Case Brief Re: Alleged anti-competitive conduct by Maruti Suzuki India Limited

Abhishek Bhushan Singh

Case: Re: Alleged anti-competitive conduct by Maruti Suzuki India Limited in implementing discount control policy vis-à-vis dealers

Suo Motu Case No. 01 of 2019

Court: Competition Commission of India

Bench: Ashok Kumar Gupta Chairperson Sangeeta Verma Member Bhagwant Singh Bishnoi Member

Order Date: 23/08/2021

CCI imposes ₹200 crore penalty on Maruti Suzuki for entering into anti-competitive agreements with dealers to restrict discounts

Facts of the Case

The CCI took up this case Suo-moto after receiving an anonymous email from a putative Maruti Suzuki India Limited (MSIL) dealer alleging that MSIL's sales policy was against consumers' interests as well as the restrictions of the Competition Act, 2002.

Furthermore, it was claimed that MSIL dealers in the West-2 Region (Maharashtra State other than Mumbai and Goa) were not allowed to discount their consumers beyond what MSIL had publicised as a 'consumer offer.' The MSIL imposed a penalty on a dealer who was discovered to be giving additional discounts.

The penalty was to be paid in the name of Swati Kale, the wife of Vinod Kale, the Vice-President of Wonder Cars Pvt. Ltd., an MSIL dealership in Pune, Maharashtra, through check. MSIL management would send the delinquent dealership an email with a "Mystery Shopping Audit Report," asking for clarification before issuing the penalty.

MSIL implemented the above-mentioned Discount Control Policy across India, particularly in cities with more than four to five dealerships.

MSIL has formed a view that there is a prima facie case of breach of Section 3(4)(e) of the Act, i.e., Resale Price Maintenance, by MSIL, as stated in an order dated 4-7-2019 issued under Section 26(1) of the Act. In view of the above background, CCI had directed the Director-General to cause an investigation into the matter and submit a report.

MSIL was ordered by the CCI to submit audited balance sheets and profit and loss accounts/turnover details for the fiscal years 2017–18, 2018–19, and 2019–20, as well as details of the revenue and profits generated by it from the sale of "passenger vehicles in India" during these fiscal years, via affidavits accompanied by certificates from Chartered Accountants.

MSIL was a manufacturer in the upstream sector, while its dealers were wholesalers in the downstream industry, according to CCI. Manufacturers and dealers entered into a contract that might be investigated under Section 3(4) of the Act because it was a contract between businesses operating at various stages or levels of the production chain in different markets.

MSIL argued that the only agreement between them with the dealers was the Dealership Agreement, and the same contained no clause restricting discounts but rather allowed dealers to offer any discounts as they deem fit.

Coram opined that such agreement/arrangement/understanding with regard to discount control policy between MSIL and its dealers might exist dehors the Dealership Agreement entered into on writing between them.

DG discovered many emails exchanged between MSIL and its dealers while investigating the email dump, indicating that MSIL did, in fact, have an agreement with its dealers not to offer discounts to consumers beyond those approved by MSIL from time to time without MSIL's prior approval.

MSIL contended that Discount Control Policy, even if found to be existing in a certain region, was only a form of policing amongst the dealers themselves inter se, and MSIL had no role in formulating such a policy, except to enforce the same on behalf of the dealers as an independent third-party.

CCI Opinion:

MSIL held meetings on Discount Control Policy, according to CCI, and it created policies limiting the maximum discount allowed in cash or in terms of accessories, among other things.

In addition, MSIL stated that any dealership discovered selling/billing at the old price following a price increase would be regarded as breaking selling guidelines and will be treated as a discount granted to customers.

MSIL sent out warnings and threats of stiff penalties if dealers offered additional reductions without first getting authorisation. As a result, according to Coram, MSIL does not appear to be solely a third-party in the Discount Control process as claimed.

MSIL was unable to prove that the discounts were granted by the dealers without requesting MSIL's prior approval.

Despite claiming to have a principal-to-principal relationship with its dealers, the CCI found that MSIL was the sanctioning authority for the maximum discounts that could be offered to clients by its dealers.

To execute its Discount Control Policy, MSIL employed MSAs to masquerade as consumers at MSIL dealerships in order to determine whether or not additional discounts were being offered to customers. If offered, the MSA would report it to MSIL management with documentation (audio/video recording), who would then send a 'Mystery Shopping Audit Report' to the offender dealership, confronting them with the additional discount and asking for clarification.

If MSIL is not satisfied with the clarification, a penalty will be imposed on the dealership and its staff, with the prospect of supply interruption in some situations. MSIL would even tell the dealership where the penalty should be paid.

MSAs were appointed solely by dealers, and MSIL had no involvement in the process.

CCI's view:

CCI opined that MSIL had tried to pick up isolated statements from its emails, which appeared to be self-serving statements, to allege that it was the dealers who had appointed the MSAs. Adding to its opinion, CCI stated that there was absolutely no indication in the emails that the appointment of MSAs was made by the dealers themselves.

DG, when questioned Swati Kale, she submitted that her role was to receive cheques as per the instructions of the Regional Manager of MSIL and deposit the same in her account, and issue cheques as per his instructions when required. It was further noted that the amount collected in the account of Ms. Swati Kale was used by MSIL to pay the bills of advertisements.

In CCI's opinion, the imposition of maximum discount limits by MSIL upon its dealers amounted to Resale Price Management (RPM) as defined under Explanation (e) to Section 3(4) of the Competition Act.

RPM can prevent effective competition both at the intra- brand level as well as at the inter-brand level. In the present matter, RPM imposed upon the dealers led to the denial of benefits to the consumers in terms of competitive prices being offered by MSIL dealers.

CCI stated that when all dealers are subject to a Discount Control Policy, they are obligated to sell the same product at the same price, effectively eliminating price competition.

Due to the lack of intra-brand competition among MSIL dealers, consumers would have been forced to acquire MSIL automobiles at set pricing without the benefit of variable discounts offered by MSIL dealers, resulting in higher costs and denial of discounts in kind.

Customers of MSIL would have been able to purchase MSIL automobiles at reduced prices if MSIL had not imposed a discount control strategy. The anti-competitive impact of the above practice of MSIL was reinforced by the fact that MSIL had more than 50% market share in the passenger vehicles segment, as observed by the DG.

Commission, however, opined that imposition and enforcement of RPM by a player like MSIL, having a significant market share, not only thwarts intra-brand competition but also leads to the lowering of inter-brand competition in the passenger vehicles market. CCI expressed that RPM as a practice by multiple manufacturers is conducive for monitoring of tacit collusion among such manufacturers.

Arrangement/ Agreement perpetuated by MSIL hindered the distribution of goods and the provision of services in relation to new cars; further it resulted in creating barriers to new entrants/dealers in the market as the new dealers would take into consideration restrictions on their ability to compete with respect to prices in the intra-brand competition of MSIL brand of cars.

Another significant observation made by the CCI was that by controlling the dealers' margin, inter-brand competition softens due to ease of monitoring of retail prices by the competitors, providing the manufacturer more liberty to regulate its own margin freely.

All dealers of MSIL are subjected to the SOP/SPG, and non-compliance with the same also result in the imposition of penalties. As such, the justification put forth by MSIL that RPM is required to eliminate the problem of free-riding is not tenable.

Conclusion

CCI concluded that Maruti Suzuki India Limited not only entered into an agreement with its dealers across India for the imposition of a 'Discount Control Policy' amounting to RPM but also monitored the same by appointing MSAs and enforced the same through the imposition of penalties, resulting in an Appreciable Adverse Effect on Competition (AAEC) within India, thereby violating the provisions of Section 3(4)(e) read with Section 3(1) of the Act,

After considering the nature of the infringing conduct and the post-pandemic phase of recovery of the automobile section, CCI determined that it was appropriate to impose a penalty of Rs 200 crores on MSIL, as opposed to the maximum penalty permissible under the Act, which is ten percent of the entity's average turnover for the previous three financial years.

CCI’s Order

In accordance with Section 27(a), CCI ordered MSIL to halt and desist from engaging in RPM directly or indirectly. Maruti Suzuki India Ltd. is accused of anti-competitive behaviour in enforcing a discount control policy against dealers.