Interview: Arun Jaitley

INTERVIEW WITH ARUN JAITLEY
"Competition Bill Is Benign"

It's a Saturday evening but there's little respite for minister of law, justice, and company affairs Arun Jaitley. He's had 12-hour days, clearing crucial economic Bills, ranging from the Competition Bill, which seeks to regulate monopolies, to the Companies (Amendment) Bill relating to insolvency. In this interview with BT's Seetha, Jaitley talks about some of these laws. Excerpts:

Arun Jaitley

Q. The past month has seen some important economic legislation being cleared by the government. Could you take us through some of them?

A. The Competition Bill, which is necessary in a free market economy, is perhaps the most important corporate legislation to be tabled in Parliament.

Then there's the Companies (Amendment) Bill relating to insolvency. Our insolvency law is located in three different places. The high courts for commercial insolvency, the Board for Industrial and Financial Reconstruction (BIFR) for commercial sickness, and the Company Law Board. Our experience of these three authorities has not been very encouraging. You could be running in the chakravyuh (maze) of these three authorities for 10 years and nothing will happen. The Bill proposes a single National Company Law Tribunal (NCLT). We've also tightened the law relating to bounced cheques.

Are you are also working on a law relating to corporatisation of cooperatives?

This is based on a suggestion by Dr V. Kurien and Amrita Patel (of the National Dairy Development Board). These cooperatives, particularly the milk cooperatives, function within a state but have objectives that are nation-wide. But they have to go to the state governments for permissions relating to day-to-day management. They need more autonomy. They now compete with multinationals. They also need more corporate discipline.

Can we have a concept of a hybrid company where one man-the producer-has only one share, in the nature of a cooperative? There is no system of proxy, no one man can take control. If there one lakh members of the cooperative, there are one lakh shareholders who vote. So it is a de facto cooperative but with the de jure mask of a company. This enables them to be subjected to financial discipline, access institutional finance, prepare accounts in accordance with the tests of professionalism.

The Competition Bill has been extensively debated. Yet you're now saying that it will not be rushed.

The Competition Bill is a textbook illustration of how such a legislation should be formulated. An expert group held public hearings and submitted a report. We made the report public and invited comments. Then we prepared a draft legislation, made that public and invited comments. Then various sectoral interests met us after which the final Bill was prepared. It was circulated to various ministries, and, finally, the Cabinet approved it.

When I said I am not in a hurry I meant that we don't want to pass it in the monsoon session. It has gone to a standing committee, which will again hold public hearings. Because this is one bill on which no one can claim that his word is the last one.

You have also said that the law will be implemented in a phased manner.

The first part of the Bill, the educational functions of the Competition Commission, will be implemented first. Britain, for example, adopted the Bill in 1998 but the Commission started functioning in 2000. For two years, they prepared the market for it. And then you have the other three chapters-relating to anti-competitive practices, abuse of dominance, and amalgamations and mergers (A&M)-coming into force periodically. It has been suggested that the A&M provisions can come into force a little later as that's not such a serious problem in the Indian market today.

There is a view that the Indian economy doesn't need a competition law at this point of time.

I strongly disagree. Is the argument that we don't need the competition law and that we need the Monopolies and Restrictive Trade Practices (MRTP) law? The MRTP Act was based on the presumption that size is evil.

The competition law is based on different principles-that the government has stepped out, the market determines competition and is going to protect consumer interest. At a macro level, a competition law is a consumer protection law, based on the principle that competition is the best protector of the consumer interest. See what competition has done to the telecom industry. You have more efficient service, you have phones on demand, and the tariffs are coming down.

Now, one chapter of the Bill deals with anti-competitive practices like cartelisation, collusive bidding, and sharing of territories. In a free market, the consumer must be protected from such aberrations. We have recently seen such an aberration in the cement industry.

Another part of the Bill relates to dominance. This law moves on the presumption that size is not bad but if size is abused to the extent that you can operate independently of the market forces, that is not permissible.

There are objections to how the law determines dominance.

It was suggested that dominance should be determined by percentage of market share. That is not correct. You may actually control 70 per cent of the market and still not be a dominant player because the tariff barriers may be so low that the minute you abuse dominance, foreign players will come in. At the same time, you may control only 30 per cent of the market but you can still be dominant; the rest is scattered among smaller players and there is no player outside the country. So dominance is determined by the size of the market, number of players, the tariff barriers. There are 20 illustrative factors that determine abuse of dominance.

The only debate is on mergers and acquisitions (M&As). There you must have an asset criteria. Asset size or turnover size is the threshold at which to determine whether or not a company is examined on the touchstone of competition on M&A. If two players merge or amalgamate, will it have an adverse reaction on competition? If it does, then such a merger should not be allowed. Most countries have a mandatory pre-merger clearance required by a competition authority. In fact a criticism of this Bill could be that it is too benign.

There is some vagueness about sectoral regulators vis a vis the Competition Commission. Whose word will prevail in case of competition-related issues?

This is one area of debate. I have tried to study world models. Supposing the telecom or the insurance regulator is faced with a competition-related question, will it quarrel with the Competition Commission? The answer is no. According to the Bill, they will refer it to the Commission, take its opinion, but the ultimate decision will be of the parent regulator. If necessary this will be clarified.

The Companies (Amendment) Bill doesn't seem to be much of an improvement over the Sick Industrial Companies Act (Sica).

It is, in many ways. One, there will be one forum. Two, companies went to the BIFR when their net worth became negative. Now they will come before the NCLT when 50 per cent of their net worth is eroded. Because when you are moving towards sickness someone must start treating you, because the sickness can be cured. Three, the new law sets strict time limits. Procedures relating to revival and liquidation by the BIFR and the official liquidators cannot go on till the cows come home. There are also powers to pass interim orders. Four, companies were actually using Sica as an iron curtain against creditors. This will not be possible (now).

Workmen don't get paid during the sickness period. So we are levying a cess and giving the Tribunal the power to give interim payment to workmen. The legislation has fixed the cess at 0.005 per cent-Rs 5 for every Rs 1 lakh turnover, which is around Rs 75 crore a year. This is sufficient to give interim help to workers and post security guards to prevent asset-stripping.

Also, the liquidation process will now be done by a panel of private liquidators instead of the lethargic official liquidators. So the entire approach is far more positive.

But you have continued with mandatory reference to the NCLT. This provision was responsible for the BIFR being overburdened with cases.

Unless you have mandatory reference, how do you take care of sickness? If people have an option, they would keep sitting outside the ambit of the authority, keep siphoning off assets, keep losing money and there is no process of recreation or restoring the health of the company.

Why not let lenders and creditors work it out among themselves?

If they are able to sort it out before the Tribunal all the more better.

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