Distribution agreements, dealership arrangements, and franchise relationships are among the most common commercial structures in the Indian economy-and also among the most frequently overlooked from a competition law perspective. Many Indian businesses operate distribution networks with pricing policies, territory restrictions, and exclusivity arrangements that could, without warning, attract investigation by the Competition Commission of India (CCI). Section 3(4) of the Competition Act, 2002 specifically addresses anti-competitive vertical agreements between players at different levels of the supply chain. This guide explains how competition law and distribution agreements in India interact, what practices are scrutinised, and what businesses must do to manage their risk.
Section 3(1) of the Competition Act, 2002 provides that no enterprise or association of enterprises shall enter into any agreement in respect of production, supply, distribution, storage, acquisition, or control of goods or services which causes, or is likely to cause, an appreciable adverse effect on competition (AAEC) within India.
Section 3(4) specifically lists vertical arrangements-agreements between entities at different levels of the supply chain-that are presumed neither per se valid nor per se void, but which are assessed under the AAEC test if they include:
- (a) Tie-in arrangements: Making the purchase of one product conditional on purchasing another product (a tied product). Example: requiring dealers to purchase accessories only from the manufacturer as a condition of selling the main product.
- (b) Exclusive dealing: Requiring a distributor or dealer to deal exclusively with the principal’s products and not stock or sell competing products.
- (c) Exclusive distribution: Allocating exclusive territories or exclusive customer classes to a distributor, preventing others from distributing in that territory or to those customers.
- (d) Refusal to deal: Restricting the entities to whom a dealer may sell or to whom a supplier may supply.
- (e) Resale price maintenance (RPM): Any agreement to sell goods on condition that the prices to be charged on resale by the dealer shall be the prices stipulated by the principal, unless prices lower than those may be charged.
Critically, unlike Section 3(3) horizontal agreements (price-fixing, bid rigging, market allocation between competitors), vertical agreements under Section 3(4) are not presumed to be anti-competitive-they must be assessed under the AAEC factors in Section 19(3).
Resale Price Maintenance: CCI’s Strict Stance
Resale price maintenance (RPM) has attracted the most CCI enforcement attention in vertical arrangements. The landmark case is:
Fx Enterprise Solutions India (P) Ltd. vs. Hyundai Motor India Ltd., Case No. 36/2014 (CCI, June 14, 2017):
Hyundai Motor India Limited (HMIL) was found by the CCI to have engaged in RPM through its dealer network by:
- Setting a “maximum permissible discount” that dealers could offer customers, effectively establishing a minimum resale price floor
- Monitoring dealer compliance with the discount restriction through a penalty mechanism (including threat of warranty cancellation and termination of dealership)
The CCI held that capping the maximum discount effectively sets a minimum price-and thus amounts to RPM under Section 3(4)(e). HMIL was penalised INR 87 crore (approximately 0.3% of its relevant turnover from passenger car sales in India). The NCLAT upheld the CCI’s RPM finding.
Key lesson from Hyundai: A “maximum discount cap” or a policy enforcing minimum retail prices through indirect mechanisms (monitoring, penalties for non-compliance, warranty conditions) is treated as RPM regardless of the label. The CCI does not require a formal price-fixing agreement; a system that produces the same economic effect will be treated identically.
RPM involving recommended retail prices alone (without enforcement mechanisms) is less likely to attract liability. However, any active monitoring and enforcement of pricing compliance by dealers converts a suggestion into a binding restriction.
Exclusive Dealing and Territory Restrictions
Exclusive dealing (a dealer agrees not to carry competing products) is assessed under the AAEC test. The CCI considers:
- The market share of the principal and dealer: a company with a 60% market share that forces exclusive dealing on its dealers forecloses a large portion of the distribution network from competitors.
- Foreclosure effect: does the exclusivity arrangement prevent competing manufacturers from accessing distribution?
- Efficiency justifications: does the exclusivity allow the dealer to invest in training, inventory, and brand promotion that it would not otherwise provide?
Exclusive dealing by dominant enterprises is more likely to attract CCI scrutiny under the abuse of dominance provisions (Section 4) than as a vertical restraint under Section 3(4).
Territory restrictions (a dealer is allocated an exclusive territory and prevented from selling outside it) are assessed similarly. Intra-brand competition (different dealers of the same brand competing against each other) is suppressed by territorial restrictions; the CCI will weigh this against inter-brand competition effects.
Most Favoured Nation (MFN) Clauses
MFN clauses (requiring a seller to offer the same or better terms to the contracting party as it offers to any other buyer) have attracted CCI scrutiny in the e-commerce context. MFN clauses imposed by platforms on sellers can prevent sellers from offering lower prices on competing platforms-with significant effects on inter-platform competition. The CCI has examined MFN clauses in the context of hotel booking platforms and online marketplaces.
For traditional distribution agreements, MFN clauses that ensure a distributor is not disadvantaged compared to other distributors are generally less problematic-but any clause that prevents a manufacturer from pricing competitively to consumers through other channels should be reviewed.
The Safe Harbour: Section 3 and the Competition Amendment 2023
The Competition (Amendment) Act, 2023 introduced provisions enabling the Central Government to specify categories of agreements exempt from the Chapter II prohibitions (Section 3(3) and Section 3(4)). Additionally, where the market share of both parties to a vertical agreement is below 10% in the relevant market, there is a strong argument (consistent with global competition law best practice) that the AAEC effects are negligible and the agreement is unlikely to attract enforcement action.
However, there is no formal safe harbour embedded in the statute itself for sub-10% market share parties. The 10% threshold is a practical guidance point rather than a statutory exemption. Businesses with significant market shares (above 25-30% in any relevant market) should conduct a compliance review of their distribution agreements before any CCI investigation is triggered.
What Businesses Should Do
Compliance audit of distribution agreements: Review all existing dealer, distributor, and franchise agreements for provisions that may constitute RPM, exclusive dealing, territory allocation, or tying arrangements. Pay particular attention to pricing policies and any enforcement mechanisms.
Pricing policies: Replace discount cap policies with guidance documents that clearly state recommended retail prices are advisory only, with no enforcement mechanism, monitoring, or penalty for offering greater discounts.
Training for sales and distribution teams: Sales personnel who communicate pricing instructions to dealers may inadvertently create competition law exposure. Training should clarify what they may and may not communicate regarding pricing.
Dominance assessment: If the company has a significant market position (above 40-50% market share in any relevant market), all distribution practices should be assessed not only under Section 3(4) but also under Section 4 (abuse of dominant position), which carries higher penalties and lower thresholds for finding violations.
Key Takeaways
- Resale price maintenance under Section 3(4)(e) of the Competition Act, 2002 is assessed under the AAEC test-not per se illegal-but the CCI’s INR 87 crore penalty on Hyundai Motor India demonstrates strong enforcement in practice.
- Setting a “maximum discount cap” enforced through penalties or dealership termination threats is treated as RPM; pricing guidance without enforcement mechanisms is lower risk.
- Competition law compliance audits of distribution agreements are particularly important for companies with market shares above 25% in any product or geographic market in India.
This article is for informational purposes only and does not constitute legal advice. Readers should seek appropriate professional counsel for their specific circumstances.
META TITLE: Competition Law and Distribution Agreements in India