WHEN THE GOING GETS TOUGH: An analysis of claims for Government protection of homegrown companies

As of December, 2016,e-commerce giants such as Flipkart and Ola, which have been led to success at the hands of Indian entrepreneurs, have been seeking government protection from global giants such as Amazon and Uber which have captured a substantial share of the market despite having entered the market post Flipkart & Ola. The claim put forth by these companies is that government policies are required to be oriented towards the development of homegrown companies and that the requirement of the market is only foreign investment for the said purpose and not foreign companies. They have further pointed out that, in their opinions, the market is being distorted by capital and the war is no longer one on innovation.

Flipkart and Ola, as companies, have themselves been criticised for what is being seen as a hypocritical move for protection, due to over 80% of the ownership of these companies resting with overseas investors. However, the argument made by the internet giants is two-fold- that theirs is an India centric approach which aims at attaining high standards within the market while creating high-end jobs in India itself and that the dominance of companies which are managed by and spurred by the ideas of Indians will allow data, security and privacy to continue being retained under Indian control.

Further, and these are the main points for consideration in this article, it has been alleged by both these companies that the global giants, due to having a profitable market base outside of India, find it easier to raise capital which allows them to engage in capital dumping to push Indian players out of the market and secure a monopoly and further this existent capital base allows them to engage in predatory pricing, without the same risks of losses being unsustainable. In this article, we shall be evaluating whether these claims have the capacity to hold ground and broadly whether the government protection sought, has any merit of being considered.

The practice of predatory pricing is one in which the goods or services are priced at such a low rate that other firms cannot compete with such prices and are forced to leave the market. This is the gist of the definition provided in the Competition Act, 2002 as well under S. 4, Explanation (b). It was held in the case of Re: Johnson & Johnson Ltd.[1] that the aim of predatory pricing is to eliminate a rival. It has also been defined as, “where a dominant undertaking incurs losses or foregoes profits in the short term, with the aim of foreclosing its competitors.”[2] These judgements are essential as are the tests explained further below because while the section prohibits pricing at a lower rate, it doesn’t specify which kind, under what circumstances and whether intention is important or not to eliminate.

It is important to understand that allegations of abuse or predatory pricing as punishable shall not withhold if the goods are placed at a lower price due to economies of scale and if their sales being high in general lead to more profit as compared to less profit in a particular place/market.[3] In order to determine whether a company is engaging in pricing of an anti-competitive nature, it becomes important to look at 2 factors primarily- the intention to eliminate rivals from the market and the intention to or the attempt to recoup on such elimination. It has further been held in cases referred to that the practice would be anti-competitive when transitory, with intention of causing competitive injury and being below an appropriate measure of rival costs.[4]

However, where a company is merely reducing the price to survive in the competitive market to increase sales or where the practice indulged in is such so as to counter other similar forces in the market, such practice would not be restrictive or liable to be struck down. Further, in the USA, which judges in India seem to have emulated to an extent with regards to predatory pricing, there is a requirement of stringent conditions and proof of the above factors to prevail in claims of anti-competitive practices.[5]

The test that is laid down by the CCI in India is thus, “before a predatory pricing violation is found, it must be demonstrated that there has been a specific incidence of under-pricing and that the scheme of predatory pricing makes economic sense. The size of Defendant’s market share and the trend may be relevant in determining the ease with which he may drive out a competitor through alleged predatory pricing scheme-but it does not, standing alone, allow a presumption that this can occur. To achieve the recoupment requirement of a predatory pricing claim, a claimant must meet a two-prong test: first, a claimant must demonstrate that the scheme could actually drive the competitor out of the market; second, there must be evidence that the surviving monopolist could then raise prices to consumers long enough to recoup his costs without drawing new entrants to the market.”[6]

However, when these claims are being made, it is for the CCI to be the appropriate forum to be approached to determine whether on the basis of the above there are anti-competitive practices which require to be penalized and not the government to be looked at towards protection in such a scenario on the basis of data and facts presented before them through the established framework of law.

The practice of capital dumping is known as one in which the price charged in a foreign market for a good or service is lower than the price charged in a domestic market for the purpose of seeking an advantageous position in the market of entry. What must be understood is that capital dumping, while condemned under the WTO Agreement, is not prohibited and that when such action causes or threatens to cause material injury to a domestic industry, at most the government of the country concerned can introduce anti-dumping measures in consonance with the guidelines under their anti-dumping agreements which usually results in imposition of extra export duty to bring the price closer to the normal value and reduce the injury to the domestic industry. The foreign companies themselves cannot be ousted on this basis. Further, the FDI regime has been such to promote foreign investment in several sectors such as e-commerce and the investments infuse competition into the market.

Ola and Flipkart are being hypocritical in making such claims of capital dumping due to the nature of these ‘homegrown companies’ being backed by foreign investors who have dumped more capital in India than the counterparts against whom protection has been sought. To draw an analogy, this is almost akin to approaching a forum without clean hands, which is an equitable remedy. This claim is to an extent also baseless due to the copycat path which has been adopted by the companies, in their model, without particular heed to innovating solutions specific to India which makes them more vulnerable to pressure in a competitive environment as at present.

While this is an analysis of the position of law as already exists and the possibilities on the basis of the same applied to the situation of Ola and Flipkart, a recourse that can be taken by the companies, if they have the relevant data to prove their points, is the legal mechanism by approaching the Competition Commission of India which is responsible for adjudging whether any pricing measure has been anti-competitive in nature as mentioned above as well. Even if their claims are not to seek special favours, but rather a level playing field through government measures such as in capital dumping, it needs to be evaluated whether the competition shall be impeded rather than stabilized through such measures in the economy and to what extent these are permissible under international agreements as explained above, and whether it is merely a lack of ability to withstand competition in the market or whether there are anti-competitive practices which need to be penalized.

[1] Re: Johnson & Johnson Ltd., (1988) 64 Comp Cas 394 NULL.

[2] MCX Stock Exchange Ltd v. National Stock Exchange of India Ltd., DotEx International Ltd. and Omnesys Technologies Pvt. Ltd, 2011 CompLR 129 (CCI).

[3] US v. Aluminum Co of America (Alcoa), 148 F.2d 416 (2d Cir. 1945).

[4] Brooke Group Ltd v. Brown and Williamson Tobacco Corporation, 509 US 209 (1993).

[5] Matsushita Electric Indus. Co., Ltd. v. Zenith Radio Corporation, 475 U.S. 574, 1986.

[6] MCX Stock Exchange Ltd v. National Stock Exchange of India Ltd., DotEx International Ltd. and Omnesys Technologies Pvt. Ltd , 2011 Comp LR 0129 (CCI)



ABOUT THE AUTHOR

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SANSKRITI SANGHI

Currently pursuing her undergraduate degree from the Gujarat National Law University, Gandhinagar, Sanskriti Sanghi possesses a flair for writing and a yearn to learn. Being avidly interested in Antitrust law, Intellectual Property Rights, Children’s Rights and International Relations, she seeks to engage in and discuss multiple disciplines which keep her constantly discovering. She believes in immersing and involving herself in various activities and letting the passion for each of those interests allow her to deliver her best.

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