Determination of Monetary Penalty: Decoding CCI's Guidelines

On March 6, 2024, the Competition Commission of India (CCI) came out with important notifications pertaining to the imposition of penalties on enterprises and individuals for contravening provisions of the Competition Act, 2002. While the CCI (Determination of Turnover or Income) Regulations, 2024, provide for the determination of turnover or income of enterprises and individuals for imposing penalty under Sections 27 and 48, the CCI (Determination of Monetary Penalty) Guidelines, 2024, provide the methodology for determination of penalty under various provisions of the Act.

Penalty based on average of the turnover or income

In case of contravention of provisions contained in Sections 3 and 4, pertaining to anti-competitive agreements and abuse of dominant position, the Commission may, after holding an inquiry, impose a penalty under Section 27(b). The said Section was amended vide the Competition (Amendment) Act, 2023, which was notified in April 2023. As per the amended provision, the penalty leviable on the person or enterprise which is a party to such agreement or has abused its dominant position, cannot be more than 10% of the average of the turnover or income for the last three preceding financial years.

Section 48(1) specifies that when the Act’s provisions are contravened by a company, every person in charge of the company and responsible for the conduct of its business at the time of contravention, along with the company would be liable. The penalty that may be imposed on such persons cannot exceed 10% of the average of the income for the last three preceding financial years.

The 2023 Amendment Act also enabled enterprises, against whom an inquiry has been initiated under Section 26(1) for contravening Section 3(4) or Section 4, to submit applications for settlement of proceedings or for offering commitments. The regulations regarding settlement and commitment were notified by the Commission on the same day as the penalty guidelines, i.e., March 6, 2024.[1]

Determination of turnover or income

  • Turnover or income of enterprises

    When it comes to enterprises, the turnover or income includes the value of sales (or revenue or receipts, by whatever name called), and other operating revenue as per their audited financial statements. All other income, indirect taxes, trade discounts and intragroup sales will not be considered for determining the enterprise’s turnover or income.

  • Income of individuals

    The income of an individual will be the gross total income as per the income tax returns. However, in a deviation from the draft regulations, Regulation 4(1) of the notified regulations expressly states that income from house property and capital gains are excluded. This deviation is pursuant to the receipt of stakeholder comments proposing to consider “relevant income” instead of “gross total income” of individuals.

Methodology for determination of penalty

One of the notable changes brought in by the amendment and the regulations is the expansion of the scope of turnover to mean global turnover derived from all the products and services by a person or an enterprise. In this regard, the new guidelines provide for the determination of penalty, leviable under Section 27(b), in stages; at the outset, the Commission has to consider an amount of up to 30% of the average relevant turnover or average income of the enterprise. The same should be done upon considering the nature and gravity of the contravention, the nature of the industry or sector affected because of the contravention and its implications on the economy, and any other relevant factor.

The amount so arrived at by the Commission can be adjusted for imposing the penalty, based on factors listed under paragraph 3(2) of the guidelines including duration of the contravention, cooperation during the Director General’s (DG) investigation, etc. but the same is subject to the legal maximum.

The enterprise’s relevant turnover or income for three years preceding the year in which DG’s report is received by the Commission can be considered for determining the average relevant turnover or average income. It is specified that if it is not feasible to determine the relevant turnover under paragraph 3(3), the global turnover of the enterprise can be considered for determining the penalty.

In case of contravention by companies, the guidelines reiterate that the penalty leviable, under Sections 48(1) and (3), on persons cannot exceed 10% of the average income of the person for the last three preceding financial years. Here, the percentage of the average income to be considered has to be decided based on factors such as the nature and gravity of the contravention, the extent of the person’s involvement in the contravening conduct and such other factors as listed under paragraph 5(2). Additionally, it is stated that the Commission will consider the income tax returns of the person for the same years as that of the company for whose conduct such person has been held liable.

However, in exceptional circumstances, the Commission can deviate from the methodology provided under the guidelines subject to the condition that the reasons for the same are recorded in writing.

Implications

The penalty guidelines are definitely a positive step in streamlining the method of calculating penalties and would assist CCI in providing a basis for the imposition or calculation of such penalties. CCI has also been provided discretion which has to be exercised judiciously by supplying reasons for it while determining the penalties.

The settlement and commitment regulations provide an opportunity for entities under investigation to submit settlement or commitment terms to CCI for its acceptance. The Commission may accept or reject such terms at its discretion. Settlement and commitment options are available to entities under investigation prior to CCI passing a judgment on the matter. Entities involved in legal issues with CCI have been given an opportunity to short circuit their disputes by settling the same and/or by paying penalties as settlement amounts and making commitments. Entities are not required to make any admission on violations in such cases. There is also no provision for appeal from any commitment or settlement accepted by CCI.

References:

[1] CCI (Settlement) Regulations, 2024; available at: https://www.cci.gov.in/images/whatsnew/en/gazette-notification-published-on-06-march-2024-regarding-the-competition-commission-of-india-se1709738701.pdf

CCI (Commitment) Regulations, 2024; available at: https://www.cci.gov.in/images/whatsnew/en/gazette-notification-published-on-06-march-2024-regarding-the-competition-commission-of-india-co1709739461.pdf

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In case of contravention by companies, the guidelines reiterate that the penalty leviable, under Sections 48(1) and (3), on persons cannot exceed 10% of the average income of the person for the last three preceding financial years. Here, the percentage of the average income to be considered has to be decided based on factors such as the nature and gravity of the contravention, the extent of the person’s involvement in the contravening conduct and such other factors as listed under paragraph 5(2). Additionally, it is stated that the Commission will consider the income tax returns of the person for the same years as that of the company for whose conduct such person has been held liable.

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Understanding CCI’s Leniency Plus Regime for Cartel Disclosures

The Competition Commission of India (“CCI”) notified the CCI (Lesser Penalty) Regulations, 2024[i] (“LP Regulations”) on February 20, 2024.  The LP Regulations arrived shortly after the Ministry of Corporate Affairs (“MCA”) notified the Leniency Plus regime paving the way for the CCI to roll out a new cartel-detecting tool. The Competition (Amendment) Act, 2023, provided for the introduction of a ‘Lesser Penalty’ or LP regime through delegated legislation.[ii] A draft of the LP Regulations was released for public consultation by the CCI in October 2023.[iii] This article aims to analyse the changes brought forward by the LP Regulations and its potential impact on the anti-trust regime in India.

The Competition (Amendment) Act, 2023 amended Section 46 of the Competition Act, 2002 (“Act”). The amended provisions cover any producer, seller, distributor, trader, or service provider (“Entities”) included in a cartel which has violated Section 3 of the Act. Section 3 of the Act prohibits Entities from partaking in anti-competitive agreements. The amended provision permitted such Entities to make true and honest disclosures regarding the violations to the CCI. If the disclosures are deemed to be vital, a lesser penalty may be imposed on the Entities by the CCI. This mechanism is generally known as the ‘Leniency’ regime, interchangeably used with the ‘Lesser Penalty’ regime. [iv] The LP Regulations deal with both the Lesser Penalty (“LP”) and Lesser Penalty Plus (“LP Plus”) regimes, which have been discussed below.

The LP Regulations impose a few conditions for Entities seeking the benefit of the LP or LP Plus regime, as per which the Entities have to:

  • cease to participate in the cartel after disclosing information to the CCI;
  • provide vital as well as all relevant information regarding the contravention of section 3 of the Act;
  • cooperate genuinely, fully and throughout the investigation and not destroy or conceal any relevant documents or give any false evidence[v];
  • provide names of all individuals who are involved in the cartel on whose behalf either LP or LP Plus regime is sought;
  • comply with other requirements as prescribed by the CCI under Regulation 3 of the LP Regulations.

Understanding the Lesser Penalty Regime

The LP regime has been operationalised in a tiered approach, with the first applicant receiving the maximum benefit, and subsequent applicants getting a lesser reduction in the monetary penalty imposed.

Applicant

Requirements

Benefit

1st Applicant

The applicant is the first to make a vital disclosure by submitting evidence of a cartel to the CCI. This evidence should enable the CCI to form a prima facie opinion regarding the cartel’s existence.[vi]

Reduction in penalty of up to or equal to 100% of the penalty imposed by the CCI.

The applicant is the first to make a vital disclosure which establishes the contravention of Section 3 of the Act by a cartel, in a matter which is under investigation by the CCI.[vii]

2nd Applicant

The applicant discloses evidence which provides ‘significant added value’ as per the CCI, to the evidence already in possession of the CCI. [viii]

It is clarified that ‘significant added value’, for the purposes of the LP Regulations, means the extent to which the evidence provided enhances the ability of the CCI to establish the existence of a cartel.[ix]

Reduction of monetary penalty up to or equal to 50% of the penalty imposed.

3rd or subsequent Applicants

The applicant discloses evidence which adds ‘significant added value’ as per the CCI, to the evidence already in possession of the CCI. This information should help in establishing the existence of the cartel.[x]

Reduction of monetary penalty up to or equal to 30% of the penalty imposed.

Lesser Penalty Plus Regime

The LP Regulations provide for the LP Plus regime, in addition to the LP regime. LP Plus regime permits an applicant, who had earlier made a full, true, and vital disclosure regarding the contravention of Section 3 of the Act by a cartel (“First cartel”), makes a full, true, and vital disclosure regarding the existence of another cartel (“Second cartel”) of which it was a part of, and has allegedly violated Section 3 of the Act, is eligible to get reduced monetary penalty.

The reduced monetary penalty for the applicant sharing information about the Second cartel will be two-fold. Firstly, the applicant may be granted an additional reduction in penalty up to or equal to 30% of the penalty imposed as regards the First cartel. Secondly, the applicant may receive the benefit of a reduction in penalty up to or equal to 100% in terms of the Second cartel i.e. the newly disclosed cartel.

Other Features

The LP Regulations provide for the procedure for the grant of either LP or LP Plus. The procedure involves the applicant filing an application with all the requisite details. The details to be included in the application have also been listed in the LP Regulations.[xi] Another key feature of the entire scheme is the identity of the applicant being kept confidential. This includes all information, documents, and evidence furnished by the applicant to the CCI.[xii]

Analysis

The LP Regulations are a positive step for regulating anti-competitive cartels in the economy. It will enable any entity and individual who is facing potential penalties from the CCI, to apply for a lesser penalty. The earlier applicant under this regime gets a greater reduction in monetary penalty as compared to subsequent applicants. Additionally, the confidentiality norms safeguard the identity of the ‘whistle-blower’ during the course of the investigations.

These Regulations also appear to be in line with anti-trust regulations across multiple jurisdictions. To name a few jurisdictions, the Leniency Plus regimes are currently being followed in the United States, United Kingdom, Singapore, and Brazil. The new LP Regulations, which mark a watershed moment in competition regulation in India, would hopefully lead to enhanced enforcement against cartels and anti-competitive agreements, act as a deterrent for possible wrongdoers and increase market transparency by bringing into light previously unknown cartels, which is bound to ensure fair competition in the market.

References:

[i] Available at: https://www.cci.gov.in/images/whatsnew/en/gazzete1708451685.pdf

[ii] Section 33 of the Competition (Amendment) Act, 2023; available at: https://prsindia.org/files/bills_acts/acts_parliament/2023/The%20Competition%20(Amendment)%20Act,%202023.pdf

[iii] The draft CCI (Lesser Penalty) Regulations, 2023; available at: https://www.cci.gov.in/images/stakeholderstopicsconsultations/en/draft-lesser-penalty-regulations1697431514.pdf

[iv] FAQ 4 of the CCI’s FAQs on Lesser Penalty Regime; available at: https://www.cci.gov.in/images/whatsnew/en/faqs-on-cci-lp-regime1708500979.pdf

[v] Regulation 3(1) of the LP Regulations.

[vi] Regulation 4(a) of the LP Regulations.

[vii] Proviso to Regulation 4(a) of the LP Regulations.

[viii] Regulations 4(b) and 4(c)(i) of the LP Regulations.

[ix] Explanation to Regulation 4(b) of the LP Regulations.

[x] Regulations 4(b) and 4(c)(ii) of the LP Regulations.

[xi] Schedule I and Schedule II of the LP Regulations.

[xii] Regulation 8(1) of the LP Regulations.

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The LP Regulations provide for the LP Plus regime, in addition to the LP regime. LP Plus regime permits an applicant, who had earlier made a full, true, and vital disclosure regarding the contravention of Section 3 of the Act by a cartel (“First cartel”), makes a full, true, and vital disclosure regarding the existence of another cartel (“Second cartel”) of which it was a part of, and has allegedly violated Section 3 of the Act, is eligible to get reduced monetary penalty. The reduced monetary penalty for the applicant sharing information about the Second cartel will be two-fold. Firstly, the applicant may be granted an additional reduction in penalty up to or equal to 30% of the penalty imposed as regards the First cartel. Secondly, the applicant may receive the benefit of a reduction in penalty up to or equal to 100% in terms of the Second cartel i.e. the newly disclosed cartel.

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CCI Proposes Manner of Determining Enterprise’s Turnover

The Competition Commission of India (CCI) has released the draft CCI (Determination of Turnover or Income) Regulations, 2023, providing the manner in which the turnover or income of enterprises/ individuals has to be determined for the purposes of imposition of penalty for violation of applicable provisions of the Competition Act, 2002. The Commission has sought public comments on the draft regulations by January 12, 2024.[1]

This computation is for the imposition of penalty under Sections 27(b) and 48 of the 2002 Act, which was amended in April of this year, vide Competition (Amendment) Act, 2023.

Imposition of Penalty

Upon inquiry into anti-competitive agreements or abuse of dominant position under Sections 3 or 4 of the 2002 Act, the Commission is empowered to pass an appropriate order. In case of violation of applicable provisions of the Act, the Commission may impose a penalty on the concerned enterprise or individual, not exceeding 10% of the average of the turnover or income for the last three preceding financial years. However, for a cartel, the Commission may impose upon each involved person included in the cartel, a penalty of up to 3 times of its profit for each year of the continuance of the violating agreement or 10% of its turnover or income, as the case may be, for each year of the continuance of such agreement, whichever is higher. The same is as per Section 27(b) of the amended Act.

In case a company is found to be in contravention of the applicable provisions of the Act, the Commission can impose a penalty on persons in charge of or responsible for the company for the conduct of its business at the time of contravention. However, the said penalty cannot exceed 10% of the average of the income for the last three preceding financial years. This is in accordance with Section 48(1).

Prior to the amendment, the 10% cap on penalty that could be imposed on individuals was not in place. Further, though it was specified that the penalty imposed on enterprises couldn’t exceed 10% of the average of the turnover, the manner in which such turnover could be determined was not laid down; Section 2(y) only stated that turnover included the value of the sale of goods or services.

The 2023 amendment, by way of an explanation, clarifies that for the purpose of Section 27(b), turnover would mean “global turnover derived from all the products and services by a person or an enterprise”. Since this is clarifying in nature, the provision could be held to apply retrospectively.

Draft CCI Regulations

Regulation 3 of the draft regulations specifies that the turnover or income of the enterprise under Section 27 of the 2002 Act would include the “total value of sales or revenue or receipts, by whatever name called, and other operating income, as per the audited financial statements maintained by such enterprise”. This amount will not include indirect taxes, trade discounts, and intra-group sales. If the audited financial statements are not available, the amount certified by the enterprise’s statutory authority as supported by an affidavit would be its turnover.

When it comes to individuals, the gross total income that reflects in the income tax returns (ITR) would qualify as income under Sections 27 and 48 of the Act. If the concerned person is not required to file ITR, ITRs are unavailable or are filed in multiple jurisdictions or not filed in any jurisdiction, the total income as certified by a Chartered Accountant and supported by an affidavit would be treated as income under said Sections.

Remarks

The power provided to CCI for determining penalty based on global turnover would culminate into hefty penalties being imposed on large multinational companies operating globally which are violating the provisions of the Act read with Rules and Regulations framed thereunder. The Regulation therefore may be an effective deterrent for such entities and encourage compliance with provisions of the Act. The Regulations also provide much-needed clarity and a specific manner in which turnover/ profit is to be determined for the purposes of imposition of penalty by the CCI.

References:

[1] The deadline has been extended to January 25, 2024, vide public notice dated January 16, 2024.

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Regulation 3 of the draft regulations specifies that the turnover or income of the enterprise under Section 27 of the 2002 Act would include the “total value of sales or revenue or receipts, by whatever name called, and other operating income, as per the audited financial statements maintained by such enterprise”. This amount will not include indirect taxes, trade discounts, and intra-group sales. If the audited financial statements are not available, the amount certified by the enterprise’s statutory authority as supported by an affidavit would be its turnover.

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