Recently, after the competition watchdog-Competition Commission of India (CCI) raised concerns over the telecom ministry’s plans to allow mergers and acquisitions (M&As) if the combined market share of merged mobile phone companies was up to 35% but less than 60%, the Telecom department has reportedly approached the Union Cabinet seeking exemption under the purview of the Competition Act.
Similarly, in the backdrop of the Ministry of Railways seeking a similar exemption in December,2011, the Railway Board in an ongoing inquiry before CCI ,challenged its jurisdiction on the grounds, inter alia, that Railways is not an “enterprise” as it performs “sovereign “ function at par with those related to currency, defence ,atomic energy and space, already exempted under the said Act. On rejection of its challenge by CCI, the Railway Board filed a writ petition before the Delhi High Court but the High Court dismissed the same holding that “Railways” is indeed an enterprise covered under the Act.
Earlier, the Standing Parliamentary Committee on Finance in December, 2011 recommended a proposal, initiated by the RBI, in the Banking Laws Amendment Bill, 2011 to keep the bank mergers outside the purview of the Competition Act, which is pending a decision. Further, there are already rumours of the Shipping and Aviation sectors waiting in the wings to chorus for a similar exemption.
Though media reports do not give details of such proposals, yet with the draft National Competition Policy making a passing reference to such “deviations”, it is just appropriate to examine whether such demands are merited from International experience. At the outset, one may ask whether India, after having adopted a modern competition law, in sync with the developed economies such as EU and US, is going to let State monopolies to continue forever ( as in case of Railways ) or to avoid antitrust scrutiny based on well tested economic principles by the competition regulator and instead continue regulation of even competition related issues by sector regulators , as before ( as in case of Banking , Telecom or shipping sectors) . What is then the economics of granting exemptions under competition laws in the World over?
A brief research into this subject by the author, including a review of different competition laws suggests that granting exemptions are not uncommon and, depending upon the level of maturity in the economy, wide range of exemptions and exceptions have been granted by various jurisdictions . However, there are no en bloc exemptions of the whole sectors of economy from
*The author heads competition law practice at Vaish Associates, Advocates, New Delhi. Views expressed are personal.
antitrust scrutiny but specific economic activities, within some sectors are exempted. For instance, the commercial exploitation of Intellectual Property Rights, say, patent -licenses for mass productions in pharmaceutical sector are exempted in most of the jurisdictions, including India, but this does not mean that the whole Pharmaceutical sector (which has a history of cartelization) be exempted . The most common sectors where types of economic activities are exempted are labour, agriculture and transportation. There are also exclusions from competition law in sectors such as financial services, energy, telecommunications (including postal services) and media/publishing.
A Paper published by UNCTAD on this subject, suggests that there are more similarities than differences in the general approach to exemptions. While some economies such as the European Union describe the general conditions for granting exemptions, others tend to be more specific by listing particular sectors or activities, such as in Canada and the United States. Nonetheless, the economic activities that are generally granted or eligible for exemptions can be said to fall into at least four categories:(i) Exemptions aimed at balancing unequal economic or bargaining power;(ii) Exemptions aimed at addressing information, transaction costs and “collective action” problems;(iii) Exemptions that reduce risk and uncertainty; (iv) Special sector and interest group demands.
For instance, in Canada, limited exemptions are provided for professional sports, financial institutions’ activities, and products covered by intellectual property laws (patents, copyrights and trademarks). However, these exemptions cannot be used to violate specific provisions of the Competition Act. For example, financial institutions cannot get together and set the deposit/loan interest rates and other service charges to customers (except for transactions outside Canada); professional sports organizations cannot impose unreasonable terms and conditions or limit the opportunities of individual players, but can form leagues and enter into franchise agreements that may be necessary in order to maintain a reasonable balance among teams, and participate in international agreements for that purpose. In a similar vein, the statutory monopoly position granted to products under the patent law may be withdrawn or amended if a firm engages in illegal business practices.
In the United States there are extensive sets of exemptions, which are unique, for historical reasons. While the Sherman Act (1890), the Clayton Act (1914) and other legislation do not list them, specific areas for the exemptions have been defined by Courts and Congressional actions over a period of over 100 years of implementation antitrust laws. The areas cover agriculture, defence mobilization, energy, export trade associations, government enterprises, insurance, labour, learned professions, marine insurance, newspaper joint operations, resale price maintenance, small business concerns, sports, State actions, and transportation by air, ocean and surface. In addition, various measures, regulations and laws permit the formation of trade associations, exchange of statistics, development of product standards and cooperation in R&D (the latter under the National Research Cooperative Act, 1984). Exemptions are also provided for selected aspects of intellectual property rights dealing with products covered by patents, copyrights and trademarks. For instance, the practice of grant of advance antitrust immunity for air lines joining transatlantic air alliances like Star Alliance, One World and Sky Team by the sector regulator, United States Department of Transportation (and not by the FTC) was initiated in the USA.
The European Union under Article 101(3) of the Treaty on the Functioning of European Union can grant exemptions from certain agreements and practices if they have significant countervailing benefits, either on their individual merit or through the application of a “block exemption”. A block exemption relates to certain categories of agreements and to agreements in specified sectors. The European Commission (EC) has issued a series of block exemptions for certain types of business practices and economic sectors. The block exemptions that have been granted cover exclusive distribution and purchasing arrangements, R&D cooperatives, patent and know-how licensing, and specialization agreements. In each of the exempt areas, clauses are listed that define what may be legally incorporated or prohibited in the agreements. For example, a joint-venture agreement between firms may contain a “non-competition clause” if it is “indispensable” to the success of the venture; otherwise it may be viewed as collusion to limit competition. Similarly, a block exemption may permit territorial restrictions of sales by firms for a period of time but not allow any other restrictions of competition. EC has issued a number of exemptions covering transportation (road, inland waterways, air and marine), insurance, and agricultural sectors, and also computer reservation systems and motor vehicle distribution and licensing. Export cartels are also exempted in so far as they do not restrict exports and/or competition in the common market. There is a process for periodic review of such block exemptions as well. For example, EC repealed the block exemption historically enjoyed by the Shippers’ Liner conferences, putting an end to the possibility of the liner carriers to meet in such conferences and fix prices, ship trade routes and regulate capacities with effect from October, 2008.
Thus, enough guidance is available on the economics for grant of exemptions. Interestingly, under the Competition Act, the grounds on which the Central Government is empowered to exempt any enterprise or class of enterprise (read sector) are , besides the ground of performing “sovereign” functions of the State (as was claimed by the Railways) , security interest of the State or public interest or to honor any international treaty or agreement , which may not be entirely justified on the economic principles enunciated in the International best practices ,discussed above . However, as Government needs to respond to such needs, it may be useful to adopt certain basic principles in the granting of exemptions, such as exemptions should be granted on a limited-time basis with a mandatory “sunset” clause and provisions for periodic review based on analysis of their impact on economic efficiency and consumer welfare and that exemptions should be generic in nature, relating to types of economic activities or arrangements, and be less industry- or sector-specific.
APPLICATION OF COMPETITION LAW:EXEMPTIONS AND EXCEPTIONS– UNCTAD/DITC/CLP/Misc.25
By R.Shyam Khemani (LECG, Europe),2002