Does competition law affect startups?

The Prime Minister Narendra Modi government has recognised and appreciated the entrepreneurial spirit of young India and described startups as “effective instruments for India’s transformation”. Not only the government, but the startup movement has been equally stimulated by the venture capital and private equity investors.

These developments essentially reflect the confidence entrusted in young entrepreneurial India by investors as well as the government, which needs to be catered to with highest standards of business ethics and responsibility.

The UK’s Competition and Market Authority (CMA), which is similar to the Competition Commission of India (CCI), has recently introduced a guide for startups that could generally apply well to Indian startups. The CMA report indicated low levels of awareness, and displayed misconception about the conducts that are prohibited under competition law. Interestingly, for example, many UK startups reported that sharing information with competitors is legal, which is usually not the case. The UK’s recent guidance can serve Indian companies well.

Competition law: Relevance for startups

The objective of the Indian competition law is to promote fair competition and consumer welfare, by ensuring ethical business practices. The Competition Act, 2002 (as amended) (Competition Act) seeks to achieve this objective by (i)prohibiting anti-competitive horizontal and vertical agreements, including cartels; (ii) prohibiting abuse of a dominant position; and (iii) regulating mergers and acquisitions, referred to as “combinations” under the Competition Act.

Are startups required to know, and ensure compliance with the Competition Act? Absolutely. And why? Because legal scrutiny under the Competition Act involves significant exposure to reputational risks. Moreover, the CCI has been empowered to impose significant penalties on the company and its officials for breaches of the Competition Act.

What does a startup need to know?

Startups must be aware of their rights and possible antitrust risks that emanate from the Competition Act, to ensure compliance. The following is a general overview of the key issues that a start-up enterprise may consider for ensuring compliance with Competition Act:

Imposition of unilateral, unfair and discriminatory terms and conditions by a dominant entity is generally considered as anti-competitive. Do not assume that being a startup, you will not be considered as a dominant entity for a considerable time period. Innovation and technology driven startups may gain significant market power in a short time. For example, the popular messaging application WhatsApp gained a user base of 56% mobile internet users in India within a period of 3-4 years and became a market leader. Hence, technology-driven startups need to ensure that legal checks and balances are put in place while drafting contracts, right from the beginning.

As a new entrant in the market, you may be subject to predatory pricing from dominant competitors. For example, in 2011, the CCI ordered that the zero-pricing policy adopted by the National Stock Exchange of India in currency derivate segment is an anti-competitive predatory pricing that was adopted to drive out a new player i.e., MCX Stock Exchange Limited. If you are faced with such conduct, then do visit your competition law counsel to discuss the possible actions.

In a similar vein, you need to be careful about possible cartelisation by your well established rivals to lower the prices, with a motive to drive you out of the market. 

An eCommerce startup may be directed by a manufacturer not to sell its products below a particular dictated price. Such conduct is referred to as “resale price maintenance” under Section 3(4) the Competition Act and considered anti-competitive. 

Innovation and technology driven startups may register their patents, trademarks and copyrights in India. The Competition Act allows an enterprise to impose reasonable conditions in an agreement to protect its intellectual property rights (IPRs). Generally, such agreements do not fall within the purview of anti-competitive agreements, provided that the IPRs are registered in India.

As a dynamic and competitive startup, you may be offered by existing market players to enter into an agreement or participate in an already existing cartel to: (i) fix prices; (ii) restrict technological advancement; (iii) allocate markets or customers; or (iv) limit production or supply. Such information is considered to be commercially sensitive. Any such agreement that impedes fair competition in the market, is considered as anti-competitive.

An anti-competitive agreement need not be formalised or reduced to writing or intended to be legally enforceable. Agreement includes any understanding, arrangement or concerted action.

(Arshad (Paku) Khan is Executive Director and Gaurav Bansal is Associate at Khaitan & Co)