Comparing China’s New Antimonopoly Law and India’s Amended Competition Act

Economists Ink: A Brief Analysis of Policy and Litigation

 


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Stuart D. Gurrea has written on the effect of changes in competition laws in India and China on the technology industry.Su Sun was actively involved in the consultation process that led to the finalization of China’s AML, and has written extensively on such issues in both English and Chinese publications.

China and India have recently introduced new laws aimed at promoting competition to benefit consumers. Competition laws are particularly significant for these two large emerging economies that have experienced fast economic growth but still have to overcome significant structural obstacles to achieve their full economic potential. In China, the enactment of China’s first Antimonopoly Law (AML), which took effect on August 1, 2008, was a significant step towards achieving this potential. Similarly, a key component of India’s efforts to foster competition was the enactment in 2002 and subsequent amendment in 2007 of the Competition Act of India (Competition Act). These laws take very similar approaches to questions of anticompetitive agreements, dominant firm behavior, and merger policy. Nonetheless, significant differences exist between the laws of the two countries.

Both laws forbid certain types of agreements. China’s AML prohibits horizontal agreements that fix prices or production quantities, allocate markets, restrict the purchase or development of new technology or new products, or jointly boycott a customer or supplier. The AML also has prohibitions on vertical agreements that are generally consistent with the pre-Leegin U.S. doctrine, and the AML may be used against resale price maintenance. The AML allows an agreement that generally would be prohibited if it has an efficient purpose, provided that the agreement does not limit competition substantially and that consumers can share the benefits of the agreement. Exemptions may also apply when firms are in economic hardship or engage in international trade.

India’s Competition Act also prohibits certain horizontal agreements, but it remains to be seen how these rules will be interpreted and applied. The Competition Act presumes that cartels are anticompetitive. Vertical agreements are not presumed to harm competition and are subject to the rule of reason. Vertical agreements are generally viewed as procompetitive because they involve complementary activities in the supply chain.

China’s AML describes methods to determine dominance and conduct that is prohibited if dominance is found. Several factors are considered in determining dominance, including share of the relevant market, ability to control the downstream sales market or an upstream input market, financial and technological strength, and ease of entry. If dominance is found, a firm is prohibited from selling at “unfairly high prices” or buying at “unfairly low prices.” It is not clear what prices would be considered as “unfairly high” or “unfairly low.” Dominant firms are also generally prohibited from selling below cost, refusing to deal, exclusionary dealing, tying, price discrimination and other abusive conduct as determined by the enforcement agency. Such conduct may be allowed, however, if the firm can present a legitimate justification. The State Administration of Industry and Commerce (SAIC) is responsible for abuse of dominance investigations, except for cases related to pricing, which are the responsibility of the National Development and Reform Commission (NDRC).

India’s Competition Act has similar provisions for determining the existence of dominance but somewhat different restrictions on the behavior of dominant firms. Dominance is determined by factors including market share and size, competitors’ market shares and sizes, and ease of entry. Dominant firms generally may not engage in predatory pricing, price discrimination, denials of market access, leveraging, or tying. Predatory pricing, however, may be allowed in order to meet competition.

The AML and the Competition Act both establish merger review and control procedures designed to prevent anticompetitive combinations. In China, the AML describes the required documents merging parties should submit, the review procedure the enforcement agency shall follow, and factors the agency should consider in its review. The Ministry of Commerce (MOFCOM), the enforcement agency responsible for the antitrust review of mergers and acquisitions, has released a number of regulations and guidelines that describe the procedures in more detail. Though MOFCOM published a brief approval notice (with conditions) on the InBev/Anheuser-Busch merger, Coca Cola’s proposed acquisition of China’s Huiyuan Juice Group is widely considered as the first major test of China’s merger regulation regime. MOFCOM’s review of this transaction recently moved into a second stage.

The recent amendments to the Competition Act significantly changed India’s merger review process. The Act now mandates notification within 30 days for combinations that involve firms that have a certain amount of economic activities in India. Moreover, the Competition Act now defines a review period, a period after filing during which the merger may not be consummated, of at most 210 days. Although the principles behind this process are similar to the Hart-Scott-Rodino (HSR) pre-merger filing and review process in the US, the length and scope of the process may prove very burdensome. Certainly a 210 day review period is longer than those established in most countries, including China. Also, notification of transactions is required where the combined asset value or turnover in India exceeds a certain value whatever the size of the transaction. Basing the threshold only on combined value means that parties to transactions of no economic consequence in India may have to undergo the substantial transaction costs that notification entails. For example, a U.S. manufacturer with large operations in India would have to notify the acquisition of a small U.S. firm, even if the transaction does not affect economic activity in India. Subsequent draft regulations address this problem by defining the local nexus based on assets or turnover of each of at least two of the parties to the combination.

One unique feature of China’s AML is its devotion of an entire chapter to the prohibition of undue government intervention that harms competition, particularly government actions that restrict market entry. This feature stems from China’s history of a highly planned economy. The first high profile case against a government agency, which involved designating an industry standard in which the agency allegedly held an interest, was dismissed by the court in 2008.

China’s AML and India’s Competition Act will play a significant role in the development of their respective national economies. The effect of these laws will depend on their interpretation and actual implementation. So far there is little experience with the implementation of the AML and almost no experience with the implementation of the Competition Act. Firms doing business in China and India will have to keep aware of ongoing developments in their antitrust regimes.