The Competition Commission of India’s (CCI) recent investigation into the Trustee Association of India (TAI) and debenture trustee units of State Bank of India, Axis Bank and IDBI Bank for collusion in respect of charging high fees for issuing debt and due-diligence checks has raised jurisdictional conflicts over the sectoral regulator -SEBI, and the market regulator – CCI.  The CCI, in its prima facie confidential order, noted that the TAI and SBICAP Trustee Company Ltd, Axis Trustee Services Ltd and IDBI Trusteeship Services Ltd had substantially increased the fee for assisting companies in raising debt and prevented members from charging below a floor price, and hence, impacting competition.  Such collective decision making by the association affected competition in the relevant market. The CCI commenced its investigation on information filed by Muthoot Finance alleging the said parties had raised the cost proposal to 300% higher than previous rates for raising debts.

Currently, the Division Bench comprising Hon’ble Justices GS Patel and Madhav Jamdar of the Bombay High Court has directed the SEBI to take a view and complete its probe by June 2022, until which time the CCI would keep its investigation in abeyance. The Bench further noted there were few communications between the SEBI and the CCI on the issue, in terms of which SEBI had asked CCI to pause its investigation. Nevertheless, the CCI has recently directed the parties to submit the records of meetings and other relevant evidence for its consideration. It was also noted that as the sectoral regulator, SEBI would be better situated to investigate the matter in alignment with the decision of the Supreme Court in the case of Bharti Airtel vs. CCI. The intervention of the Hon’ble Bombay High Court is likely to decide the jurisdictional aspects and avoid parallel proceedings, during the next hearing scheduled for April 15, 2022.

It is worthwhile to note that SEBI regulates the capital markets sector and has twenty-six (26) debentures trustee units of several banks registered with it. It is responsible for registration, casting obligations, and authorizing inspections along with the authority to suspend, prohibit, debar, and take actions in cases of defaults by the registered players. Schedule III of SEBI (Debenture Trustees) Regulations, 1993 prescribes a Code of Conduct for debenture trustees in which Regulation 11 specifically prohibits a Debenture Trustee not to indulge in any unfair competition, which may harm the interests of other trustees or debenture holders or is likely to place such other debenture trustees in a disadvantageous position while competing for or executing any assignment, nor shall it wean away from the clients of another trustee on assurance of lower fees.

Of late, SEBI has observed several defaults in the debt market and had amended the Debenture Trustees Regulations, 1993 and SEBI (Issue and Listing of Debt Securities) Regulations, 2008, in order to strengthen the role of debenture trustees, conferring on them the power to evaluate independently and oversee the assets. The SEBI expects the debenture trustees to play a more proactive role in protecting the interests of companies and had prescribed standard procedures to be followed by debenture trustees.

The CCI’s cognizance of the matter could have significant ramifications on India’s USD 500 billion corporate debt market that has been altering costs and affecting the way the trustees operate. Furthermore, the highly marked-up prices call for the CCI’s in-depth price-cost investigation to check the profit margin of the dominant market actors. Section 4(2)(a)(ii) of the Competition Act, 2002 does not prohibit profit margins and only unfair prices have been prohibited. However, where it can be established that a price substantially exceeds the costs involved, it will be necessary to assess whether the difference is so large as to become ‘excessive’ and trigger a review of the ‘fairness’ of prices by the CCI.  As all parties are also among the leading players in the market for debt securities, real estate, and other investment funds, the CCI investigation can provide a deeper analysis into the structural and functional aspects of the relevant market.

It is interesting to note that the issues in the present case are similar to ones answered by CCI in the case of Shamsher Kataria vs Honda Seil & Anr., which, inter alia, involved charging substantially marked-up prices of spare parts by the OEMs (by an average of 100% – 5000%) in the secondary/ after-sales market of cars (that is, the market for spare parts, diagnostic tools, technical manuals, etc.).  In that case, the CCI viewed such escalated prices as disproportionate to the economic value of the products, and it was observed that OEMs had exploited the locked-in position of the consumer by charging higher marked-up prices in the secondary market. In its final order, the CCI had observed that in determining whether a price is unfair, it is necessary to consider the impact on the end-consumer and comprehensive market conditions. Furthermore, the CCI related the concept of the unfairness of a price to the notion that such price is unrelated to the ‘economic value’ of the product and was being charged because of the enterprise’s capacity to use its market power in the relevant market to affect its competitors/ consumers in its favour. With such observations, the CCI had inter alia opined that the substantial price margin earned on spare parts amounted to unfair pricing within the meaning of section 4(2)(a)(ii) of the Act, and apart from penalty, the CCI also imposed market corrective remedies on the automobile companies to open up the secondary spare-parts market and provide freedom of choice to the consumers.

Finally, certain key issues involved in the present case such as the dominance of enterprises in the debt market, high marked-up prices, strong involvement of association, etc. indicate that jurisdiction of CCI over competition aspects will exist, even as SEBI continues to regulate the sector.  CCI’s investigation is likely to have material implications, where it may ask the impugned enterprises to stop charging excessive prices, restrict price-fixing, impose remedies, penalties and order a cease and desist.

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