By Toshit Shandilya and Mohith Gauri
Public sector undertakings (PSUs) continue to constitute an important economic driver in the country. Their economic activity encompasses sectors ranging from energy to telecommunications to transportation, and affects stakeholders in a big way and, therefore, aren't left unregulated. Sectoral regulators, for instance, those for electricity and petroleum, regulate activities of the state-owned companies in these segments. Additionally, their significant market presence, frequent preferential treatment afforded, and extensive resources need to be regulated from the perspective of antitrust rules to ensure fair competition and foster an environment that encourages innovation, efficiency and economic growth.
The Supreme Court of India recently delivered a landmark verdict involving Coal India Limited (CIL) that settles the debate on extending necessary antitrust scrutiny on PSUs and government companies.
The Competition Commission of India (CCI), the antitrust body established under the Competition Act, 2002, is the regulator responsible for eliminating practices having an adverse effect on competition in India. The CCI has previously issued decisions against public sector insurance companies and gas companies like GAIL for their supply agreements with customers, and scrutinised several public procurement processes including in the railways sector.
The case against Coal India
The CCI had penalised CIL for imposing unfair/ discriminatory conditions in its fuel supply agreements with power producers. The CCI found that the conditions related to sampling, grading of coal, compensation for supply of oversized coal stones, etc. were arbitrary and one-sided. The CCI found that CIL and its subsidiaries operated independently of market forces and enjoyed market dominance in the relevant market for production and supply of non-coking coal in India.
CIL contested that the Competition Act should not apply to its activities because those are governed by the Coal Mines (Nationalisation) Act, 1973. CIL contended that it has to follow the principles of ‘common good’ under the Indian Constitution to ensure equitable distribution of a scarce natural resource, and that it doesn’t operate for commercial profits.
Here’s why the Supreme Court disagreed with CIL, and why government companies should rather embrace competition regulation.
Expansive scope of the Competition Act
The apex court found that the starting point of the CCI’s analysis, i.e., the scope of the word “enterprise”, includes government departments and companies, and leaves out those activities that are related to sovereign functions of the government. Admittedly, Coal India does not perform any sovereign functions so it could not benefit from this narrow carve-out.
The court noticed that even the parameters to assess a position of dominance under the Competition Act include factors like a monopoly position acquired as a result of being a PSU/ government company. Therefore, it was clear that the legislature intended to regulate activities of government companies too under the Competition Act. The court also cited the report of the government-appointed Raghavan committee on competition policy issues.
The Supreme Court found that the functions/duties of CIL acting under the Nationalisation Act and following the Directive Principles (and other provisions) under the Indian Constitution to achieve common good are not at odds with the Competition Act. For example, if the national policy requires there to be differential pricing between groups, or if there’s a decision to limit supply, such conduct can be justified and explained to the CCI. If CIL engages in differential pricing, it can explain to the CCI that the transaction under scrutiny is situated differently from its usual transactions with other customers. Nevertheless, the concept of common good is dynamic and ought to change with changing times, and the Supreme Court rightly held that the objectives of competition regulation must be harmoniously interpreted with the Nationalisation Act.
Government companies should embrace competition regulation
The overarching objective of antitrust regulations is to protect consumer welfare and foster vibrant market competition. Regulation of PSUs would ensure that consumers receive the benefits of lower prices, improved quality and increased choice in sectors dominated by government companies, which are the hallmarks of healthy competition.
To effectively regulate PSUs (and not overregulate), it is imperative to develop an analytical assessment framework that aligns with their unique characteristics and public interest obligations. The regulator should endeavour to strike a balance between promoting competition and accommodating the strategic interests of government companies by appropriately testing the alleged anticompetitive effects of conduct as well as any objective/business justifications. This will ensure transparency, predictability and accountability, while encouraging compliance.
Additionally, cooperation between the CCI and sector-specific regulators should be enhanced to address the nuances associated with PSUs' operations. Such collaboration would help streamline the enforcement process, eliminate regulatory overlaps, and provide a cohesive approach to antitrust regulation.
As India's economy reaches new heights, the significance of maintaining fair competition cannot be overstated. Antitrust regulations play a pivotal role in ensuring a level playing field, encouraging competition on merit, preventing monopolistic practices and safeguarding the interests of consumers. Robust competition regulation including for the PSUs will be the catalyst for empowered consumers and propel the nation's economic growth.
Toshit Shandilya is a Partner & Mohith Gauri is a Senior Associate with AZB & Partners. The views expressed are personal and should not be attributed to the firm.
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