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VINOD DHALL AND AUGUSTINE PETER
India is a developing country, but with a long tradition of scientific inquiry. There was, however, consistent decline in India’s economic and scientific prowess during the eighteenth and nineteenth centuries and continuing into the first half of the twentieth century until the country gained independence and started a new run on the path of economic and scientific development. The economic policies immediately after independence were aimed at ‘capsuling’ generations of lost growth into a few decades. The economic and technological policies visualised by independent India were aimed at making the country self reliant through an import substituting strategy, with the State (public sector) given the responsibility to build and control the ‘commanding heights’ of the economy. Intellectual property (IP) laws inherited from the colonial past were not found to be suited to national interests and were either amended or repealed and substituted by new laws enacted to complement the self reliance and import substituting objectives. Import, in general, and import of technology in particular, was restricted to the bare essentials. However, as time passed, especially by the end of 1970s, it was realised that countries that were at similar stages of development as India in the early 1960s had achieved much faster growth and export capability through an export oriented strategy. This prompted a shift in India as well in the 1980s towards relaxing the restrictions on industry, investment and trade. In 1980s the reform was essentially limited to deregulation of procedures. This was followed in 1991 by comprehensive liberalisation of the economy, which included opening up to foreign investment and technology transfer as well.
While the IP laws pre-dated India’s independence, the anti-monopoly law was only enacted in 1970. The Patents Act 1970 and other IP laws supplemented the broader economic policy framework to make it a coherent one. The first anti-monopoly law, the Monopolies and Restrictive Trade Practices Act (MRTP) 1969 reflected India’s abhorrence of monopolies and large business empires and had a structuralist approach; but over time it was seen to obstruct growth. A modern competition law was enacted in India only in 2003 and was made enforceable (except the provisions relating to combinations) in May 2009. Since the implementation of the competition law is at an early stage and since final decision in no case has yet been issued by the Competition Commission of India (CCI), there has been no instance of formal interface as yet between the competition law and IP laws. Therefore, periodical reference would also be made to the erstwhile MRTP Act and the jurisprudence that went with it.
This chapter is organised as follows: the first part is the Introduction. The second part touches on the industrial and technology policies pursued by the Government since independence. The third part analyses the IP laws and competition law in the country. The fourth part looks at the interface between competition law/policies and IP laws/policies. The chapter ends with concluding remarks and suggestions relating to better management of the interface between the competition law and the IP laws.
II. The Industrial and Technology Policies of India
The dynamics of Indian economic development in recent years cannot be appreciated without reference to her colonial past, characterised by resource drain and very low rates of growth in gross domestic product (GDP), and the period of planned economic development that followed independence in 1947. Post independence, economic planning was primarily aimed at building a foundation on which India could build a self reliant economy with stress on growth and distribution. The early years concentrated on creating the necessary industrial infrastructure to facilitate future growth. The developmental efforts were however interrupted thrice by wars, with China in 1962, and with Pakistan in 1965 and again in 1971.
Three distinct phases may be viewed in India’s economic development after independence:
(1) the initial socialist period with state control of the ‘commanding heights’ of the economy: 1950–51 to 1980–81;
(2) the period of domestic economic de-regulation: 1981–82 to 1990–91; and
(3) the period of liberalisation: 1991 onwards.
A. Phase I: The Socialist Phase
Although the development process only started with the launch of the first Five Year Plan in 1951, the Industrial Policy Resolution of 1948 had already envisaged a mixed economy for the country; it visualised four categories of industries viz:
(i) state monopolies (defence, atomic energy, railway);
(ii) mixed sectors (aircraft, ship building, telecom equipment, mineral oil, coal, iron);
(iii) industries subject to controls (18 sectors); and
(iv) sectors generally open to private enterprise.
The approach was formalised in 1952, with the Industries (Development and Regulation) Act of 1952 which further entrenched the role of the State and the public sector, as well as the mixed sectors. The State monopoly sectors were increased from six to 17, and the mixed sectors from six to 12. The strategy was two pronged: first, to maintain government control over the economy and second, through the first, to promote import substitution and self reliance. The Import Control Order (1955) and the Industrial Policy Resolution of 1956 reiterated and re-enforced this economic philosophy. Stiff labour protection laws were enacted, which in later years were found difficult to be rolled back, and became a stumbling block in the reform process. State presence in the economy was further enhanced through nationalisation of several enterprises and reservation of sectors/products for the public sector and small scale sector. The MRTP Act 1969 and the Patents Act 1970 were enacted as part of these policies.
While the economic growth during the initial years of planned development was certainly superior to that in the colonial days (1.5 per cent), the rate of 3.5 per cent, also known as the Hindu rate of growth, fell short of the growth performance of medium and large economies internationally. India ranked 60th in the global growth ranking of 74 large and medium countries for which GDP figures were available for 1960 onwards. Only 19 per cent of these countries had a worse growth performance. As the restrictive regime tightened its grip, the growth rate fell to an average of 2.9 per cent per annum, well below the rate of around 3.5 per cent during the period 1950–51 to 1965–66. In global growth ranking, India fell to the bottom 15 per cent at 64th position out of a set of 74 countries for which data is available.
B. Phase II: De-Regulation, 1980–81 to 1990–91
Starting around 1980, the policy witnessed a gradual and subtle shift from the import substitution to a more liberal regime through de-regulation of domestic economic policies and processes. These reforms were limited to internal deregulation and there were differences of opinion as to whether these could at all be termed as reforms. However, the de-regulation resulted in a structural break in the Indian economy, as pointed out by Ahluwalia, Ray, and Virmani, among others. Several intellectuals and economists like Bhagwati and Desai and Ahluwalia have tried to explain the causes of industrial stagnation in India in terms of the policies then pursued, including doubts about the effectiveness of the import substituting approach.
The de-regulation measures included ‘broad-banding’ of the products that a firm could produce based on the license obtained, enabling it to reap economies of scale and scope, specifying minimum economies of scale (MES), expansion of the positive list of MRTP exempt industries, and raising of the investment thresholds (above which a licence was required even for industries in the positive list); raising of investment thresholds for the purpose of monopoly control; and revision of investment limit for the small scale sector. Reforms in corporate and personal income tax were also initiated during this period. The import policy witnessed slow but steady transition with products under open general license (OGL) increasing progressively from 76 items in 1979 to 1939 items in April 1990. The shift from the import substituting strategy to an export neutral regime was subtle and without much fanfare. This phase was transitory, but it prepared the economy for the comprehensive liberalisation that was to come in 1991.
C. Phase III: Liberalisation from 1991
The economic reforms from 1991 were comprehensive and ‘big bang’, unlike the ‘reform-by-stealth’ of the 1980s. These reforms included liberalisation of industrial, trade, investment, technology, exchange rate, fiscal, monetary and capital market policies. Industrial licensing was abolished except in a select set of industries. Regulatory structures in place were either abolished altogether (eg, the Controller of Capital Issues, who determined the quantum and issue price of shares issued by companies, and the Directorate General of Technical Development, responsible for technology transfer policy), or overhauled (eg, the Chief Controller of Imports and Exports was transformed into the Directorate General of Foreign Trade). The new capital market regulator, the Securities and Exchange Board of India (SEBI), was established through the SEBI Act. The MRTP Act 1969 was drastically amended, with the asset ceiling for treatment as monopoly undertaking being removed altogether, and the provisions related to mergers being taken off the statute. The process of pruning of the small scale reservation list was accelerated. Tariffs were brought down even more steeply than was warranted by India’s commitments under the Uruguay Round. Liberalisation of the foreign investment regime included raising of the foreign investment limit from generally 40 per cent to over 50 per cent, and even to 100 per cent in select sectors. Foreign direct investment approval procedures were liberalised with the automatic approval process put in place for many sectors. Foreign investment was largely de-linked from foreign technology transfer. The Foreign Exchange Regulation Act (FERA) 1974 was substituted by the much less restrictive Foreign Exchange Management Act (FEMA). The capital market was opened up to Foreign Institutional Investors. Interest rates were de-regulated. Privatisation of public sector undertakings in a selective manner was also initiated. Private enterprise and initiative began to receive greater recognition.
III. Evolution of the Technology Policies
Even though a formal technology policy in the form of a Scientific Policy Resolution came out only in 1958, efforts to build India into a technologically advanced nation were discernable since the beginning of the planning process in 1951. The Industrial Policy Statement of 1980, which focused attention on promoting competition in the domestic market, also recognised the need for technological upgrading and modernisation; thus foreign investment and technology transfer received special attention. Efficiency and productivity became important objectives. Although productivity was not high by international standards, by the mid 1980s India had a large network of basic industries, with different degrees of self-reliance in a large number of products. Besides, the country also witnessed the emergence of new industrial centres and a new generation of entrepreneurs. The number of skilled manpower also registered substantial increase.
The Technology Policy Statement of 1983 made a clear statement of its basic objective: ‘the development of indigenous technology and efficient absorption and adaptation of imported technology appropriate to national priorities and resources’. The effort was to achieve breakthroughs in indigenous technological development. Considerable resources were allocated for this purpose. The new Science and Technology Policy 2003 complemented the liberalised economic policies. The policy differentiated between fundamental research and development (R&D) and commercial R&D. The private sector was encouraged to create Scientific and Industrial Research Organisations (SIRO) for undertaking more fundamental R&D in a non-commercial manner. The emphasis shifted from indigenisation to productivity.
Table 1 below gives the highlights of policy liberalisation having implications for technology development.
R&D expenditure as a share of GNP is considered an indicator of efforts at innovation. R&D expenditure in India, as a share of gross national product (GNP), rose consistently from 0.17 per cent in 1958–59 to 0.91 per cent in 1988–89, the major share of which was borne by the Government. However, the immediate post reform period witnessed a declining trend in this regard, with the share falling to a level of 0.71 per cent in 1995–96 and then rising marginally to 0.80 per cent. This could probably be explained by the fact that imports of disembodied technology emerged as the most preferred mode of technology acquisition for Indian manufacturing during 1991–2001. Pradhan and Puttaswamaiah note that on account of the policy initiatives there has been a perceptible decline in the average import coverage ratio for capital goods from 77 per cent in 1986–90 to 21 per cent in 1991–95 and further to eight per cent in 1996–2000. The average effective rate of protection (ERP) fell steeply to 33 per cent in 1996 from 79 per cent in 1980–90.
Table 1: Post 1991 Liberalisation: Highlights
— Technology import through foreign direct investment (FDI) freely allowed in all sectors except a small negative list based on environmental, scale economies and security reasons.
— Automatic approval for foreign investment subject to certain ceilings.
Foreign technological collaboration of up to US$2 million allowed the automatic approval route in all industries if royalty payment was limited to eight per cent on sales.
— Royalty payment allowed up to 10 years from the date of agreement or seven years from the date of commercial production, whichever is earlier.
— In the case of foreign financial collaboration (without technology transfer), royalty payment of up to two per cent for exports and one per cent for domestic sales on use of trademarks and brand name under automatic route permitted.
— The wholly owned subsidiaries (WOS) permitted under automatic route to make royalty payment up to eight per cent on exports and five per cent on domestic sales to their parent companies without any restrictions on the duration of royalty payment.
— Quantitative restrictions on capital imports removed (2001), facilitating embodied technology import.
— Import of second hand capital goods permitted provided they have a minimum residual life of five years.
The National Science Foundation’s Report on Asia’s rising science and technology strength noted that substantial differences in R&D-to-GDP ratios exist among the five major Asian economies. In 2003, Japan and South Korea had the highest values: 3.15 and 2.63 respectively. The ratios were lower in Taiwan (2.45) and Singapore (2.13). China’s ratio showed the sharpest increase since 1995, closely followed by Singapore’s, and showed further growth in 2004, to 1.23. The Report did not give corresponding figures for India, due to data inadequacies, although the figures available (which may not be strictly comparable) indicate that the ratio is below one per cent. Even within this low share, the contribution of central and state government laboratories and industrial R&D in public sector enterprises in India is as high as four-fifths of the total, with the private sector contributing only 20 per cent. On the other hand, the corresponding share of the private sector in the East Asian countries, even in the early 1990s, was much higher: eg Singapore (60 per cent in 1992), Korea (around 80 per cent in 1992) and Taiwan (50 per cent in 1993).
High-technology manufacturing exports provide an indication of a country’s ability to produce technologically sophisticated goods that can compete in the international market. As per the compilation of the NSF Report, while the high-technology exports worldwide grew from $474 billion in 1990 to $1.9 trillion in 2003, exports by Asia’s high-technology manufacturing industries grew especially rapidly since 1990, contributing to the region’s strong economic performance. In 2003, Asia accounted for 43 per cent of world high-technology exports, up from 33 per cent in 1990. In 2001, China displaced Japan as Asia’s leading exporter of such goods. The growth in Asia’s share of world activity during the 1990s was also driven by increased exports from Singapore, South Korea, and Taiwan. Among Asian economies, China’s success as a high-technology exporter is the most prominent. In 2003, China accounted for 12 per cent of world high-technology exports, up from five per cent in 1990. Singapore was third at six per cent in 2003. South Korea and Taiwan each had about five per cent. India’s position was not indicated by the NSF 2007 Report.
It is expected that India’s position is much behind the above mentioned five Asian countries. This could probably be explained by the following factors:
(a) The R&D efforts in India have been largely in the public sector, whose productivity is generally lower compared to that of the private sector; the effect on competitiveness, especially at the international level, was therefore not commensurate with the R&D efforts.
(b) The concentration of the R&D efforts during this period was largely on self reliance, and not on frontier technologies. International competitiveness was not one of the motives.
(c) The policy restrictions inhibited the flow of the best technologies into the country or of their whole-hearted transfer; this resulted in poor and inadequate absorption. Naturally their impact on exports was also negligible. This observation underlines the need for continuous incentivising of innovation in industry.
Ray, in an interesting observation, contends that the technological trajectory of the Indian Electronics and Electricals sector was oriented towards high total factor productivity (based on know-how capabilities), with little emphasis on acquisition of adaptive and designing (know-why) capabilities and, therefore, IP policy had perhaps a little role to play in this regard. The pharmaceutical industry, on the other hand, focused on building up of know-why oriented technological capability, even at the cost of immediate productivity gains in the short or medium terms. In the case of pharmaceutical industries, the IP regime did matter. He concludes that the process revolution in the Indian pharmaceutical industry reflecting significant learning and technological catch up can be largely attributed to the Patents Act of 1970 allowing only process (and not product) patents for pharmaceutical substances.
IV. Evolution of Competition Law and Intellectual Evolution of Competition and IP Laws
Competition law and IP laws both seek to promote economic advancement, innovation and technological progress and consumer welfare; in this sense the two laws complement each other, even though there might be apparent conflict between them. However, these common goals are pursued by each through different instruments: IP laws grant the exclusive legal right to the exploitation of an innovation for a limited period of time, while competition law seeks to remove impediments to the efficient functioning of markets. In the long term, the benefits from the two laws converge. In the nearer term, a balance needs to be struck between the two instruments, in order to ensure that both laws can play their complementary roles in incentivising innovation and economic growth. The balancing of the two laws needs an understanding that an IP is comparable to any other property, and that possessing an IP does not automatically confer market power. However, in certain circumstances, an intellectual property right (IPR) could be exercised in a manner that could be anti-competitive. In such cases, it becomes necessary to establish as to when the exercise of an IPR ceases to be legitimate and violates the principles of competition law.
A. Evolution of Competition Law in India
The Monopolies and Restrictive Trade Practices (MRTP) Act 1969 was the first competition related legislation in India. The Act drew inspiration from the mandate enshrined in the Directive Principles of State Policy in the Constitution of India that mandates the State to: prevent the concentration of economic wealth and means of production and to ensure equitable distribution of the material resources of the country. The Mahalanobis Committee on Distribution of Incomes and Levels of Living had in its report in 1960 highlighted the growing income inequality in India after independence. Following this, the Monopolies Inquiry Committee (MIC) was appointed by the Government to inquire into the extent and effect of concentration of economic power in private hands. The MIC was also to suggest legislative and other measures to protect essential public interest and mechanisms for enforcement of the legislation. The MIC found that there were adverse social effects of economic concentration and the government policies were one of the contributing factors of economic concentration. The MIC inter alia recommended:
— An autonomous Commission headed by a judge to implement an anti-monopoly law.
— All proposals for expansion by dominant enterprises to be approved by the proposed Commission.
— IPRs to be under the purview of the proposed law.
The focus of the MRTP Act was, therefore, more on the control of monopolies and the prohibition of monopolistic and restrictive trade practices—it was a product of the regime of licensing and controls.
After the working of the MRTP Act for over six years, in 1977, a High Powered Expert Committee (Sachar Committee) was set up, inter alia, to consider and report changes necessary in the MRTP Act. In pursuance of the Sachar Committee’s report, two important amendments were carried out in the MRTP Act in 1984: (1) unfair trade practices (UTPs) were brought within the purview of the Monopolies and Restrictive Trade Practices Commission (MRTPC). These included misleading advertisement and false representation; bargain sale, bait and switch selling; offering of gifts or prizes with the intention of not providing them and conducting promotional contests; and hoarding and destruction of goods. (2) Several restrictive trade practices (RTPs) were deemed to be anti-competitive and required to be registered, and the burden of proving that these RTPs were eligible for the ‘gateways’ of exemption was placed on the defendant; these RTPs included, for example, cartels, exclusive supply and exclusive distribution, tying, resale price maintenance, and predatory pricing.
When comprehensive liberalisation was undertaken in the early nineties, one of the first measures was to amend the MRTP Act by removing the restrictions placed on the growth of large companies, as well as the requirement of prior approval of the Government for expansion of monopolistic/dominant undertakings. Also, public sector undertakings were brought under the purview of the Act.
However, as the reform process progressed, it was realised that the MRTP Act was not in tune with the new market-oriented environment, and a new competition law was needed to maintain and sustain competition in the markets where the Government’s role had now been withdrawn. The Government set up a High Level Committee on Competition Policy and Law in 1999 (the Raghavan Committee). This Committee observed that the MRTP Act fell short of addressing competition issues and that the law would be ineffective in an era of globalisation and liberalisation. The Committee found it more expedient to have a new competition law altogether. The Government accepted the Raghavan Committee’s recommendation leading to the enactment of the Competition Act 2002.
Like most modern competition laws, the Competition Act 2002 addresses the following competition issues:
i. Anti-Competitive Agreements
Section 3 of the Competition Act 2002 recognises an anti-competitive agreement as an arrangement or understanding between businesses which has or is likely to have an appreciable adverse effect on competition in Indian markets. It deals severely with hard core horizontal agreements which are presumed to be anti-competitive, while all other agreements are to be analysed under the rule of reason. From the perspective of this chapter, notably, the Act exempts from the provisions of section 3 any reasonable restriction for protecting an IPR.
ii. Abuse of Dominance
Unlike the MRTP ACT, the Competition Act has no problem with mere possession or acquisition of dominance, but it has strict provisions against the abuse of dominance (section 4). A dominant position has been defined similar to the EU definition as a position of strength enjoyed by an enterprise in a relevant market in India, which enables it to operate independently of competitive forces prevailing in that market. Dominance has to be determined based on the set of factors specified in the Act. The Act lists the abuses of dominance, and once a dominant enterprise indulges in any of the listed practices, it would amount to abuse of dominance. Although there is no mention of an effects analysis in section 4, an effects analysis could be read into the formulation of some of the abuses.
iii. Regulation of Combinations
The Competition Act 2002 seeks to regulate large mergers above the given thresholds, called combinations, which includes mergers, amalgamations and acquisitions (sections 5 and 6). It prescribes a compulsory notification regime, and the enterprises are required not to complete the merger until the CCI decides the matter. The CCI can approve, reject, or modify the merger. The CCI’s assessment of the anti-competitive effects of the merger is to be based on the factors listed in the Act. The thresholds are prescribed in terms of assets and turnover of the combined entity, and there are separate thresholds for the domestic nexus (in India) of the combined entity.
iv. Competition Advocacy
The Competition Act 2002 mandates the CCI to undertake competition advocacy by creating awareness and imparting training in competition issues. It also provides that the Government may refer any policy on competition to the CCI for its opinion, although the opinion is not binding on the Government. Competition advocacy would encompass non-enforcement activities which are geared towards promoting a competition culture and achieving competition neutrality across the economy, mainly through interaction with government departments and agencies and sector regulators and by increasing public awareness of the benefits of competition.
Although the Competition Act was enacted in January 2003, and the CCI was set up in October 2003, the CCI could not commence enforcement due to certain constitutional challenges to the validity of the Competition Act followed by a lengthy process of amendments to the Act. Meanwhile, the CCI undertook extensive competition advocacy, and other preparatory measures for the eventual enforcement of the Act, which commenced finally in May 2009, but without the merger regulation provisions. Merger regulation was brought into force with effect from 1 June 2011.
B. Evolution of IP Laws in India
Most IP legislations in India have colonial origins and their subsequent versions have partaken generously from their English counterparts. However, subsequent to India becoming a member of the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), Paris and Berne Conventions, IP legislations have reflected the minimum uniform standards expected of member countries under these international treaties. The development of various forms of IP under these legislations in India is briefly described below.
A patent is a negative territorial right granted to a person in return for disclosing a new, non-obvious product or a process which is capable of industrial application. Such a product or process is considered an invention. The current legislation for patents in India, the Patents Act 1970, was preceded by the Patents and Designs Act 1911, which for all practical purposes replicated the provisions of the 1907 Act of the United Kingdom. In 1948, a Committee under Dr Bakshi Tek Chand, a retired Judge of the High Court of Lahore, was appointed to review the status of patent laws in India, with a view to ensuring that the system of patents was made more responsive to Indian interests. The Committee submitted its report in 1950 observing thus: