent S. Abraham, Catarina Marvao ‘Leniency of the Competition Commission of India’, (Working Paper Presented at 7th National Conference on Economics of Competition Law Competition Commission of India March 4, 2022) <https://www.cci.gov.in/public/images/economicconference/en/paper-on-leniency-of-the-competition-commission-of-india1663219827.pdf> accessed 12 December 2023.
[20]Cartelisation in Industrial and Automotive Bearings v ABC Bearings Limited, 2020 SCC OnLine CCI 19.
[21]South Eastern Railway West Bengal v Hindustan Composites Limited, 2020 SCC OnLine CCI 28.
[22]ECP Industries Ltd. v CCI, 2016 SCC OnLine Comp AT 71.
[23]‘Spotlight: cartel leniency programmes in USA’ (Lexology) <https://www.lexology.com/library/detail.aspx?g=1677ceca-f5d4-4f65-b5ee-b9c51dadbb24> accessed 12 December 2023.
[24]Nagrik Chetna Manch v Fortified Security Solutions, 2018 SCC OnLine CCI 9.
[25]Eveready Industries India Ltd., In re, 2018 SCC OnLine CCI 5.
[26]Lesser Penalty Regulations 2023, reg 5.