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A few days ago, a friend congratulated me on the fact that the Competition Commission of Pakistan (CCP, the “Commission”) was continuing my practice of inflicting heavy fines on violators of competition law. I winced when I heard that. It was certainly never my intention that CCP’s law enforcement should be anything other than fair and just, to remain within judicious limits and to take punitive measures only to the extent warranted by the letter and spirit of the law. My friend was, of course, referring to the action taken by CCP in the wake of the sugar inquiry commission report which had apparently urged the concerned Government agencies to proceed against the sugar industry within their respective spheres.

I decided to take a look at the CCP Order issued last August against the sugar manufacturers with respect to their alleged collusive conduct, and I have to say I found it somewhat disturbing. Not merely because the evenly split decision was resolved through a questionable casting vote by the Chairperson, but more importantly, because the Commission seems to have erred in enforcing the law, in both its procedural and substantive aspects.

As it happens, a full bench of the Commission, comprising all four serving Members, has issued a ‘magnum opus’ spread over 174 pages comprising a main decision (“the First Opinion”) of 134 pages signed by two members, a dissent (the “Second Opinion”) of 39 pages signed by the remaining two members, and a one-page casting vote order (entitled “Commission’s View”) signed by the Chairperson. And fines aggregating Rs 44 billion have been slapped on the Pakistan Sugar Mills Association (PSMA) and its member undertakings.

I have gone through all three components of the CCP Order, and I would like to observe in broad general terms as noted below, in paras 3 to 15 — in doing so, I am not only aware of my own limitations but also I am conscious of the fact that the CCP Order has been challenged in court and eventual adjudication by the superior judiciary will be binding on everyone.

While some of the constitutional and technical objections raised by PSMA and its member undertakings have been adequately addressed in the CCP judgement, there still remain several glaring procedural shortcomings which appear to have shattered the glass ceiling of basic protections the law provides to those proceeded against by law enforcement agencies.

The way I see it, these procedural flaws could potentially overturn the case made against PSMA and its constituents, whatever be the substantive merits, when these matters are agitated before the superior judiciary. Two fundamental procedural violations by the Commission, among others, stand out and are noted below.

In the first place, there appears little doubt that the law as well as relevant judicial pronouncements require the Commission to have plausible grounds (including prima facie evidence) before a formal enquiry is ordered under Section 37 of the Competition Act.

Formal cognizance of plausible grounds by the Commission is essential whether it proceeds “suo motu” or consequent upon a Government reference or the filing of a private complaint. However, in the instant case, any such grounds or reasoning was conspicuous by its absence.

Furthermore, it is self-evident that it is the inherent right of parties likely to be affected by an enquiry under Section 37 to be communicated the Commission’s Order in this respect; and it is necessary for this Order to unequivocally spell out in transparent fashion the alleged infractions being inquired into as well as the Commission’s rationale for embarking upon the enquiry (albeit, at this stage, the affected parties do not have any right to be heard, i.e., the dictum of “audi alteram partem” does not apply). The law envisages that an enquiry by the Commission cannot be whimsical; it is not a fishing expedition or a “shot in the dark”, and it must not only be fair, but also seen to be fair, above board, and transparent.

Measured against the standard enunciated in the preceding para, both the Commission’s initial enquiry and the subsequent reconstituted enquiry appear to be way off the mark. In particular, the rationale for reconstituting the enquiry (both its terms of reference and personnel) is somewhat of an enigma —- the Commission alludes to undisclosed “peculiar circumstances” and an “emergent crises like situation” without any clarification in this respect! Also, it is fairly obvious that the reconstituted enquiry was prompted by a reference received from the Government although inexplicably the Commission has tried to distance the reconstituted enquiry from this reference. Oddly, the reconstituted enquiry committee seems to have ignored whatever was gathered by the initial enquiry committee.

All this is strange and irregular. To crown these irregularities, it is impossible to overlook the fact that within 24 hours the Commission was able to process, study, and deliberate upon the rather extensive enquiry report and then take the required duly considered decisions to commence proceedings against PSMA and each of its members. While I greatly support expeditious action, to anyone who knows the system, the speed displayed is simply not credible and could only be possible if the Commission perfunctorily went through the motions without due application of mind.

The other notable procedurally flawed approach relates to the show cause notices issued by the Commission to PSMA and its constituent entities. Issuance of a show cause notice is a serious matter, not a casual communication.

However, I found nothing on record to show that the Commission engaged in rigorous and informed analysis, independent of the enquiry report, to satisfy itself and form an objective, carefully considered opinion on merits with respect to the specific case against each entity. There is every indication that the Commission seems to have adopted a wholesale and omnibus approach contrary to law and the time-honoured tenets of justice. The show-cause notice is a foundational document upon which the case proceeds further to its logical conclusion. Thus, instead of resting it upon assumptions and speculation, the show-cause notice must present the hard factual and legal stance of the Commission in definitive terms. Unfortunately, this has not been done.

In connection with show-cause notices, it is also noteworthy that shortly before the issuance of show-cause notices by the Commission to PSMA and its constituent members, the Lahore High Court had held that since the applicability of the Competition Act (which is a Federal Law) extends only to matters involving inter-provincial commerce, it was necessary for a show-cause notice to clearly show upfront that the commercial activities of the undertaking in question spilled over to other provinces. Thus, it would seem that most sugar producing units that buy raw material, produce and sell from their factory sites located in a particular province really fall outside the purview of the Commission.

Perhaps, the Commission should have studied the activities of the variety of intermediaries that buy sugar from sugar mills in different provinces and sell their stock of sugar through outlets and other means all over the country. The show cause notices issued to sugar producing enterprises are thus fairly weak and infirm, and the entire superstructure built on them is likely to crumble down.

Before turning to merits, I would like to mention a couple of significant technical shortcomings floating on the surface of the Commission’s Order. The first is that the Commission has clearly gone against the tide of its own jurisprudence.

In all recent cases where the Commission has proceeded against associations of undertakings for acting collusively (as per Section 4), the Commission has invariably penalised the association but not its constituents — even where the involvement of these entities in achieving the collusive goal was quite evident. Ordinarily, the decision of a trade association, taken in accordance with its established procedures, is deemed to be a decision taken by all member entities except in the case of those members that overtly distance themselves from the decision.

However, the actual practice in several jurisdictions, including Pakistan, has been not to penalise members and only do so if it could be shown that they “knowingly” and actively participated in the decision-making. Since, quite obviously, the involvement of PSMA’s member entities in the decisions of the association can at best be vaguely surmised or indirectly deduced, the Commission did not have any grounds to fine these entities.

In doing so, the Commission has arbitrarily departed from its well-known and established practice thereby violating the inherent constitutional right of sugar mill owners to expect fair, predictable and consistent treatment. Undoubtedly, the Commission has infringed the constitutional stipulation (Article 25) that requires all citizens be treated equally, and has thereby also deviated from the principle of imparting justice in accordance with law.

The second technical shortcoming relates to the established legal principles the Commission was duty bound to observe when imposing penalties but apparently did not. I am referring primarily to a law enforcement agency’s duty to withhold the imposition of a penalty if two or more interpretations of what happened include one that does not involve a penalty, and also to penalise only substantial infringements not merely technical or superficial contraventions.

Insofar as merits of this case are concerned, the entire superstructure of the Commission’s adverse decision seems to be rooted in two primary factors: firstly, that the sugar mills shared commercially sensitive information; and secondly, that the sugar mills conspired to achieve substantial exports with a view to reducing the supply of sugar in the domestic market, thereby raising its price for the benefit of the mills.

All this was done allegedly under the aegis and support of PSMA. Whether or not the sugar mills actually acted in this manner or had in any other way manipulated the market for their benefit cannot be adduced convincingly from the First Opinion (the part of the Order that prevailed). The evidence referenced and the ratio decidendi appears to be insufficient as will become clear below.

As regards sharing of information, sensitive or not, it is fundamentally important to appreciate the nature of the sugar industry. Not only are various aspects of it closely supervised and regulated (including, importantly, the support price of sugar cane, the start of the crushing season, the import/export limitations etc) but also it is a mature industry with a well-established and known “modus operandi”.

The capacity of each mill and its age, the sugarcane harvest and quality of cane procured locally (as is almost invariably the case), when the mill began to crush cane or is expected to commence crushing, and a variety of other relevant factors are very well known — thus even before the start of the crushing season, the quantity and cost of production of each of the 84 mills (as well as in aggregate for the industry as a whole) can be estimated fairly accurately by the trade itself, and is also estimated by several credible domestic and foreign forecasting agencies.

The differences in such estimates, if any, both as to the current situation and with respect to the immediate future are really not significant. Further, a lot of important and reasonably updated statistical data is available in the public domain, even if one ignores the costing and production data that is available via cost audits mandated by the SECP (Securities and Exchange Commission of Pakistan) from time to time. Thus, like in any other mature, well documented industry, there is hardly any commercially sensitive information since all sugar mills are effectively an open book; and the competitive risk posed by each mill as a consequence of uncertainty with regard to its operations is quite negligible.

(To be continued)

(The writer is a former chairman of Competition Commission of Pakistan. The view expressed in this article are not necessarily those of the newspaper)

Copyright Business Recorder, 2022

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