top of page
Image by Annie Spratt
images-removebg-preview.png

NLSIR

|

Online

Leverage and ‘Legacy’ Enterprises: Bharti Airtel v. Reliance Jio


- Anandita Tayal


In September 2016, Reliance Jio Infocomm Limited [‘Jio’] entered the telecom market and took it by storm. It released a series of attractive schemes offering free services. This disrupted the previous players in the market, which led to one of them, Bharti Airtel, alleging anti-competitive practices before the Competition Commission of India [‘CCI’ or ‘the Commission’].


Various observations have been made about the findings of the Commission regarding whether the essential elements to establish “predatory pricing” were present, such as the “dominant position” of Reliance Jio in the relevant telecom market. However, the informants had also laid another claim that the CCI did not consider worthy of equally detailed analysis as other issues, and the same has also largely escaped scrutiny by the legal community thereafter. This claim was regarding the violation of Section 4(2)(e) of the Competition Act by Reliance Industries Limited [‘RIL’] by abusing its dominance in other markets (commonly known as ‘leveraging') to enter the telecom market through Jio. I argue that the Commission’s conclusion regarding the applicability of Section 4(2)(e) is legally invalid when viewed from an Exclusive Legal Positivism [‘ELP’] lens, as it lacks backing from conventional sources.


The CCI devotes merely three sentences to dismissing the Section 4(2)(e) contention.[1] This brief engagement with the claim can be broken down into four observations or justifications. Firstly, the 4(2)(e) contention cannot be sustained in the absence of contravention of the other alleged sections. Secondly, this is a “mere investment” by RIL in Jio, which is insufficient to invoke the clause. Thirdly, it is particularly relevant that RIL was not involved in either providing telecom services or any activities incidental thereto. And fourthly, if this claim is sustained, it would have an adverse effect on the growth of the market and would restrict entry/exit. I shall address these claims in order and illustrate how all of them go against the ‘sources thesis.’ This thesis is the basis for ELP theory and claims that ‘law’ has authority only if it is source-based. In this case, the primary conventional ‘source’ that the CCI claims to rely on is Section 4(2)(e). However, I argue that all four of CCI’s assertions completely derogate from the source’s language and intent.

Regarding the first of these observations, the CCI calls the Section 4(2)(e) submission “contradictory” to its other submissions.[2] Then, it piggie backs its prima facie dismissal of this claim upon its rejection of the other contentions since it believes that “in the absence of any finding of anti-competitive conduct by OP-2 [Jio], OP-1 [RIL] cannot be held to be in contravention of Section 4(2)(e) of the Act”. Seemingly, there is some conflation of the requirements under Section 4(2)(a)(ii) which pertains to predatory pricing, and Section 4(2)(e), which requires clarification.


The Act, under explanation (b) to s.4(2), mandates certain conditions to be set out in order to find predatory pricing. The enterprise must have a dominant position in the relevant market, which it abuses to impose a price that is below the cost of production, with an intent to reduce or eliminate competition. The CCI, in this case, rightly assesses and dismisses Jio’s “dominant position” in the relevant market and a clear “view” to reduce competition, considering it is a nascent entrant in the telecom sector. However, neither of these considerations has a bearing on the text of Section 4(2)(e).


Section 4(2)(e) is regarding the leveraging of a dominant position in one relevant market to enter other relevant market. Therefore, the telecom sector, for the purposes of this clause, is the “other relevant market” that is being entered into. Thus, it is irrelevant that Jio is a nascent and, thus, non-dominant player in the same. It is also an incorrect assertion that this claim is contradictory to the other ones. A firm using its dominance elsewhere to enter a market, and later abusing the acquired dominance in the new sector, can be two independent, consistent, and simultaneous claims.


Thus, the only requirement for establishing the abuse of “leverage” is a ‘dominant position’ in some market to enter a new one. Bharti Airtel had informed the CCI of various facts that point towards RIL’s domination of other markets, which were completely ignored by the CCI. These include the fact that RIL is “one of the biggest private companies in India in terms of its size, revenue, assets, and value, leading it to be one of the financially strongest companies in the country.” Its massive market share in various markets was also highlighted.[3] If considered, these factors would have helped establish a prima facie case of RIL’s dominant position in various markets, as s.9 of the Act makes all of these factors relevant for inquiring into dominant position. Meanwhile, CCI’s consideration of dominance (or lack thereof) in the telecom sector and an anti-competitive intent do not find a mention in Section 4(2)(e).


Moving on to CCI’s second dispute with the claim, it conceptualises the Section 4(2)(e) contention as an attack on RIL making a “mere investment”, in a second entity, Jio. Here, it is pertinent to note that Section 4(2) assesses the abuse of dominance by an “enterprise” and not a company. This makes it relevant to consider the definition of “enterprise” under Section 2(h), which extends its ambit to a person (includes companies) who provides service either directly or through one or more of its subsidiaries. The Competition Act expressly goes beyond the concept of a ‘separate legal personality’ of ‘companies’ under the Companies Act regime. There is a clear acknowledgment of the possibility of holding and subsidiary companies acting as a single entity for the purposes of impacting competition.

In this case, the CCI overlooks this distinction. RIL owned a 99.44% stake in Jio, which makes Jio its subsidiary under s. 2(87) of the Companies Act. This contextualisation changes the perspective from 2 ‘companies’ engaging with each other through investments to an ‘enterprise’ strategically employing its resources accumulated through the domination of certain markets to enter a new market. It was only through the immense money allocated from RIL’s funds that enabled Jio’s provision of free services.[4]


This clarification is also pertinent to understand the flaw in the CCI’s third reason as well which relies on RIL not being engaged “in business of providing telecom services or any activities incidental thereto.” At the outset, the CCI’s observation that RIL is not engaged in providing telecom services seems incorrect when RIL is considered an “enterprise” providing telecom services via Jio, its subsidiary. Nonetheless, maybe the CCI wanted to underline that RIL, even as an enterprise, is not dominant in the telecom sector or any market incidental thereto. However, even this assertion would be irrelevant given the text of the statute.

The SC has previously explicitly noticed that “the language of section 4(2)(e) of the Act itself suggest that there have to be two markets, one in which the enterprise has a dominant position and the other in which it intends to enter or protect”,[5] and used this understanding to dismiss the claim based on the lack of two markets being established. Thus, in fact, had RIL already been dominant in the same market, i.e., the telecom sector, there would be no question of leverage.


Further, while leveraging might often arise in “incidental” or related markets, the Indian competition law does not require so. The omission of such a requirement in the clause is deliberate. This is proved by the fact that even when there was a suggestion to amend the clause to limit it to entering another ‘associated’ relevant market, the Competition Law Review Committee rejected the same. The basis for this suggestion, and probably also for the Commission’s misunderstanding, is that such an ‘associational link’ requirement is well-established in foreign jurisdictions. However, the Committee rejected this suggestion citing reasons earlier noted by the CCI in MCX Stock Exchange Ltd. v. National Stock Exchange of India Ltd. while rejecting the decisional practice in foreign jurisdictions establishing such an ‘associational link’ requirement. This was done on the ground of dissimilarities in the Indian markets due to a nascent competition law. Its primary concern was certain firms that have entrenched themselves in trade and commerce due to a lack of regulations for years.


I believe RIL is a perfect prototype for what I call, such ‘legacy’ firms. The Reliance Group was founded by Dhirubhai Ambani in 1957. The Ambani family has since expanded the business across various sectors for more than six decades in an environment free of any regulations. By the time the Competition Act was notified in 2011, RIL was already the private company with the highest revenue, net profits, and total assets. Therefore, firms like RIL are at the root of the rationale for excluding an associational link requirement, and thus, it is completely against legislative intent to introduce such a requirement when assessing allegations against RIL. Consequently, the concern that RIL is not dominant in telecom or related sectors is completely misplaced.


Now that the contrast between the text of the law and the Commission’s application is evident, I will address CCI’s final contention. Essentially, it raises a policy concern regarding the application of Section 4(2)(e), in this case, having a chilling effect on investments in the market. Firstly, such a policy concern cannot override the unambiguous text of the source and be used to re-open a debate that was already settled by the same. Secondly, this concern is also a product of the CCI’s misperception of the facts of this case. Since this is not a case of a “mere investment” by a person in another company and is instead a case of a massive dominant enterprise abusing its resources in other markets, it does not have any implications on investments in general and the consequent market growth.


Thirdly, even if the CCI’s concerns were practical, the adverse implications of its current decision outweigh these hypothetical concerns. Let us consider the counterfactual of the flagged scenario. Due to the Commission’s current conception, all legacy firms have the entitlement to use the resources gained from their historically unchecked domination of other markets to fund anti-competitive schemes to dominate other markets as well. They can simply plead that they are nascent players in this market and go scot-free. The CCI, with its current position, would refrain from intervening until the subsidiary itself becomes dominant in that particular market and continues to further employ such practices. This can even lead to the eventual domination of all sectors by a handful of legacy enterprises holding immense power to introduce anti-competitive practices, at least in the initial stages. In this case, the Commission’s purpose of preventing practices that adversely affect competition and consumer welfare would be rendered futile.

In conclusion, the CCI’s reasoning violates the source thesis by re-opening a debate clearly settled by the Act itself. If the 3-sentenced intervention on the issue is re-written with the backing of an authoritative source of law, it will read something like — Regardless of the absence of any finding of anti-competitive conduct by Jio itself because it is not in a dominant position in the relevant market yet, RILs’ conduct via Jio may also lead to abuse of dominance as they are a part of the same enterprise. According to the information, RIL’s funds were invested in providing such free services via Jio, which facilitated the entry of the enterprise into the relevant telecom market. These massive funds were the result of the dominant position of RIL in various relevant markets like polyester fiber, yarn, petroleum products, etc. It is irrelevant that these markets do not have any link with the telecom sector, in light of the text of the law, as well as the legislative intent to prevent abuse by enterprises that gained a dominant position in various sectors due to a historical lack of competition laws in India.

[1] Bharti Airtel Limited v Reliance Industries Limited & Other CCI Case No 03/2017 [24] — “…In the absence of any finding of anti-competitive conduct by OP-2, OP-1 cannot be held to be in contravention of Section 4(2)(e) of the Act just because it has made huge investments in OP-2. Mere investments cannot be regarded as leverage of dominant position, particularly when OP-1 itself is not engaged in business of providing telecom services or any activities incidental thereto. If one were to construe such investment as anti-competitive, the same would deter entry and/or expansion and limit the growth of markets...” [2] Bharti Airtel Limited v Reliance Industries Limited & Other CCI Case No 03/2017 [24]. [3] Bharti Airtel Limited v Reliance Industries Limited & Other CCI Case No 03/2017 [4]. [4] This statement is based on the information received by the Informant. Admittedly, this may turn out to be false. However, at this stage the CCI is merely supposed to consider this information and form a prima facie opinion, under Section 19. The factual correctness of this claim can be confirmed via an investigation by the Director General initiated under Section 26(1). In the absence of the same, the only available information for the purpose of this paper is the Informant’s contentions, which have thus been relied upon. [5] The National Stock Exchange of India v Competition Commission of India 2014 SCC OnLine Comp AT 37.

276 views

Recent Posts

See All

Comments


images-removebg-preview.png

NATIONAL LAW SCHOOL OF INDIA REVIEW  © 2022

bottom of page