Decluttering the Dilemma of Dealing with Leniency Applications by SEEs

November 1, 2022/ Aniket Panchal and Swetha Somu/ Competition Law

By Aniket Panchal and Swetha Somu. The authors are students of Gujarat National Law University.

Availing leniency under a leniency programme provides full or partial reduction of fines imposed by the competition authority on companies indulging in cartels in return for the cooperation of such companies in disclosing vital information proving the existence of a cartel. Section 46 of the Competition Act, 2002 (“the Act”), in conjunction with the Competition Commission of India (Lesser Penalty) Regulations 2009 (“LPR”) codifies and governs leniency with respect to cartel investigations in India. The grant of penalty reduction is given on the basis of the marker system. Under the marker system, the first leniency applicant would be given ‘priority status’ and the benefit of a penalty reduction of up to or equal to 100% of the total penalty leviable.

Following that, subsequent leniency applicants are granted penalty reductions if they submit relevant evidence that adds significant value to the evidence already on record with the Competition Commission of India (“CCI”). Prior to the 2017 amendment to the LPR, there were just three markers under the Indian leniency system. Post the amendment, the restriction on the number of markers was removed, allowing for more than three applications for leniency.

While the leniency program is still in its nascent stage, it has seen significant growth since 2017 (which was also the year when India passed its first leniency order). However, the treatment of leniency applications made by a Single Economic Entity is one of the most tumultuous areas of the leniency regime, falling in the penumbra thereof.

The grey area of leniency applications

The confusion arises as follows:  According to Regulation 2(b) of the LPR, a leniency applicant is an ‘enterprise’, as defined under Section 2(h) of the Act, which includes a person engaged in any activity either directly or through one or more of its units or divisions or subsidiaries. This leads to the subsequent discussion of whether entities belonging to the same group (i.e., parent-subsidiary) are to be considered as a single economic entity (“SEE”) or not. This question was partly answered in the case of Shamsher Kataria where the CCI held that parent-subsidiary entities are presumed to be a part of an SEE because they are economically synergetic. Nevertheless, the central question still stands: Whether two entities forming a part of an SEE are to be treated differently for the purpose of leniency?

However, before delving into these puzzling questions, a reference must be made to the single economic entity doctrine.

The doctrine of SEE in India vis-à-vis European and American jurisprudence

The doctrine of SEE states that irrespective of the legal personalities of both entities in question, the entities could be grouped into an SEE for competition law purposes. In India, the doctrine of SEE is still at a nascent stage compared to its recognition in American and European jurisprudence. The U.S. Supreme Court case of Copperweld (1984) held that a parent-subsidiary entity is regarded to be a single entity. This wide-ranging interpretation of an SEE was then overruled by the U.S. Supreme Court American Needle in 2010. In this case, the court stressed on the factor of common ownership between the parent and subsidiary for attaining single entity status, which was not necessary previously. The Court laid down two other factors for determining whether an entity was an SEE apart from common ownership: (i) the lack of competitive link and (ii) the absence of concurring interests between the two entities.

Meanwhile, in  European jurisprudence, the landmark Shell case defined an SEE as an “economic unit which consists of a unitary organisation of personal, tangible and intangible elements which pursues a specific economic aim.” While deciding whether the group of undertakings is an SEE, it is not imperative to have separate legal personalities but it is crucial to discern whether they “act together on the market as a single unit.” This indicates that the control and conduct of an entity are intrinsic in determining if it constitutes an SEE.

However, in  Indian jurisprudence, the CCI has set a confusing precedent by denying the principle of SEE in the Grasim Industries cartel case (2017) while previously accepting the principle in the Grasim Industries merger case (2015). Since the CCI has not recognized the doctrine of SEE in the Grasim Industries cartel case, the CCI can extend its implication under Section 27 of the Act to the parent/subsidiary entity which is considered a part of the SEE.

Bringing to light a different perspective on leniency applications by SEEs

It is important to note that in India, only one entity can be entitled to a marker by filing a leniency application. However, a joint reading of Regulation 2(b) of the LPR and Section 2(h) of the Act implies that an entity acting through its subsidiary is to be considered an SEE. This leads to the moot question of (i) whether the parent-subsidiary entities could get a similar reduction if the penalty was extended because of derivative liability and, (ii) if yes, is there a need to file a separate leniency application?

Jurisprudence on this front

In Laufen Austria AG vs. European Commission, the European Union General Court was tasked with determining whether  a legal entity should benefit from a fine reduction based on the leniency application of another entity belonging to the same group of companies. In response to this question, the General Court reaffirmed its existing case laws on parental liability and observed that where the parent company has not actually participated in the cartel, but is found liable simply because its subsidiary has, the parent’s liability cannot exceed that of the subsidiary. In 2013, the same principle was reiterated in the case of Roca Sanitario, SA, vs. European Commission.

Derivative liability with regards to an SEE

Resultantly, a leniency application filed by the subsidiary will benefit the parent company in such circumstances and vice-versa. However, the same benefit cannot be availed by a fellow subsidiary merely on the ground that it forms a single economic entity with the parent company and the other subsidiary. The primary reason for this distinction is that a fellow subsidiary’s liability arises as a result of its own participation in the cartel and is not derived from that of another fellow subsidiary. The liability of the parent, on the other hand, is purely derivative, secondary and dependent upon that of the subsidiary.

(i) Whether the parent-subsidiary entities could get a similar reduction if the penalty has been extended because of derivative liability?

To address the question of whether two entities forming a part of the Single Economic Entity can get the same marker, a reference to the CCI’s decision in the Electric Power Steering  (“EPS Case”) case is imperative. In this case, the CCI granted a 100 per cent penalty reduction to NSK Limited Japan and its Indian subsidiary, Rane NSK Steering Systems Ltd. In light of this, two inferences can be drawn.

Firstly, two entities forming a part of the same group (or SEE) are eligible to get the same markers within the leniency regime. The reason for this is that they will not be treated as separate leniency applicants within the definition of an ‘applicant’ under Regulation 2(b) of the Competition Commission of India (Lesser Penalty) Regulations, 2009 owing to the inseparable unity of economic interest which exists between a parent and a wholly-owned subsidiary.

While in the above-mentioned case, the CCI did not adjudicate on the SEE status of the entities, they were accorded similar markers while granting penalty reductions. Nonetheless, there exists a presumption (unless rebutted) that subsidiaries and the direct and indirect parent companies form a part of the same economic unitSecondly, since these entities will be treated as a single ‘applicant’, the need to submit separate leniency applications to get priority status is also obviated.

(ii) Why is there no need to file separate leniency applications?

As a corollary to this, entities forming a part of the single economic entity will not be required to separately meet the standard of Regulation 3(1) of the LPRIllustratively, a parent company that is being made liable derivatively for the acts of its subsidiary will not be required to meet the conditions of vital disclosure and uninterrupted cooperation separately while seeking a reduction in penalty.

Further, while adjudicating leniency applications submitted by the parties, the CCI must adhere to the cardinal concept of equitable treatment. In this regard, it was observed in the Krupp Thyssen Stainless case that, “the Commission is not entitled to disregard the principle of equal treatment, a general principle of Community law which is infringed only where comparable situations are treated differently or different situations are treated in the same way, unless such difference of treatment is objectively justified.” Due regard to this principle will require the CCI to grant similar penalty reduction to entities forming an SEE (especially entities sharing parent-subsidiary relationship) since one cannot be punished more strictly than the other for the same violation unless there are some aggravating factors present.

Concluding Remarks

With regards to the leniency applications filed by SEEs, two entities cannot be considered as a single unit for penalty imposition under Section 27(b) and as separate legal entities for the purpose of leniency while granting penalty reduction under the CCI (Lesser Penalty) Regulation, 2009. Besides, differential treatment may out-and-out violate the principle of equitable treatment for it would amount to according unequal treatment between two equal members of an SEE.