SMEs and Competition Law: Worth Exploring the Linkage

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A version of this article has been published in World SME News (January Issue, 2018)

By Nidhi Wadhwa, Economist 

It is a well-recognized fact that Small and Medium Enterprises (SMEs) play a vital role in the development of any economy with their significant contribution to inter alia economic growth, employment, and exports. These firms, however, face unique constraints to their development owing to their size. Their ability to fulfill their role in achieving various social and economic objectives is greatly influenced by the regulatory and policy environment in which they operate. Governments worldwide, therefore, adopt specific policy measures to support SMEs and address barriers to their growth.  Recognizing their strategic importance, India since independence has also adopted various regulations and policy measures specifically targeted towards promotion of SMEs such as product reservation, subsidized bank credit, tax concessions, technical and marketing support, and also set up various agencies and institutions for the implementation and monitoring of these policies. Although some protectionist policies towards SMEs continue, and maybe rightly so, with liberalization, the focus has shifted from protection to promotion of their competitiveness; particularly towards enabling them to overcome key challenges to their growth and performance.

One policy that if effectively enforced and complied with could have an important role to play in the development of SMEs is competition policy. Competition policy comprises various government measures, statutes, and regulations for facilitating competitive outcomes in the market with the objective of promoting efficiency and consumer welfare. Competition law, a subset of competition policy is a regulatory instrument to prohibit practices against the competition. Adequate and effective competition policy and law can promote the growth of SMEs by providing them an equal and fair chance to compete with better-established competitors.

This article attempts to discuss the linkage between competition law and growth of SMEs, an area which probably needs to be explored more in India in order for SMEs to realize their full potential.

Competition law in India

The genesis of competition policy and law in India could be traced to late 1990s when it was felt that the MRTP Act was deficient in dealing with competition issues in a liberalized and globalized economic framework. After taking into considerations the recommendations of various expert committees, the government enacted India’s competition law – the Competition Act in 2002, which provided for the establishment of the Competition Commission of India (CCI), the regulatory authority for promoting competition by preventing practices against competition and providing remedies to address malpractices affecting competition.  Proper constitution and functioning of the CCI commenced only from 2009 onwards after certain amendments were made to the Act. The CCI is empowered to prevent anti-competitive behavior by prohibiting agreements against competition and abusive market conduct by dominant enterprises, and regulating proposed mergers/acquisitions likely to have an adverse impact on competition.

The basic idea behind competition law is to protect the interests of consumers by preventing practices that adversely affect competition in the market.  The Competition Act states its objective is “to prevent practices having an adverse effect on competition, to promote and sustain competition in markets, to protect the interest of consumers and to ensure freedom of trade carried on by other participants in markets in India”. The focus is, therefore, to ensure a level playing field to all enterprises irrespective of size so that all businesses have an equal opportunity to participate in the economy.

How can SMEs benefit from competition law?

Presence of proper infrastructure to protect competition is significant for the survival and growth of SMEs in a free market. This is because SMEs could be vulnerable to competition law abuses particularly by large dominant enterprises that may resort to strategies to eliminate smaller competitors from the market in order to further strengthen their position. SMEs could be harmed by anti-competitive conduct in various ways be it in their capacity as competitors, buyers, or even as suppliers. For instance, cartelization[1] between large producers of raw materials could affect the prices and/or supplies of inputs required by SMEs. Large incumbent firms with enough resources at their disposal may charge prices below cost (predatory pricing) with an intention to restrict the ability of small competitors to compete.

There are various examples from international jurisdictions where SMEs have been found to be at the receiving end of anti-competitive conduct. European Commission’s 2009 investigation in the EU food retail sector found evidence of large supermarket chains abusing their strong bargaining position vis-à-vis small suppliers by engaging in anti-competitive practices. The effect was a drastic reduction in payments to suppliers forcing many to shut down or survive on abysmal profit margins. In a proposed acquisition involving shopping centers in South Africa[2], the competition enforcement agency granted an approval subject to removal of an exclusivity clause from the lease agreement involving the concerned parties as it could have excluded small retailers (line stores) by denying them access to the affected shopping malls. Given the potential risk to small business the proposed transaction was concluded to have raised public interest concerns and was thus given a conditional approval.

Studies/surveys done in various countries have found SMEs being affected by the absence of effective competitive markets or prevalent anti-competitive practices. For instance, in a worldwide survey conducted by Shiffer and Weder in 2001[3], over 20% of small and medium-sized firms identified anti-competitive practices as the major obstacle in their development. In Singapore, a survey of SMEs conducted by the Competition Commission found only 46% of firms considered consumers were protected from unfair business practices and only 39% of firms believed that all businesses compete on a level playing field.[4] Similarly in India, in a 2010 survey by Federation of Indian Micro and Small & Medium Enterprises brought to fore experiences of SMEs with unfair/anti-competitive practices faced during their business conduct.[5]

Competition law provides for redressal against anti-competitive practices. The provisions in the Act allow any individual, enterprise or association to approach the CCI for countering abusive practices. SMEs can approach the CCI to request an inquiry against firms indulging in potentially anti-competitive practices, which the CCI is obligated to investigate (and penalize if the violation of the law is found). In fact, SMEs (any aggrieved party) can also claim compensation for losses incurred as a result of practices that are found to be in contravention of competition law.  An effective competition law, therefore, is critical to prevent large businesses from creating artificial barriers to entry or limiting market access thereby enabling SMEs to enter and participate freely in the market.

 SMEs can also fall foul of the competition law

While competition law benefits SMEs by safeguarding their economic opportunities, it is imperative to note that SMEs are also subject to the competition law provisions. In other words, the Competition Act of India is equally applicable to SMEs as much as it applies to any other business. Therefore, SMEs engaging in practices against competition would also be guilty of violating the competition law. Competition enforcement authorities of various countries have found SMEs engaging in anti-competitive practices. For instance, 21 sausage manufacturers – some of them SMEs were found to be colluding on price increases and other strategies (cartelization) by the German Federal Cartel Office in 2014. The CCI has also found SMEs engaging in bid-rigging, which is prohibited under the Competition Act.[6]

It is argued by some authors that competition policies and the law should give special attention to SMEs considering the specific challenges they face in competing with larger rivals because of small size. In fact, competition regulations of some countries allow for exemptions for SMEs. For instance, small-scale enterprises are exempt from the provisions of Indonesia’s competition law. In South Africa, one of the explicit objectives of the Competition Act is to ensure SMEs get an equal opportunity to participate in the economy. Cartels between SMEs that improve their competitiveness and do not significantly affect competition are exempt from the provisions of the German law. In India however; SMEs are not accorded any special treatment under the Competition Act. This is because it was felt that granting of exemptions would be against the spirit of competition and tends to dilute the law.

The Competition Act of India focuses on the effect of business practices of the enterprises on competition and not on their size. SMEs can thus also be penalized if found violating the law. However, given that SMEs individually would lack the market power to adversely affect competition, there is a less likelihood of SMEs inadvertently violating the law. Further, it is notable that combinations involving SMEs may not require approval from the CCI as they are likely to fall below the minimum turnover thresholds prescribed for merger filings. Moreover, the Act contains provisions that allow the Government in certain circumstances to grant exemptions from the provisions in view of public interest. Although SMEs do not enjoy any protection from competition law in India, the Act empowers them to thrive in the market. Also, empirical evidence does not support a protectionist competition policy increasing SME growth.

Conclusion

The benefits of competition law in promoting SMEs can only be realized if the law is effectively enforced. For this, SMEs need to be aware of the competition law provisions – their rights as well as duties. This will enable them to counter anti-competitive practices and ensure they comply with the law. Though the competition law has been in effect in India for about a decade, the knowledge about it is still limited especially with small businesses. Hence there is a need for advocacy and training programs to spread awareness on competition law amongst SMEs to make them aware of the mechanism they have to counter anti-competitive behavior and also reduce their risk of contravening the law. Further, there is a need to examine if the design of competition law is appropriate to address the issues faced by SMEs. This is not to call for exemptions but to assess whether the provisions of the law are sufficient to protect SMEs from various unfair practices encountered in their business.

Given the importance of SMEs to our economy, it is imperative to take create an environment conducive for them to compete. In this regard, recognizing the role of competition policy in unlocking the potential of competitive SMEs is crucial.  This is especially relevant in light of the role SMEs are supposed to play in achieving the UN’s Sustainable Development Goals (SDGs). Healthy competition in national and international markets will be important for SDGs as it will enable the private sector to prepare products at lower prices affordable to many people. The importance of competition law in maintaining healthy competition cannot be ignored. However, it needs to be kept in mind that competition policy is not a panacea for the problems of SMEs. Competition policy supported with complementary SME policies and strong institutions can aide the development of SMEs.

References:

[1] Cartels are agreements between firms operating at the same level of the supply chain with an objective to restrict competition (could be in the form of agreements to fix prices, quantity, allocate markets, etc.)
[2] Synergy Income Fund Ltd v Certain letting enterprises owned by SA Corporate Real Estate Fund, May 2012 (available at http://www.saflii.org/za/cases/ZACT/2012/39.html)
[3] M. Schiffer and B. Weder, Firm size and the business environment: worldwide survey results, Discussion paper no. 43, International Finance Corporation, 2001
[4] The Competition Commission of Singapore, Perception and Awareness Survey: Chief Executive Presentation, Nov 2009
[5] Federation of Indian Micro and Small & Medium Enterprises, Handbook on Competition Policies and MSMEs in India, 2010
[6] For instance, see Suo-moto case against LPG cylinder manufacturers, Case no. 03/2011 and B.P. Khare v. M/s Orissa Concrete and Allied Industries Ltd. & Ors. Case no. 05/2011