Single Economic Entity: Has The Competition Regulator Set A Confusing Precedent?

Two entities that belong to the same business group are recognised as a single economic entity under competition law. And so, agreements between such entities are not viewed as anti-competitive. But the Competition Commission of India seems to have set a confusing precedent by confirming this principle in a merger case and denying it in a cartel case – that too for the same set of parties. BloombergQuint asked experts if there is merit in the regulator’s approach and the implications for business.

Concept of Single Economic Entity

The European Commission recognised the concept of ‘single economic entity’ back in the 1960s. It had held that a subsidiary company loses its ability to act independently when it’s affiliated to a group. The U.S. Supreme Court too upheld this principle in the Copperweld case where it said that an internal agreement to implement a single firm's policies does not raise antitrust dangers. Back in India, the concept is viewed in the context of the definition of a ‘group’.

In India a ‘group’ is defined in terms of either shareholding or the number of directors on the board or having control over the affairs and management of a company, Amitabh Kumar, a competition law partner at J Sagar Associates explained.

That is one deviation that India makes from international principles; so any investigation under Section 3 – the section that covers anti-competitive behaviour in competition law – could mean that you can possibly ignore the group concept even though one is influenced by the other in certain specific circumstances, he added.

But the regulator has in fact applied the ‘group’ concept in the past - in the Lamborghini case - while assessing conduct under Section 3 that prohibits anti-competitive agreements, Nisha Kaur Uberoi, a competition law partner at Trilegal pointed out.

Single Economic Entity: CCI’s Confusing Precedent

Grasim Industries and Aditya Birla Chemicals: Cartel Case

While assessing Grasim Industries and Aditya Birla Chemicals conduct under Section 3 itself, the regulator deviated from its position in the Lamborghini group case.

In a recent order, the CCI found Grasim Industries and Aditya Birla Chemicals guilty of bid-rigging a Delhi Jal Board tender. The regulator rejected the argument of the companies that there can’t be collusion since they are part of the same group and hence constitute a single economic entity. It held that since public procurement involves use of taxpayers’ money and consumer welfare, bid rigging should be viewed as one of the most pernicious anti-competitive conduct inviting serious penalty to serve as a deterrent.

Grasim Industries and Aditya Birla Chemicals: Merger Case

Now, rewind to 2015- when the CCI had approved the merger of Aditya Birla Chemicals and Grasim. At that time too, the companies had argued that since they are a single economic entity, with common leadership, executive management, marketing, procurement and HR team, the merger will not have any appreciable adverse effect on the market. The regulator had accepted this argument.

So, in ruling that Grasim and Aditya Birla Chemicals are a single economic entity for merger control purposes but not cartel purposes, has the CCI set a confusing precedent?

Uberoi replied in the affirmative.

It sets a very confusing precedent because at the end of the day, clarity and consistency are required when there is a single legislation and here that is the Competition Act, she said.

Uberoi explained that the CCI’s view is not in line with international jurisprudence because both the U.S. and the EU are very clear that if there is a single economic entity, there is no question of a cartel because you cannot have an agreement with yourself. In order to have an agreement, you need to have more than one entity and the rule of thumb is that these entities have to be independent, she said.

Single Economic Entity: Business Reality

In considering this requirement of independence, the regulator pointed out that though Grasim and Aditya Birla Chemicals had common shareholders, employees etc, they participated in the tender as separate entities. It pointed out that where two or more entities of the same group decide to separately submit bids in the same tender, they have consciously decided to represent themselves as independent options for procurement.

But Kumar pointed out that in a lot of cases, public sector procurers force bidders to do so.

So, what’s the solution? Experts quoted in this story suggested that on its part, the CCI should use its advocacy programme to educate public sector procurers against this behaviour. And until that happens, companies should make the procurer aware of the fact that they belong to the same group, specifically mention this in the tender documents and use it as a defence if it comes to that. Something that Grasim and Aditya Birla Chemicals couldn’t do as the fact of their common ownership was not recorded in the tender documents.