Competition Law in Sri Lanka

Competition Law in Sri Lanka

Competition Law, Pubudini Wickramaratne Rupesinghe LL.B. (Hons) (London), Attorney-at-Law

1. Introduction

The term ‘competition’ in its ordinary meaning denotes an event or contest in which people strive for supremacy. In the corporate world however, it denotes the process whereby firms strive against each other to secure custom for their products. It further denotes a situation, which ensures that markets always remain open to potential new entrants and that firms operate under the pressure of competition1. Competition law often referred to, as Anti-trust law is that branch of the law, which regulates the behavior of firms in markets to ensure that they do not operate in a manner that is anti-competitive2.

The subject of competition was much talked about during the past two decades, especially in the light of the significant economic changes that took place around the world. The number of countries having national competition legislation has increased from 40 to 80 during the last two decades 3, with Sri Lanka joining in 1987. This paper seeks to analyze the competition law in Sri Lanka focusing on the role of competition law and policy, the areas covered by the competition law and the Consumer Protection Authority Bill”. The conclusion lists out a set of recommendations that could be made use of in strengthening the competition law regime of Sri Lanka-

2. Competition Policy in Sri Lanka Competition policy is generally defined in economic literature to include government policies that directly affect the structure and behavior of an industry. The role of an effective competition policy is to enhance competition in local and national markets, to maximize economic efficiency and at the same time to ensure consumer welfare. A comprehensive competition policy should not merely deal with trade practices, but also address all government policies that affect competition. These include, inter alia, trade, investment and labour policies.

Within the general objectives of competition policy set out above, the role it plays in different countries varies depending on factors such as the needs of the country and its economic policies. Korea for instance, revised its competition law to suit the movement towards economic globalization. Similarly, Indonesia adopted the philosophy of gradualism and designed its competition policy in such a way to slowly open up its markets. Mexico on the other hand, designed its competition policy to complement trade liberalization policies, privatization of state enterprises and regulatory reform policies3.

Sri Lanka saw its competition policy as being essentially integrated with economic liberalization and the privatization programme. The liberalization policy, which was adopted in 1977, aimed at promoting sustainable economic growth in a market friendly environment where the private sector was perceived as the engine of growth. In 1987, privatization was announced as a government policy with a view to improve economic efficiency, profitability and accountability as well as to generate revenue and reduce the financial burden of state owned enterprises (SOEs)6. However, the conflicting objectives inherent in the government’s privatization approach and competition policy have resulted in problems from the very outset.

For instance, although privatization of large SOEs were aimed at maximizing revenue, it was done at the cost of creating monopolies as in the case of in the flour, liquefied petroleum gas and lubricant markets. Moreover, policy makers have failed to create mechanisms by which greater competition could be encouraged in markets where there are high barriers to entry. A similar situation exists with regard to industrial policy, which assigns a greater role to the private sector to achieve rapid development within an export oriented industrial strategy. The government has adopted an incentive based approach, where the export sector is given a range of incentives such as tax holidays and duty free imports of raw material and machinery, and has thereby created an uneven playing field between the export oriented industries and those who cater for the domestic market7.

As such, it is evident that throughout, competition policy has been formulated on an ad hoc basis catering to specific situations as and when they arise. Although over two decades have passed since economic liberalization, the formulation of an overall comprehensive competition policy that complements privatization, trade and industrial policies has been accorded little priority. This is especially so with regard to the present government and the previous regime of the People’s Alliance which promoted competition policy as one of the key policies for the 21st century. Despite the importance they placed on competition policy issues they have failed to formulate a comprehensive competition policy.

3. The Role of Competition Law in Sri Lanka

Competition law consists of an enforceable legal code applicable to commercial transactions involving both public and private enterprises and prohibits commercial conduct that is anti-competitive in nature or that would conflict with specific national goals. In most countries competition law deals with restrictive business practices, abuse of dominant position, mergers and acquisitions etc. and is often enforced through competition authorities or agencies, having investigative, prosecutorial and judicial or quasi-judicial powers.

In Sri Lanka, competition law was introduced as late as in 1987, with the enactment of the Fair Trading Commission Act (FTCA)8. The wide scope of the FTCA covers the power to control monopolies, mergers and anti-competitive practices and the formulation and implementation of a national price policy9. The implementation of the Act is entrusted

to the Fair Trading Commission (FTC), which is a quasi-judicial body that comes under the Ministry of Commerce and Consumer Affairs.

Although economic liberalization was effected in 1977, the FTC was established only in 1987. The delay in introducing a regulatory framework could be attributed to the lack of central and long-term planning among policy makers to achieve the goals of a market based economy. Even after its introduction, competition law received little attention from the governments in power. The FTC was dormant from its inception and has not been able to make a visible impact on the behavior of firms in the market or attract legitimacy in the eyes of players in the market or of consumers.

The law has sometimes been found ambiguous and weak in terms of penalties for contravention. Exclusion of several areas such as banking, conduct of professionals etc. from the scope of the competition law has further complicated matters. The FTC’s position vis a vis institutions such as the Public Enterprise Reform Commission (PERC) and the Board of Investment (BOI) is not clear and questions have arisen as to whether monopolies granted to firms by these institutions come within the scope of the FTC. Further complications have arisen due to the lack of demarcation of boundaries between the FTC and sector specific regulatory authorities such as the Telecom Regulatory Commission and the National Transport Commission. As such, whether competition law of Sri Lanka has achieved its goal is a matter for debate.

4. Powers of the Fair Trading Commission

The FTCA entrusts the FTC with the powers to investigate into and decide matters relating to monopoly situations, merger situations and the prevalence of anti-competitive practices that are contrary to the public interest10. Its price control powers include the power to fix prices of specified articles11. In addition, price revision powers are given to the FTC by the Industrial Promotions Act (IPA)12.

In the exercise of its powers under Section 11 with regard to monopolies, mergers and anti-competitive practices, the FTC is required to give special regard to matters such as, inter alia, the protection of the interests of consumers, the provision of necessary incentives to producers, the necessity for ensuring reasonable rates of return on capital employed in the production of articles, the allocation of resources among different sectors of the economy and the efficient operation of public corporations in the production of articles and the control of inflation13.

The FTC is given wide powers of inquiry and investigation. It can investigate into any matter specified in Section 11 either on a complaint made to it or on its own motion, although the latter option has not been utilized by the FTC for several years. Further powers of inquiry and powers to require maintenance and production of records and to call for information are entrusted to it for the discharge of its functions14. It is also vested with the powers of a District Court to compel the production of documents, and to administer any oath or affirmation to a witness.

Although wide investigative powers are given to the FTC, it has failed to actively perform its functions and exercise its powers. This dormancy on the part of the FTC could be attributed to the lack of staff and financial resources. Statistics show that FTC has been equipped with its full cadre of 27 persons only in its year of inception, with vacant positions gradually increasing and only about 13 positions being filled over the past four years15. The high number of vacancies is a result of the low priority the FTC is given by the Ministry and the difficulties in recruitment due to the poor salaries and other benefits paid to the FTC staff compared to that of the private sector. The lack of adequate financial resources has hampered the investigations of the FTC, as it is one of the key factors considered before a decision is made to investigate into a complaint.

5. Areas Covered by the Competition Law

5.1 Monopolies

Section 12 of the FTCA deals with monopolies and identifies five instances where a monopoly situation could exist, namely, in relation to the supply of goods, supply of services, export of goods in specified circumstances, export of goods generally and in relation to the export of goods to a particular market.

A monopoly situation exists in relation to the supply of any goods or services in Sri Lanka, if the prescribed percentage of goods or services of a description is15:

a) supplied by or supplied to one and the same person

b) supplied by or supplied to members of the same group of interconnected bodies corporate

c) supplied by or supplied to members of the same group consisting of two or more persons

A monopoly situation also exists if goods or services of a particular description are not supplied in Sri Lanka as a result of one or more agreements in operation.

In relation to export of goods, a monopoly exists if the prescribed percentage of all goods of that description, is produced in Sri Lanka by the same person or by members of the same group of interconnected bodies corporate. Here, the monopoly is deemed to exist in relation to export of goods generally and to each market taken separately18.

A monopoly exists in relation to the export of goods generally, if one or more agreements in operation prevents, restricts or distorts competition in relation to the export of goods of that description from Sri Lanka and where such agreements operate with respect to the prescribed percentage of all goods of that description, which are produced in Sri Lanka19. Similar provisions operate with regard to the export of goods to a particular market20.

The definition of monopoly situations specified in Section 12 applies to goods and services of “any description”. Kelegama and Cassie Chetty (1993)21 have pointed out that such a wide-ranging definition of a monopoly situation is not conducive to the growth and development of commercial activity in Sri Lanka.

The test used to determine the existence of a monopoly is the “prescribed percentage test” as opposed to the “dominant position test”22 which is used by countries such as New Zealand. The prescribed percentage is an arbitrary cut off point determined by the Minister on the recommendation of the FTC and generally varies between 40% and 50 % 23. The FTCA specifies that the prescribed percentage should not be less than one third of the supply of goods or services and export of goods of any description. In recommending the prescribed percentage to the Minister, the FTC looks at the market share held by different stakeholders to decide whether such market share could be used to eliminate or damage a competitor, to prevent entry of a competitor into the market or to prevent a person from engaging in competitive conduct in the market.

The prescribed percentage test has limited the scope of the FTCA so as to prevent the application of the law unless the article in question is a prescribed article. Such a situation arose with regard to the cable market where ACL Cables’ buyout of Kelani Cables gave them an estimated control of over 70% of the market. The FTC did not investigate into this matter under Section 12, as cables were not gazetted as a prescribed article. However, the FTC has commenced an investigation into the matter under Section 13 of the FTCA24. Accordingly, although the definition of a monopoly is widened by its application to goods of ‘any description’, the prescribed percentage test has considerably curtailed the application of Section 12, as is evident from the ACL Cables case.

Kelegama and Cassie Chetty point out that this test is used in Sri Lanka to minimize the cost of identifying a monopoly and state that it provides an adequate and acceptable entry point for the investigation of monopoly situations, given the relatively limited scale of the country’s economy and the financial and staff constraints of the FTC25.

5.2 Mergers

Section 13 (1) of the FTCA provides that a merger situation exists when a person, whether a body corporate or not, acquires or proposes to acquire any shares in the capital or in the assets of a body corporate or of any other person:

a) if it results in such first mentioned person to be or likely to be in a position to control or dominate a market for goods or services

b) where such first mentioned person is in the position to control or dominate the market for goods and services, there exists a competitor of the first person and the acquisition would substantially strengthen the power of the first mentioned person to control or dominate the market.

The Act specifies two instances where the first mentioned person is deemed to be in a position to control or dominate the market. Firstly, where a body, or two or more such bodies (whether corporate or not), related to the first mentioned person, together, are in a position to control or dominate a market. Secondly, where the first mentioned person and a body or bodies corporate, who are related to such first mentioned person, together, are in a position to control or dominate a market26. Further, reference to ‘control or dominate a market for goods or services’ include control or domination as a supplier or as an acquirer of goods or services in that market.

The test applied in Section 13 is the ‘control or dominance of the market’ for goods and services. However, this is limited by the ‘public interest test’ to be applied under Section 15(l)(a). As such, a Proposed merger that gives the acquirer a position of control or dominance in the market, will be struck down by the FTC only if it is against the public interest. In the European Community for instance, the dominant position test is limited by the ‘effective competition test’. Accordingly, a merger with a Community dimension that creates or strengthens a dominant position as a result of which effective competition will be impeded in the Common Market, will be declared incompatible with the Common Market27. In countries such as Canada for instance, the initial test applied to identify a merger is the effective competition test and thus a merger is subject to remedial order by the Competition Tribunal if it prevents or lessens competition substantially28.

All mergers and acquisitions resulting in a merger situation should be notified in writing to the FTC at least 30 days prior to the proposed acquisition. The FTC should communicate its decision to the party within 21 days stating either that it has no objection to the proposed acquisition or that it will communicate its decision after holding an investigation relating to the matter29. The original FTCA empowered the FTC to investigate into mergers only upon a complaint being made to it. However, with the amendments made to it in 199330, the FTC was given power to investigate into mergers either on a complaint made to it or on its own motion. Non-compliance with the pre-merger notification provision is common in Sri Lanka, In such a situation, the FTC can inquire into the matter on its own motion and demand representation by the parties. After the investigation, depending on whether the proposed merger is likely to operate against the public interest or not, the FTC may authorize or refuse to authorize the proposed merger. However, due to the dormant nature of the functioning of the FTC, it does not initiate investigations on its own motion, in practice.

It is notable that all acquisitions of shares that might create a merger situation in terms of Section 13 should be notified to the FTC. Whether all mergers should be so notified or whether notification should be limited to cases which pass a certain threshold is a matter for debate. The United States, for instance, requires firms to notify proposed mergers or acquisitions exceeding a certain size-of-party and size-of-transaction threshold31 . The mandatory pre-merger notification requirement however, has not burdened the workload of the FTC in terms of numbers.

5.3 Anti-competitive Practices

Anti-competitive practices are generally classified into three main categories, namely, collusive behavior among firms, abuse of dominant market position and

mergers that create market dominance. Several forms of activities come within these three broad categories. They include inter alia, bid rigging, agreements to limit production, refusal to supply, predatory pricing, price discriminations, vertical and horizontal restraints and limiting access to essential facilities.

The FTCA does not identify these different types of restrictive and unfair trade practices. Instead, it defines anti-competitive practices to include instances where a person in the course of business, pursues a course of conduct which has or is likely to have the effect of restricting, distorting or preventing competition in connection with the production, supply or acquisition of goods or the supply or securing of services in Sri Lanka32. Cases falling under this definition too, have to be contrary to the public interest.

Despite the broad definition of anti-competitive practices, Sri Lankan courts have interpreted Section 14 narrowly to exclude certain practices, which are generally accepted as forming part of anti-competitive practices. This was evident in the case of Ceylon Oxygen Ltd. v. Fair Trading Commission’11’ where the Court of Appeal held that the FTC does not have the jurisdiction to inquire into predatory pricing, discriminatory rebates and exclusive dealings and that the FTC could only investigate matters specified in Section 11 of the FTCA, namely, monopolies, mergers and anti-competitive practices. It is unfortunate that the Court failed to recognize predatory pricing, discriminatory rebates and exclusive dealings as falling under the category of anti-competitive practices. The court did not recognize these acts as ‘restricting, distorting or preventing competition’ within the meaning of Section 14. This raises the effectiveness of having such a wide-ranging definition that fails to capture strategic market behavior that can be potentially anti-competitive. Instead, a well-defined and categorized definition covering different types of anti-competitive practices is more suitable as in the case of India.

The Monopolies and Restrictive Trade Practices Act (MRTP) of India defines restrictive trade practices generally and proceeds to set out various types of trade practices that are likely to constitute restrictive practices within the definition. They include both horizontal and vertical agreements. The problems faced by Sri Lanka are due to the lack of demarcation of different types of anti-competitive practices. Thus detailed provision specifying the categories falling under Section 14 is most desirable.

6. Orders of the Fair Trading Commission

Section 15 of the FTCA deals with the orders that could be made by the FTC upon the conclusion of an investigation under Section 11. If the FTC is of the opinion that the monopoly, merger situation or the anti-competitive practice exists, but does not / or is not likely to operate against the public interest, it can order such monopoly, merger or anti-competitive practice. If the FTC finds that the monopoly, merger situation or anti-competitive practice exists and operates against the public interest, it can order the following:

i) the division of any business by sale of any part of the undertaking or asset including:

a) transfer or vesting of property, rights, liabilities or obligations

b) adjust contracts whether by discharge or reduction of any liability

c) subject to the Companies Act, form or wind up a company or other association or amend the memorandum and articles of association or other instrument

d) determine the extent to which and the circumstances in which provisions of the order affecting a company or association in its share capital or constitution may be altered by the company or association

e) continue with any necessary change of parties of any legal proceedings.

ii) the appointment of a person to conduct such activities on terms specified by the FTC

iii) termination of any anti-competitive practice

iv) take any other action that the FTC may consider necessary.

The determination process of the existence of a monopoly, merger or anti-competitive practice is two tiered. Firstly, the act complained of must fall within the ambit of either Section 12,13 or 14 and secondly, it should operate against the public interest. Only if both these requirements are fulfilled, can the FTC step in to remedy the situation. In the case of a monopoly, in addition to the case having to pass the above two tests, it also has to pass the prescribed percentage test. Accordingly, the FTC can remedy the situation only if the case comes within the definition of a monopoly, is contrary to public interest and is concerned with a prescribed article. The prescribed percentage test . further restricts the automatic application of Section 12 to monopolistic behavior arising from subsequent mergers and acquisitions mergers and acquisitions reveal that there is possible monopoly power falling within Section 12, the case cannot be investigated under Section 12 if the item concerned is not a prescribed article.

It is clear that the notion of public interest plays an important role in the determination of a monopoly, merger or anti-competitive practice. Section 15 provides that when determining the public interest element, the FTC should take into account all factors that are relevant to the matter under investigation and that it should give special regard to the following:

a) maintaining and promoting effective competition between suppliers of goods and services

b) promoting the interests of consumers with respect to price, quality and variety of goods and services

c) promoting through competition, the reduction of costs, development and the use of new techniques and products and facilitating entry of new competitors into existing markets

d) maintaining and promoting balanced distribution of industrial activity and employment

e) maintaining and promoting competitive activity in export markets.

These specifications only indicate the factors that should be taken into account by the FTC and do not give adequate guidance as to the meaning of the term ‘public interest’. The example of the market for plastic water tanks illustrates the difficulties faced by the FTC in determining what constitutes public interest. The dominant player in this market deliberately reduced the price with the assistance of other players in order to prevent a competitor from entering the market. Although in the longer term, the result would be an increase in the price after eliminating the competitor, the FTC could not rule that the price should be increased to enable the competitor to enter the market, as there was a prima facie benefit to the public by the reduction of prices. In India on the other hand, the MRTP Act lists out the circumstances under which monopolistic trade practice will be deemed to be prejudicial to public interest and specifies that the MRTP Commission should take into account the economic conditions prevailing in the country and other relevant circumstances of the case.

Kelegama and Cassie Chetty are of the opinion that the public interest considerations should not be used as a justification for intervention, where there is no perceived anti-competitive activity34. Accordingly, the public interest test would, on the one hand, let the FTC intervene where there is no anti-competitive practice, and on the other hand, prevent action being

taken where the act concerned is anti-competitive but not against the public interest. It has also been pointed out that the powers of the FTC to divide undertakings. and transfer property of companies are too excessive and that a competition agency should not be given legislative authority such as the power to rewrite contracts or to amend the memorandum and articles of association of a company35.

The FTC’s powers are mainly aimed at curing a defect. However, it may be desirable if the law adopts a ‘preventive approach’ as opposed to the curative approach currently in force. This may be done by incorporating deterrent provisions such as exemplary fines and increased penalties for contravention of the law. In the United States for instance, the Sherman Act imposes criminal penalties and treble damages to deter agreements in restraint of trade and attempts to monopolize trade. Although the FTCA contains several criminal offences for contravention of the Act36, they do not have a deterrent effect.

7. Price Control and Price Revision

The original FTCA gave substantial price control powers to the FTC. They included the power to fix prices or set out a price structure of certain articles on a request by the Controller of Prices, examine questions relating to the price of an article referred by the Minister and to review questions relating to the price of an article or the charge for any service and report to the Minister. However, these price control powers were curtailed to great extent by the Industrial Promotions Act (IPA)37. Presently, under Section 32 of the IPA, the FTC may only be requested by the Controller of Prices to fix or vary the maximum retail price of specified articles38.

Under its price revision powers, the FTC could review the price of any article and hold an inquiry. If the FTC determines that the price of an article is unreasonable and that it is necessary to encourage competition by allowing imports, it could recommend to the Minister, the rate of custom tariff that should be levied on the importation of such articles39.

8. Related Provisions in the Intellectual Property Act

The Code of Intellectual Property Act40 recognizes unfair competition as a wrong actionable at the suit of a trader and defines unfair competition as any act of competition contrary to honest practices in industrial or commercial matters”41. It proceeds to identify five acts that are included within the definition of unfair competition. Since S.142 does not identify an exhaustive list of acts of unfair competition, the courts will have to consider on a case-by-case basis, whether the act complained of is an act of competition contrary to honest practices.

Trademark piracy is an aspect of unfair competition, which is common in Sri Lanka. Trademark piracy means the registration or use of generally well-known foreign trademarks that are not registered in the country or are invalid as a result of non-use.4- Section 99 (2) prohibits the admissibility of trademarks on objective grounds. It provides that the Registrar of Patents and Trademarks must have regard to all factual circumstances, especially, the length of time the mark has been in use in Sri Lanka and in other countries and the fact that the mark is held to be distinctive in other countries or in trade circles.

Imitation of labels and packaging is another aspect of unfair competition common in Sri Lanka. Here the imitator takes advantage of the reputation of the competing product by trying to give his product an appearance that is very similar to the other product, thereby confusing the consumer. Often the imitated product is packaged in a similar manner to that of the competing product. The colours used, graphic presentation and the product name bear a very close resemblance to the genuine product thereby misleading the consumer to buy the imitator’s product43.

9. The Proposed Competition Protection Authority Bill

The Consumer Protection Authority Bill, which was presented in Parliament in August 200144, is the long awaited revision of the competition law in Sri Lanka. The Bill seeks to combine competition and consumer protection laws and establishes a new Consumer Protection Authority (Authority) and a Consumer Protection Council (Council), which are entrusted with consumer protection as well as market regulation of internal trade. It repeals the FTCA, the Consumer Protection Act (CPA)45 and the Control of Prices Act46. Upon the operation of the proposed Act, the Department of Internal Trade (DIT), which is currently handling consumer protection issues and the FTC will cease to exist and will be replaced by the Authority and the Council

9.1 Powers of the Authority and the Council

The Bill sets out the overall powers and functions of the Authority in a broad and detailed manner. They include inter alia, the following47:

* Control and eliminate :

* restrictive agreements

* arrangements amongst enterprises with regard to prices

* acquisition or abuse of a dominant position with regard to domestic trade or economic development within the market or substantial part of it

* restraint of competition adversely affecting domestic or international trade or economic development

* Investigate into mergers, monopolies and anti-competitive practices and abuse of a dominant position

* Maintain and promote effective competition between persons supplying goods and services

* Carry out investigations and inquiries in relation to any matter specified under the Act

* Promote competitive prices wherever possible and regulate prices in markets where competition is less effective

* Undertake public and private sector efficiency studies and provide information relating to market conditions and consumer affairs

* Promote consumer education with regard to good health, safety and security of consumers

* Promote the exchange of information relating to market conditions and consumer affairs with other institutions.

The Council will hear and determine all applications and references made to it under the Act48. They include:

*  The existence of monopolies, mergers and anti-competitive practices

* Investigation of matters relating to excessive pricing

* Approval of items that are essential to the life of the community.

9.2 Regulation of Trade.

Under Part 11 of the Bill, provision is made for the Authority to regulate trade. On a closer examination of this part, it is evident that most of the provisions. are identical to those in the present Consumer Protection Act. Almost all the provisions of the present Act have been incorporated into the Bill with minor changes or no changes at all. A few new additions have also been made.

These additions include Section 17 of the Bill, which prohibits the increase of the retail or wholesale price of ‘specified articles’ without the prior approval of the Authority49. The Authority, within thirty days of application by the manufacturer or trader for an increase of price of a specified article, will hold an inquiry and authorize the increase if such price increase is reasonable. Failure to give a decision within 30 days will render the manufacturer the opportunity to effect the price increase without the approval of the Authority. It is notable that the power to make interim orders, which was lacking under the FTCA and the CPA, has been introduced to enable the Authority to prevent the increase of prices during the pendency of the investigation and until the final determination of the case.

Price control powers of the FTC are given to the Council subject to three conditions. The Council can look into the matter only where the goods or services are supplied at an excessive price and the charge of such price is a major public concern and where there is evidence of the existence of a monopoly situation, market manipulation or any other market imperfection50. The Director-General is given power to refer such matters of excessive pricing to the Council where the goods or services in question are of general economic importance or where a category of consumers are significantly affected by such price51. Upon the conclusion of an investigation if the Council decides that the price concerned is excessive it is empowered to fix the maximum price above which such goods cannot be sold or services cannot be provided. It is notable that under the FTCA, the FTC could fix the maximum price of only ‘specified articles’, which included only Pharmaceuticals. However the Bill has given the Authority the power to fix prices in relation to ‘any goods sold or services provided’ thereby considerably expanding its price control powers.

Among the other novel features of the proposed legislation is the power of the Authority to conduct public and private sector efficiency studies at the request of the Minister52. Once a report is submitted by the Authority, the Minister shall place it before Parliament. At present, no government department undertakes studies of such nature. However, the impact or the benefit of such studies is questionable as the public sector is excluded from the purview of the Bill under Section 5053.

9.3 Monopolies, Mergers and Anti-competitive Practices

The substance of Sections 33-3554 of the Bill is very much similar to Sections 12-14 of the FTCA55. As such, difficulties faced at present due to lack of adequate definitions, requirements of public interest, the prescribed percentage test etc. which were discussed in detail above, will continue to exist under the new regime56. Furthermore, the lack of legal provision to cover horizontal and vertical restraints and cross border transactions will continue to exist under the proposed regime as well57.

The Authority is entrusted with the power to inquire and investigate into matters relating to monopolies, mergers and anti-competitive practices and refer such matter to the Council for determination under whose realm, the public interest test lies58. The orders that the Council could make where it concludes that the monopoly, merger or anti-competitive practices operates against the public interest, are limited when compared with the FTC. Where it decides so, the Council could only appoint a person to carry out activities of the firm, terminate the anti-competitive practice and take any other action it considers necessary. The FTC’s power to divide a business by sale or otherwise is not given to the Council under the new regime.

9.4 Exemptions

The Bill has introduced two sections59 that considerably limit its application by exempting the public sector and existing agreements with the government and thereby effectively creating an uneven playing field in the market. Under Section 50, provisions relating to monopolies, mergers and anticompetitive practices (Part III) and the Consumer Protection Council (Part IV) of the Bill are not applicable where the goods or services are supplied:

a) solely by the government or by a public corporation

b) by an institution which is granted the exclusive right to supply goods or services by any law

c) by a person to whom the government, in the interest of national economy, has granted a monopoly for a period not exceeding three years.

Section 50(a) exempts all public sector monopolies such as the Ceylon Wholesale Establishment (CWE) and the Ceylon Petroleum Corporation while Section 50 (b) extends the protection to the privatization initiatives of the government such as Shell, Prima and Lanka Lubricants. Section 50(c) covers the granting of a monopoly for a period up to three years and may create a situation where the first-mover advantage accrues to the established firm, restricting or preventing competition in that particular market60.

Section 81 of the Bill exempts agreements entered into with the government, from Part III of the Bill (monopolies, mergers and anti-competitive practices), for so long as the agreements are in force, provided that the agreements were in force at the commencement of the Act. Under this provision, although the exclusive five year period of Shell Gas expired in December 2000, it would not come under Part III of the Bill for the rest of its agreement, that is 25 years beginning January 2001.

10. Conclusion

From the foregoing analysis, it is clear that the absence of a comprehensive competition policy has resulted in a weak competition law regime that fails to effectively capture anti-competitive conduct. As such, a well-designed competition policy framework that also complements related policies such as trade, privatization and consumer protection, is most desirable. This would prevent the formulation of ad hoc policies and rules by different institutions. The competition law should be designed in a manner in which it is flexible enough to accommodate the dynamics of competition policy. The following recommendations would strengthen the current and proposed competition law:

* Definitions of monopolies, mergers and anticompetitive practices should be of adequate clarity and be wide enough to capture strategic market behaviour that is anti-competitive in nature.

* In particular, the definition of anti-competitive practices should be drafted to include specific categories of anti-competitive conduct that would fall under the Section.

* The requirement of the ‘prescribed percentage as a condition for investigations for monopoly situations should be removed.

* The law should be sufficiently expanded to cover anti-competitive conduct such as horizontal and vertical restraints, collusive behaviour of firms.

* The law should apply equally to all economic agents engaged in commercial activity, irrespective of any division between the private and public sectors.

* The law should be amended to create a deterrent effect and prevent anti-competitive conduct while at the same time be stringent enough to give adequate punishments to wrongdoers.

* As the inefficiency of the FTC has been attributed to the lack of staff and facilities, it is strongly recommended that all appointments should be filled and that the FTC be given sufficient resources in terms of funding.

* It is imperative that the law be revised constantly to meet the challenges posed by privatization and globalization and to be flexible enough to meet rapid market changing situations.


“All About Competition Policy and Law for the Advanced Learner”, Consumer Unity and Trust Society, Jaipur, India, 2000.

“A National Competition Policy: What is Required ?”, Malathy Knight-John, LST Review June 2001.

” Towards a New Competition Law Regime of Sri Lanka”, Thushari de Soyza and Pubudini Wickramaratne Rupesinghe, Consumer Unity and Trust Society, India, 2002.

“Consumer Protection and Fair Trading”, Saman Kalegama and Yohesan Casie Chetty, Law & Society Trust, 1993.

“Unfair Competition – An Antidote to Dishonest Trade Practices”, K. Kanag-Isvaran, Bar Association Law Journal, 1997.

Judgment in Ceylon Oxygen Ltd. v. Fair Trading Commission, C.A. Minutes 30.04.1996.

Annual Reports, Fair Trading Commission.

Consumer Protection Act No.l of 1979

Fair Trading Commission Act No. 1 of 1987

Industrial Promotions Act No. 46 of 1990

Intellectual Property Act No. 52 of 1979

Consumer Protection Authority Bill

Competition Law of Sri Lanka – Pubudini.doc/BASL

1 “All About Competition Policy and Law for the Advanced Learner ” Consumer Unity & Trust Society, Jaipur, India, 2000-2 The origin of anti-trust law could be traced to common law actions that were aimed at limiting restraints of trade and proscribing monopoly situations. The root of the modern anti-trust law springs mostly from the late 19th and early 20th centuries-

The term ‘anti-trust’ emerged from the USA in the last decades of the 19″1 century, during which time the position of large corporations were under strong attack from industrial workers and small farmers. These large corporations were seen to be acting in unison to control markets and exploit consumers and the rebellion against these “trusts” formed the basis of what became the US anti-trust law, (“All About Competition Policy and Law for the Advanced Learner” Consumer Unity & Trust Society, Jaipur, India, 2000).

3 Malathy Knight-John ,”A National Competition Policy: What is Required?” LST Review June 2001.

4 The Bill was presented to Parliament on 07.06.2001. 5 Supra n. 1

6 Forthcoming publication by Thushari de Zoysa and Pubudini Wickramaratne Rupesinghe, on the Competition Law Regime of Sri Lanka as a part of the 7 UP Project cordinated by the Consumer Unity and Trust Society, Jaipur, India.

7 Ibid.

8 No. 1 of 1987 as amended by Act No. 57 of 1993.

9 Preamble to the FTCA.

10 Sections 5 and 11 of the FTCA.

11 Sections 5 and 18 of the FTCA.

12 No. 46 of 1990.

13 Section 6 of the FTCA.

14 By Sections 7 – 10 of the FTCA.

15 Annual Reports of the FTC.

16 Section 12(1) and (2) of the FTCA.

17 The term “two or more persons” refers to those who conduct their affairs in a way to prevent, restrict or distort competition in connection with the goods or services concerned.

18 Section 12(3) of the FTCA.

19 Section 12(1X4) of the FTCA.

20 Section 12(1X5) of the FTCA.

21 “Consumer Protection and Fair Trading” (Law & Society Trust, 1993).

22 This test uses market dominance of firms to determine monopoly situations. Dominant position encompasses market share (or prescribed percentage) but goes further to include barriers created by the dominant player to restrict entry or restrict the freedom of other enterprises to operate in the market.

23 For example, the prescribed percentage for milk is 50% while

it is 45% and 40% for electric bulbs and ballpoint pens


24 Annual Report of the FTC 2000.

25 Supra n.21.

26 Section 13(2) of the FTCA.

27 Supra n. 1.

28 Ibid.

29 Section 9A of the FTCA as amended. 30 By Act No. 57 of 1993.

31 Hart-Scott-Rodino Antitrust Improvements Act of 1976. “Section 14 of the FTCA. 33C.A. Minutes 30.04.1996.

34 Supra n. 21.

35 Ibid.

36 Section 37 of the FTCA. 37No. 46 of 1990.

38 Currently, only Pharmaceuticals come under this section. However, prior to 1992, food items were also covered.

39 Section 23 of the IPA.

40 No. 52 of 1979.

41 Section 142 of the Code of Intellectual Property Act.

42 K. Kanag-Isvaran. PC, “Unfair Competition -An Antidote to Dishonest Trade Practices?”, The Bar Association Law Journal 1997.

43 A case of this nature came before the Court of Appeal in 1992 (Lipton Limited v. Stassen Exports Limited CA602/92 as reported by K. Kanag-Isvaran. P.C., “Unfair Competition – An Antidote to Dishonest Trade Practices?”, The Bar Association Law Journal 1997) in which the action for unfair competition was based on the fact that the defendant used labeling, packaging and a get-up which so nearly resembled the plaintiff’s products as to be likely to cause confusion. The defendant’s Managing Director admitted in cross examination that he placed orders with the plaintiff’s own printer to copy the plaintiff’s labels, that he selected a striped design for his product with a colour shield devise and a crest which bore a close resemblance to that of the plaintiff’s etc. However, the Court of Appeal in the judgment delivered on 08.10.1996 held that there was no unfair competition.

44 The Bill was referred to a Parliamentary Select Committee.

45 No. 1 of 1979.

46 No. 29 of 1950.

47 S.7 of the Consumer Protection Authority Bill.

48 S.40 of the Consumer Protection Authority Bill.

49 The Minister, in consultation with the Authority, declares articles, which are in his opinion essential to the life of the community, as ‘specified articles’.

50 An amendment is proposed enabling the Council to intervene either where the goods or services are supplied and an excessive price or where the charge of such price is a major public concern or where there is evidence of the existence of a monopoly situation etc. 51 Section 18 of the Bill. “Section 31 of the Bill.

53 An amendment is proposed to the effect of deleting Section 50.

54 Sections 33,34 and 35 deal with monopolies, mergers and anticompetitive practices respectively.

55 However, the draft Bill does not clearly indicate whether monopoly situations in relation to the export of goods are covered by Section 33.

56 At a meeting held at the Ministry of Commerce and Consumer Affairs, on 18.03.2002 at which the amendments to the Bill were discussed, it was agreed that the ‘prescribed percentage’ requirement would be deleted from Section 33 thereby enabling the Authority to investigate monopoly situations even where the article in question is not a prescribed article. 57 However, in cases where there would be cross border implications, the ‘effects doctrine’ could be used to consider cases where Sri Lanka would be affected by a transaction having an international dimension.

58 A proposed amendment to the Bill introduces a 100-day time limit for the Authority and a one-month time limit for the Council in respect of investigations into monopolies, mergers and anticompetitive practices.

59 At a meeting held at the Ministry of Commerce and Consumer Affairs, on 18.03.2002 at which the amendments to the Bill were discussed, it was agreed that these two sections would be deleted.