Dawn raids in India: A Growing Trend?

01-May-2015 #IIJ,#Globalwealth Source: India Inc

by Laurence Lieberman and Attika Valli

Created in 2009 out of the Competition Act 2002, the Competition Commission of India (CCI) was tasked with eliminating anti-competitive practices, protecting the interests of consumers and promoting economic efficiency through regulating anti-competitive mergers and takeovers. Despite being described by a Parliamentary panel as being in its ‘infancy stage’, the CCI has sought to make an impact on the markets in India. In 2012 it fined 11 cement companies Rs6,300 crore for cartelisation and last year alone it dished out penalties worth around Rs 2,700 crore in total, as well as making a landmark order to place restrictions on the proposed USD 4 billion Sun Pharma-Ranbaxy merger.

Despite this confident entry as a new regulator, the CCI is still finding its way and testing the powers available to it. Historically the organisation has conducted its investigations through methods such as requesting documents and deposing witnesses. Recently though, the CCI has launched new tactics, not only fining individuals, but also conducting its first ever ‘dawn raid’ in September 2014, entering and searching the premises of M/s JCB India Ltd for alleged non co-operation with an ongoing investigation, ushering in a new era of proactive investigation for the watchdog.

The new powers

The power to conduct dawn raids is derived from Section 41 of the Competition Act 2002 through the office of the Director General (DG). Since its creation the CCI was required to comply with the requirements set out in the Companies Act 1956 (the 1956 Act), with regard to dawn raids, which meant that the CCI had to obtain a warrant from the Chief Metropolitan Magistrate in Delhi before conducting a raid. In doing this, it needed to satisfy the Magistrate that material documents, evidencing anti-competitive conduct were likely to be destroyed, altered or falsified.

However, the 1956 Act was repealed by the Companies Act 2013 (the 2013 Act). Crucially, the sections of the 1956 Act that contained the requirement for the CCI to obtain a warrant have been replaced with provisions that remove this explicit requirement. Under the 2013 Act, the DG only has to have ‘reasonable grounds to believe’ that material documents are likely to be destroyed, altered or falsified in order to carry out a dawn raid, without the need to obtain a warrant. These altered powers were proposed to be formalised under the Competition Act (Amendment) 2012, however after coming under Parliamentary criticism, as at the time of writing, this Bill has lapsed.

Although the DG theoretically has the right to conduct dawn raids without a warrant (although this is not clear), it is yet to do so. A warrant was obtained for its first raid in September 2014 and it is possible that the DG may continue to follow this course of action, as a matter of best practice.
However, this was its first foray using this type of action and cannot act as a guarantee for a continuation of this path in the future.

The UK regime

It is instructive to compare the extent of the CCI’s powers to those available to comparative organisations in other jurisdictions. For example, under UK and EU legislation the Competition and Markets Authority (the CMA – the UK equivalent of the CCI) has the power to conduct dawn raids both with and without a warrant.

Whilst the CMA is able to enter premises without a warrant, this is restricted to business premises and, where the occupier of the premises is not suspected of any infringement, two days written notice must be provided to the business. When business premises are entered without a warrant (with or without notice), the CMA only has the power to request that information and documents are provided to the investigators and to take reasonable actions to preserve documents (for example by applying seals) but not to search the premises or use force to enter it.

In order to search premises and use force to enter, the CMA must obtain a warrant by satisfying a judge of the English High Court that there are reasonable grounds for suspecting that documents would be concealed or destroyed if a written request was made for them. If this is granted, then the CMA has the power to enter both business and domestic properties (using reasonable force to obtain entry if necessary), search the premises, seize original documents and copy any electronic information that isn’t practicable to search on the premises.

A lack of clarity

Whilst superficially the CCI’s increased powers do not appear to be too far out of step with that of their UK equivalent, there are some key differences. Both authorities can enter premises without a warrant; however the powers of the CMA to do so, and the extent to what they can do when they have entered the premises, are more limited. Meanwhile, the DG has the authority to enter any premises, business or domestic, and seize documents as considered necessary. Whilst the burden of evidence that is required is the same, with both the CMA and the CCI having to show ‘reasonable grounds’ that there will be destruction or tampering with documents, it is the lack of judicial oversight of the CCI that makes its powers stand out. This lack of independent oversight increases the risk of dawn raids being used as a regular investigatory tool, rather than an extreme but necessary action to prevent the destruction of documents.

Although discussions of judicial oversight and CCI legal backing may not seem to affect the day-to-day running of businesses in India, the uncertainty that the issue provides to companies does have practical ramifications. In the UK, the CMA has issued detailed guidelines in relation to dawn raid operations. These guidelines include information such as the extent of the CMA’s powers, what authority they require, when and how they are able to use these, the obligations of those being raided and the right to legal assistance. This allows UK companies and their legal advisors to know how to prepare for, and respond to, dawn raids. The CCI on the other hand have produced no such guidance over these issues, making preparation for Indian companies harder and their chance of non-compliance higher (which can have serious consequences – failure to co-operate with the DG attracts penalties of INR 0.1m per day, up to a maximum of INR 10m). As the CCI have begun to exercise their power to conduct dawn raids and the likelihood is that this will only increase, this will become an ever more important issue. Indian companies with concerns could seek advice from lawyers in jurisdictions where the dawn raid has been longer established, such as the UK, as a preventative measure (see below).

Preparing for the worst

Dawn raids, by their very nature, are unexpected. Therefore companies operating in India should be proactive in dealing with the issue. Preparation by a company will mean that, in the event a raid did occur, they can respond quickly and effectively to the situation, minimise the risks of non-compliance and preserve their reputation with the market and stakeholders. To ensure that CCI raids are dealt with effectively, companies operating in India should have the necessary preparations in place. These preparations should include:

• Ensuring a clear written response strategy is in place across the company and that practice raids are carried out.
• Identify a response team who will be the sole contact between the company and the CCI and lead the internal response to the raid.
• Educate staff across the company about dawn raids and set out clear guidance regarding how staffs are to act if a dawn raid occurs.
• Ensure that the company’s legal advisors are capable of advising on a raid and are able to respond quickly were one to take place.

Until it is clearer if the CCI intend to continue seeking warrants and publish clear guidelines and information about dawn raids, companies operating in India, especially those that may be subject to CCI interest, should take a proactive and careful response, preparing strategies and staff before the event.

Laurence Lieberman is partner and head of the India Group and Attika Valli is senior associate in the India Group from international law firm Taylor Wessing. The firm assists with outbound invest- ment from Indian companies looking to expand into Europe, the Middle East and beyond, as well as providing practical legal advice to European and international clients looking to enter the Indian market.

The above article was published in India Inc‘s print edition of the India Investment Journal launched in April 2015 in conjunction with the Global Wealth Management Conclave 2015.


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