The Competition Commission of India on January 14, 2020, has issued directions under Section 26(1) of the Competition Act, 2002 to the Director General to cause an investigation against alleged anti-competitive practices by Asian Paints Limited.

Brief Facts:

An information under Section 19(1) (a) of the Competition Act, 2002 (“Act”) was filed by JSW Paints Private Limited (“Informant” or “JSW Paints”) alleging contravention of provisions of Section 4 and Section 3(4) of the Act by Asian Paints Limited (“Asian Paints”).

The Informant is a part of JSW group of companies. JSW paints was incorporated in the year 2016 and launched its decorative paints in May 2019.

Asian Paints is primarily engaged in the manufacture and sale of decorative and industrial paints.

The Informant stated that it approached several dealers in Bengaluru, Hubli, Kochi and Kozhikode, Hyderabad and Chennai and based on their positive response organized a Retailers Launch Meet, where it provided them with an overview of their strategy and how they would work together to promote the brand, place orders, receive stocks etc.

JSW Paints launched its decorative paints in May, 2019, in Bengaluru and Hubli. Subsequently, JSW Paints launched its products in Kerala (Kochi and Kozhikode) in June, 2019, Telangana (Hyderabad), and Tamil Nadu (Chennai) in August, 2019. Immediately after its launch of decorative paints, Asian Paints began pressurizing dealers who had agreed to stock and display decorative paints manufactured by them. Asian Paints targeted dealers/distributors/retailers partnering with JSW Paints directing them to stop dealing with JSW Paints, stopping supplies to these dealers, dropping service levels by delaying supplies and deliveries, asked dealers to remove display of JSW Paints products from their retail shelves and dealer signboards, threatened dealers by not allowing discretionary discounts, not inviting them for trips and loyalty schemes, etc.

Issues:

The Informant has relied on several instances where dealers were directed by Asian Paints to remove the signage and other promotional material supplied by the Informant. Many dealers discontinued the purchase of JSW Paint’s products for the fear of losing dealership of Asian paints.

Asian Paints allegedly also pressurised enterprises that provided infrastructure facilities like warehouses to JSW Paints to not keep products of JSW Paints. The Informant stated that the enterprise that provided warehouse facility rescinded the contract with JSW Paints on account of Asian Paints requiring it to choose between Asian Paints and JSW Paints. The sheer volume of business given by Asian Paints and the potential loss in revenue resulted in the enterprise succumbing to the pressure of Asian Paints. The rescission of contract with JSW Paints led to delay in the launch of JSW’s products in Hubli, which resulted in loss of revenue, reputation and credibility.

After the launch of products in Chennai, at least 12 dealers did not place any orders with JSW Paints fearing reprisal from Asian Paints. Dealers were allegedly prevented from undertaking any business with JSW Paints.

In that state of Telengana, several dealers were appointed by JSW Paints. Due to harassment by Asian Paints, the dealers were compelled to remove danglers, boards and products relating to JSW Paints from conspicuous locations in their premises.

Based on instances highlighted in the states of Karnataka, Telengana and Tamil Nadu, the Informant alleged that the conduct of Asian Paints is a case of enforcing an exclusive supply agreement in terms of explanation (b) to Section 3(4) of the Act and refusal to deal as provided in explanation (d) to Section 3(4) of the Act. The said conduct has caused appreciable adverse effect on competition by creating barriers to entry, driving existing competitors out of market and foreclosure of competition by hindering entry of JSW Paints into the market. All the instances of abusive conduct tantamount to perpetuating anti-competitive agreements as Asian Paints enjoys a dominant position in the relevant market. Such agreements cause appreciable adverse effect on competition and are in contravention of provisions of Section 3(4) read with Section 3(1) of the Act.

Analysis by the Commission:

The Commission analyzed the allegations for abuse of dominant position by Asian Paints, in terms of the provisions of Section 4 of the Act and imposition of restraints in the nature of exclusive supply agreement and refusal to deal under the provisions of Section 3(4) of the Act.

Delineation of relevant market:

Before delineating the relevant market, the Commission analyzed the paints industry. Paints industry can be segmented into (a) decorative paints; and (b) industrial paints. Decorative paints include high end acrylic exterior and interior emulsions, interior and exterior paints, low end distemper, wall putty, wood coatings, primers, thinners, etc. These are either water based or solvent (oil) based and are generally used for painting of domestic, office and other buildings. Industrial paints comprise general industrial, automotive, protective powder coatings, coil coatings, etc. constitute 26% of the market sales.

The CCI placed reliance on Industry Reports such as SBI Capital Markets Ltd. Report on the Paints sector dated 18.07.2019 (“SBI Caps Report”), CARE Ratings Report on Paints industry dated 27.10.2017 (“CARE Ratings Report”), etc., as also Annual Reports of competitors such as Asian Paints, Akzo Nobel India Ltd. (“Akzo Nobel”), Shalimar Paints Ltd. (“Shalimar Paints”), etc and observed that decorative paints and industrial paints constitute separate segments as there is a clear distinction between the two segments based on basic characteristics, intended use and price. Further, players in unorganised sector do not appear to pose competitive constraint upon players in the organised sector due to various reasons such as brand image, difference in pricing, quality, etc. Accordingly, relevant product market for the purpose of assessment in the present case would be defined as “market for manufacture and sale of decorative paints by the organised sector”.

The Commission was of the view that conditions of competition in the paint sector are homogeneous across India. Accordingly, the relevant geographic market could be defined as “whole of India”. The Commission, for the purpose of carrying out prima-facie analysis under the provisions of the Act, delineated the relevant market as the “market for manufacture and sale of decorative paints by the organised sector in India”.

Assessment of dominance of Asian Paints:

The Commission observed that there are top 4 operators in this industry namely, Asian Paints, Berger Paints, Kansai Nerolac, Akzo Nobel, who have occupied around 80 % of the relevant market, with Asian Paints maintaining its highest market share consistently over the years. The Commission observed that extensive dealership networks are required in decorative paints market to create a strong presence in rural and urban areas. With its large number of dealers, Asian Paints appears to have penetrated deeply in the relevant market and appears to enjoy competitive advantage over its competitors. Given that dealers are small traders with few resources, they are dependent upon Asian Paints. Further, these dealers do not have countervailing buying power.

Assessment of abuse of dominant position-

The Commission observed that denial of market access is a severe form of abuse of dominant position.

“In the present case, it has been brought out that without access to the dealers, there is no scope for a new or existing entity to survive in the market as the dealers are interface of business with customers and help products of manufacturers reach them. In the facts of the present case, the Commission notes that the alleged conduct of Asian Paints of threatening and pressurising dealers as highlighted by JSW Paints prima-facie brings out that Asian Paints has attempted to prevent JSW Paints in establishing a presence in the relevant market. This conduct prima-facie appears to be tantamount to abuse of dominant position by Asian Paints, wherein Asian Paints has denied access to necessary distribution channels in the relevant market and has limited the availability of alternate products in the relevant market for consumers thereby reducing the competition in the market in contravention of provisions of Section 4(2)(c) of the Act. As a result of the conduct of Asian Paints, the final consumers may also be deprived of choice to purchase different kinds of paints at competitive prices.

Based on material available on record, the Commission is of the view that evidence provided by JSW Paints is prima-facie sufficient to indicate that Asian Paints has denied access to the distribution channels in the relevant market to JSW Paints by threatening and coercing such dealers through various means. In view of foregoing, Asian Paints, prima-facie, appears to be in contravention of provisions of Section 4(2)(c) of the Act.”

Assessment of restraints under Section 3(4) of the Act:

The Commission observed that the alleged restrictions on dealers not to deal with JSW Paints or any other company manufacturing paints can create barriers for suppliers of paints, who compete with these suppliers besides not allowing the benefit of better prices to the consumers. A stipulation that appears to create barriers to entry and restricts choice of consumers is likely to result in appreciable adverse effect on competition resulting in higher prices for consumers.

“Thus, the Commission is prima-facie satisfied that imposition of said restraints amounts to contravention of Section 3(1) of the Act read with Sections 3(4) (b) and 3(4) (d) of the Act by Asian Paints which is prima-facie found to enjoy market power in the market.”

Decision:

The Commission was of the opinion that there exists a prima facie case which requires an investigation by the DG, to determine whether the same has resulted in contravention of the provisions of Sections 4(1) of the Act and 3(1) read with Section 3(4) thereof. Accordingly, the Commission directed the Director General to cause an investigation to be made into the matter under the provisions of Section 26(1) of the Act. 

This update has been contributed by R. Sudhinder (Senior Partner) and Prerana Amitabh (Managing Associate).