CCI imposes Rs. 200 crore fine on Maruti Suzuki India Limited

On November 17, 2011, an alleged dealer (hereafter referred as “informant”) of Maruti Suzuki India Limited (hereafter referred to as “Maruti”) sent an e-mail to the Competition Commission of India to inform about the sales policy of Maruti, which allegedly violates not only the provisions of the Competition Act, 2002, but also the interests of the customers. The informant elucidated that the vehicle dealers within the region of West-2 (the territory of Maharashtra excluding Mumbai and the state of Goa) were not permitted to provide any discount to the consumers beyond the permitted limit prescribed by Maruti, wherein any discount beyond the permissible limit makes the said dealer liable for a fine by Maruti under Maruti’s ‘Discount Control Policy’ depending on the number of incidents found  against the said dealer in a particular financial year; however, the reason of the fine would not be disclosed by Maruti. The dealer revealed that the violation of any other policy of Maruti (ex: manpower encroachment, selling vehicles outside the designated territory, charging excess from the customer, etcetera) was revealed to the wrongdoing dealer by Maruti, except in cases under the Discount Control Policy.

Upon the reception of the email, the CCI invited Maruti to file its comments, if any; consequently, the CCI held a preliminary conference with Maruti on May 22, 2019. The CCI directed the Director General (DG) to conduct an investigation into the said matter. In the upstream market of the manufacture of passenger vehicles, Maruti occupied a market share of 51.22% in the financial year 2018-19, wherein the dealers and distributors occupied the downstream market of distribution and sale of passenger vehicles. The DG found that Maruti had appointed Mystery Shopping Agencies (MSA) to keep track of the discounts offered by the dealers while threatening to either impose penalties on the said dealers or suspend the supply of premium models to the dealers. The DG found Maruti guilty under Section 3, Sub-Section 4, Clause E of the Competition Act, 2002 (Resale Price Maintenance) for making an agreement with its dealers under the Discount Control Policy for causing an appreciable adverse effect on competition in India since the products were not being offered to the customers at best prices.

The CCI held a final hearing on the DG’s report on April 15, 2021, through video conferencing. It is worth noting that Resale Price Maintenance is an agreement between the manufacturer of a good and the retailer (including the seller) of the said good to not sell the good either at or below a specified price floor (minimum resale price maintenance) or at or above a price ceiling (maximum resale price maintenance), i.e. the retailer must abide by a price band set by the manufacturer. It is worth mentioning that the Discount Control Policy amounts to Resale Price Maintenance under Section 3, Sub-Section 4, Clause E, which thwarts effective competition not only at intra-brand but also inter-brand level; consequently, the appreciable adverse effect on competition within India caused by the Discount Control Policy is void under Section 3, Sub-Section 1 of the act. The imposition of a Discount Control Policy upon the dealers by Maruti prevents the former from decreasing the sale prices below Maruti’s specified limit; consequently, the policy bars the dealers from effectively competing on price while increasing the vehicle’s price for consumers due to adverse affects the intra-brand competition of Maruti.

The large market share of Maruti in the upstream market of the manufacture of passenger vehicles causes the aforementioned affect in intra-brand competition to affect the inter-brand competition with other brands within India since the policy takes away the pricing pressure on competing vehicle manufacturers like Hyundai.

The Commission argued that the imposition of the policy creates a situation where all dealers under Maruti are selling Maruti’s vehicles at similar prices as set by Maruti, wherein the said prices can be monitored and understood by other vehicle manufacturers in the upstream market while structuring their individual pricing strategies for their competing models in an environment of softer competition. The competitive pricing while keeping Maruti’s pricing in mind may cause the competing manufacturers to price their competing models higher than the prices of the Maruti vehicles; consequently, the consumers who prefer the competing brands may end up spending more than required; this creates an obstruction for consumers to avail the benefit of competition in pricing in an inter-brand modality.

It is worth noting that Maruti’s two-point argument of a) non-existence of the aforementioned policy within any clauses of its official Dealership Agreement with its dealers, b) existence of Clause 28.1 in the Dealership Agreement that specifically allows the dealers of Maruti to provide discounts as the dealers see fit with a provision of charging a price lower than the Maximum Recommended Retail Price from the consumers, was found to be non-tenable since the CCI shed light on the stark difference between the interpretation of the word “agreement” in the Competition Act, 2002 and the Indian Contract Act, 1872, wherein the former broadly and liberally includes any arrangement (or understanding) as an agreement even if the said agreement may or may not be formally written, may or may not be legally enforceable (under Section 2, Clause B of the act). Although the official Dealership Agreement was silent on the policy, the CCI found multiple e-mails between Maruti and its dealers reveal an unofficial agreement enforced by Maruti to discourage the dealers from offering discounts to customers beyond those permitted from time to time by Maruti and doing so was barred without the express approval of Maruti. The e-mails prove that Maruti had enforced a Discount Control Policy upon its dealers, wherein the latter was barred from providing any freebies and discounts to customers beyond the permissible limit set by Maruti; additionally, the e-mails tell that the failure of a dealer in following the policy invited penalties for not only the dealers but also the individual persons of the dealership: Direct Sales Executive, Regional Manager, Showroom Manager, Team, Leader, etcetera; hence, the CCI believed that the instructions embedded within the e-mails amounts to an “agreement” under Section 2, Clause B of the act.

The CCI found Maruti guilty of not only imposing the aforementioned policy amounting to Resale Price Maintenance but also appointing the MSAs to monitor and enforce the policy in the form of penalties upon the dealers of Maruti; consequently, the CCI fined Maruti Rs. 200 crores for violating Section 3, Sub-Sections 1 and 4 of the act, wherein the fine must be submitted within 60 days of the receipt of the order by Maruti. The order comes under Section 27, Clause B of the act, wherein the penalty shall not be more than ten percent of the average of the turnover of the entity for the last three preceding financial years, i.e. Rs. 200 crores.

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