On 23 August 2021, the Competition Commission of India (CCI) found Maruti Suzuki India Limited (MSIL) liable for adversely affecting competition in the passenger vehicles(1) sector. The finding marks the conclusion of a two-year-long antitrust probe into MSIL's implementation of a "discount control policy" (DCP) across its dealerships.
The CCI found these DCPs to be restricting the ability of dealers from offering discounts to customers, beyond what is prescribed by a manufacturer. These policies often take the form of "resale price maintenance" (RPM), an agreement that prohibits distributors from reselling a manufacturers' product/service below a certain price. In the terms of the Competition Act 2002 (the Act), RPM may contravene section 3(4) if the CCI finds it to cause an appreciable adverse effect on competition (AAEC) in India.
The CCI found MSIL's DCP to be anticompetitive RPM and in contravention of the Act. Consequently, it imposed a penalty of $26 million on the automobile manufacturer.
The CCI's order assumes significance for its competitive assessment of the impact of RPM. It also signals the CCI's continued interest in the automobile sector (one of the most heavily scrutinised industries by the authority).
In 2017, the CCI received an anonymous complaint by a purported dealer of MSIL. The complaint alleged that MSIL had adopted an anti-competitive DCP that dictated the maximum discount a dealer could offer its customers. Dealers found to deviate from the DCP were penalised either through the discontinuation of supplies or the imposition of a monetary penalty.
The complaint also revealed a "monitoring mechanism"-based modus for the implementation of the DCP. According to the complaint, MSIL had appointed the infamous mystery shopping agencies (MSAs), to track discounts offered by the dealers. The MSAs would pose as customers before dealerships to check whether extra discounts were being offered. If offered, the MSA would send audio/video proof to MSIL. Based on this evidence, MSIL would seek clarification from the deviating dealer. Where the clarification was not deemed satisfactory, MSIL would penalise the dealership along with its personnel (eg, sales executives and team leaders).
On 4 July 2019, the CCI formed the prima facie opinion(2) that MSIL had contravened section 3(4) of the Competition Act. It directed the director general (DG) (of the investigative wing of the CCI) to investigate the matter.
The DG delineated the markets for assessment as:
- the upstream market of the manufacture of passenger vehicles in India; and
- the downstream market for the distribution and sale of passenger vehicles in India.
Upon analysis of emails from 2012 to 2019, the DG found that MSIL had:
- actively implemented a DCP;
- tracked the penalty amounts imposed on dealers; and
- tracked the recovery and utilisation of the penalty amounts.
In view of this evidence, the DG confirmed the averments in the complaint.
Thereafter, the DG concluded that given MSIL's high market share in the upstream market (ie, 51.22% in the financial year ended 31 March 2019 (FY 2019)), the implementation of the DCP lowered both inter-brand and intra-brand competition in the market.
The CCI agreed with the findings of the DG. In doing so, the CCI rejected several arguments forwarded by MSIL in its defence. The observations of the CCI are detailed below.
Absence of formal agreement
MSIL submitted that its dealership agreements explicitly permitted dealers to provide discounts as they deemed fit. In the absence of any restrictive clause in the dealership agreement, MSIL could not have implemented the DCP. Finding the submission untenable, the CCI held that the agreement on the DCP was outside the dealership agreement – as was sufficiently evidenced in the emails between MSIL and its dealers.
Role as a facilitator
MSIL argued that it had not actively formulated the DCP (which was, in fact, an inter se agreement between its dealers). MSIL's role had been limited to implementing the DCP on behalf of its dealers in the capacity of a third-party facilitator.
However, MSIL's involvement through the circulation of warnings, the imposition of penalties and the hosting of meetings on the DCP did not support the submission that it was a mere third-party facilitator. In any case, the act of monitoring and controlling discounts (whether active or passive) amounted to an RPM.
MSIL also submitted that the MSAs had not been appointed by MSIL. This was proved from the invoices for the appointment of MSAs, which had been issued in the name of dealers. Unswayed by the submission, the CCI noted that:
- the proposal to appoint MSAs had been forwarded by MSIL;
- MSIL had determined the mode and frequency of the MSA visits; and
- the dealers likely had had no choice but to comply with MSIL's proposal.
Therefore, MSIL could not shirk responsibility in this regard.
Lack of implementation
MSIL highlighted that at least 30% of MSIL's sales made in FY 2019 had involved additional discounts by dealers to consumers, which had been officially communicated by dealers to MSIL. Therefore, even if the DCP had been implemented, it had done so for a limited set of instances.
MSIL also submitted that it had 331 parent dealers and 3,067 outlets across India. Given this, MSIL buttressed the logistic impossibility in relation to the implementation of a successful DCP. Compounding this impossibility was the fact that dealers had offered unofficial discounts and additional freebies (eg, accessories, extensions on warranties and home deliveries). As such, the diversity and nature of these free offers were not possible to regulate.
On additional discounts (30%), the CCI noted that the dealers had procured the prior permission of MSIL in terms of the DCP itself.
On logistics, the CCI turned MSIL's argument regarding the DCP being implemented inter se by dealers against MSIL. The CCI held that if a DCP was impossible to implement by MSIL, the DCP would be near impossible to implement by several dealers spread across the geographic breadth of the country. Therefore, MSIL must have been in charge of the formulation, monitoring and implementation of the DCP.
MSIL argued that it did not have the incentive/motive to implement a DCP because of the lack of any conceivable benefit. The CCI was of the view that by controlling its dealers' margins, MSIL was at liberty to regulate its own margin freely. In any case, the motive (or absence thereof) was irrelevant for the purpose of establishing a contravention.
The RPM was argued to offer several procompetitive benefits such as the elimination of freeriding and the promotion of "non-price" competition amongst its dealers. MSIL also challenged the high market power (ie, 51%) attributed to it by the DG and stated that customers were at liberty to switch to alternative automobile manufacturers if the prices were deemed too high.
As a first step, the CCI highlighted the anticompetitive effects of RPM. It noted that RPMs prevent dealers from effectively competing on price, thereby stifling intra-brand competition. Further, the imposition of RPM by a market leader (such as MSIL) also lowers inter-brand competition. This is because competing automobile manufacturers can monitor prices more easily and factor it into their pricing strategy. The softening of intra-brand and inter-brand competition leads to consumers paying higher prices for products/services. The conduct also obstructs the effective distribution of cars and hinders new dealers from entering the market (given the restrictions imposed on them).
As for the pro-competitive effects, the CCI noted that MSIL had detailed sales operating procedures and system and process guides to prevent freeriding. Therefore, the implementation of RPM was not found necessary.
In sum, the CCI found that the harm caused in the market outweighed any conceivable pro-competitive effects in the market. Accordingly, MSIL was penalised with an amount of $26 million.
Interestingly, the case is only the second instance of a finding of anti-competitive RPM since the Act's enforcement in 2009. Jurisprudence has been sparse, with most parties being let off due to their low market power (and therefore, inability to impact markets).
Incidentally, the first case involving a contravention of RPM was also in the automobile sector. The case was, however, stayed by the appellate authority on procedural grounds. The vigour with which the CCI addressed each of MSIL's submissions was perhaps intended to prevent a similar challenge in the present matter.
In doing so, the CCI goes to the extent of stepping into the shoes of MSIL, to determine the "necessity" or "effectiveness" of the adopted DCP to prevent the freeriding concerns. Such detailed assessments are uncommon and indicative of the stringency with which the CCI views a contravention of RPM.
For further information on this topic please contact Alisha Mehra or Rahul Singh at Khaitan & Co by telephone (+91 120 479 1000) or email (firstname.lastname@example.org or [email protected]). The Khaitan & Co website can be accessed at www.khaitanco.com.
(1) Passenger vehicles include passenger cars, utility vehicles and vans.
(2) A "prima facie" opinion here refers to the CCI's tentative or preliminary view.