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Senior Associate Zerick Dastur along with Abir Roy of J. Sagar Associates analyse the final order of the Director General, the investigating authority under the Competition Act and discuss the prepayment charge on home loans.
After nearly eighteen months from the date of notification of the substantive provisions of the Competition Act (Act) pertaining to anti competitive agreements and abuse of dominance by business enterprises, the Competition Commission has issued a comprehensive final order, after a thorough investigation by the Director General, the investigating authority under the Act. The order deals with issues involving the alleged anti-competitive agreements entered into and abuse of dominant position by banks while charging prepayment charge (PPC) on home loans. PPC currently ranges between 1-4 percent for most banks. The levy and the rate of such PPC is discretional. However, CCI, by a majority order of 4-2, has held that the practice of charging PPC is not violative of the provisions of the Act. Interestingly, the Chairman of the Commission recused himself in the case. It has been observed that owing to the extremely fragmented market shares of the banks in the area of home loans where no individual bank has a market share of more than 17 percent, the provisions relating to abuse of dominant position would not apply.
It is pertinent to note that the Director General had, in his report to the Commission stated that the practice of the banks levying PPC amounted to an agreement for the limiting or controlling the market, that levy of PPC made the exit for a borrower expensive and hence violated the provisions of the Act. The report further stated that the practice acted as a deterrent for borrowers seeking shift to other banks in order to avail the best prevailing interest rate offered by those banks.
The order serves as an authoritative interpretation on a number of issues under a law which is in its nascent stage. One of the issues which came up for determination before the Commission was the extent and scope of the term “agreement” which is a prerequisite in order to determine whether there was any violation. It was observed that for an agreement to exist there has to be an act in the nature of an arrangement, understanding or action in concert including existence of an identifiable practice or decision taken by an association of enterprises or persons. It was held in this case, the existence of any “agreement” between the banks cannot be conjectured or even circumstantially adduced as the practice of levying PPC was based upon individual discretion of each bank. The Commission noted that the practice of charging prepayment penalty cannot be said to be a concerted decision of all the banks as all of them had not started charging prepayment penalty at one point of time. Further, there was no evidence to suggest that that the banks had formed any internal or discrete association for the purpose of charging prepayment penalty. Thus, congruence of action, which is an integral part of any agreement, was not established. Whereas it has been found that some banks are imposing PPC, there is no evidence to establish that this practice is a result of some action in concert or emerges from a collusive decision but levying of such PPC has a reasonable economic justification.
Having said that, CCI seems to have raised the “bar” for proving the existence of an agreement and for it to qualify as anti competitive. It is true that in almost all countries, including India (even under the erstwhile MRTP Act), more evidence is required than just parallel behavior to support a prosecution for entering into an anti competitive agreement. US and European courts have adopted a “parallelism plus” approach, which requires the existence of “plus factors” beyond merely parallel behavior by firms in order to prove that the firms have indulged in anti competitive behavior. Having said that, normally there is no express agreement that is entered into by entities engaging in anti competitive conduct but the practice is usually in the form of a tacit understanding. Existence of such arrangements is usually proved by circumstantial evidence, and by setting up and proving a chain of events leading to a common understanding or plan. The underlying issue is what, at the minimum, constitutes that “meeting of the minds” which must be directly or circumstantially established to prove that there is a restrictive effect on competition. It can be argued that, the Commission should have given more importance to the meetings of the Indian Banks Association (IBA) where the decision to charge PPC was taken and should have scrupulously analyzed the actions of the banks to show how the common approach deliberated in meetings of IBA was actually implemented. Further, the perusal of the internal circulars of these banks may lead to a conclusion that the main purpose to introduce PPC was to dissuade the borrowers from shifting to other banks. Whether, the Commission should have attached more importance to such circumstances in arriving at the conclusion in its order remains a moot point.
Considering the fact that the informant did not present any views after the Director General presented its investigation report, it seems unlikely that he would pursue the matter before the appellate tribunal. However, the Act provides that “any person” who is aggrieved by the order of the Commission may appeal to the appellate tribunal. Hence, any consumer who may be aggrieved by the order may take recourse to the tribunal. The same remains to be seen, but as it stands the banks are free to charge PPC as has been done hitherto.
Zerick Dastur is a Senior Associate at J. Sagar & Associates, Advocates & Solicitors. His practice covers diverse areas of Corporate Commercial and Securities law and he is also a part of the Firms Competition Law practice.