A Governmental Regulation of the Restriction of Monopolistic Activity and the Protection of Competition in Kazakhstan
Zhibek Aidymbekova, Lawyer, Macleod Dixon LLP
Rinat Begaliyev, Lawyer, Macleod Dixon LLP
Since the Law on the Development of Competition and the Restriction of Monopolistic Activity was firstly adopted in the Kazakh Soviet Socialist Republic in 1991, this governmental antimonopoly regulation had been gradually developed into a rather advanced system during the following 12 years. However, the first precedent for the imposition of a heavy fine for a breach of anti-monopoly legislation occurred only in 2003. At that time, a large foreign oil company, which is currently operating in Kazakhstan, had illegally inflated the sales prices of petroleum, oil, and lubricant, and was subsequently ordered to return its profit resulting from this monopolistic practice. This profit was required to be returned to the state budget, since they were earned as a result of a breach of the antimonopoly legislation. The authors of this article would now like to present to readers of the magazine a brief review of the chief legal aspects of the government’s antimonopoly regulations, which, in their opinion, should be understood by any investor planning to work in, or who is already operating in Kazakhstan.
Governmental Regulatory Body
The creation and enforcement of the national antimonopoly policy for the Republic of Kazakhstan has been entrusted with the Agency for the Regulation of Natural Monopolies and the Protection of Competition (“Agency”), which is a body subordinate and accountable to the President of Kazakhstan. Thus, the Agency is legally independent from the Government and Parliament of the country in the exercise of its powers. In order to conduct economic and technical examinations, the so-called Expert Council under the Agency was established. It is a consultative body including researchers, technical experts, and employees of the Agency, representatives of state bodies and private companies.
The Agency has been empowered: (1) to define the presence of the dominant (monopolistic) positions of companies operating in the market; (2) to determine if the company’s activity restrains competition; (3) to give conclusions on the establishment of what the company share amounts to in it, where it is found to be exceeding 35% of its individual market, and to reorganize or liquidate companies found to have a dominant (monopolistic) position in the individual market; (4) to formulate decisions on the implementation of state determined pricing adjustment for goods (works, services) of the companies found to have a dominant (monopolistic) position in the individual market; (5) in some cases, to exercise government control over compliance with the Kazakh antimonopoly legislation in the event of the acquisition of securities (shares, interests) in the charter capital of the Kazakh companies.
For the purpose of monitoring, the Agency is entitled to inspect companies, and request and acquire information from state bodies, companies and individuals. In turn, the companies will be required to submit information requested by the Agency. In the event of failure to submit the requested information or if it’s submitted in an untimely manner, the company and its General Manager may be penalized.
The Agency is entitled to issue administrative resolutions, which are subject to compulsory implementation to specific companies, as well as to impose administrative fines on them.
The Kazakh antimonopoly legislation consists of the Law on Competition and the Restriction of Monopolistic Activity as of January 19 2001, the Law on Unfair Competition as of June 9 1998, the Law on Natural Monopolies as of July 9 19981, as well as other subordinated legal acts, including the Government’s resolutions, instructions and orders of the Agency. (This article doesn’t concern the issues of governmental regulation that relate to the natural monopolists’ activity alone since the purpose of this article is an overall review of the governmental regulations of antimonopoly activity)
The Kazakh antimonopoly legislation provides a general legal regime for Kazakh and foreign companies.
A key term for the liabilities of a company under the antimonopoly legislation is the legal definition of the “subject holding a dominant position” (“Dominant Subject”). A company can be recognized as the Dominant Subject in the following cases:
• if its share in the certain market for goods lies within a marginal amount determined by the Agency. The aforesaid amount is set every year and cannot be less than 35% of the total market;
• if its market share, along with the share of another company, amounts to 50 percent or more, and with shares of two other companies amounts to 70 percent or more;
• if its market share is stable for two last years and, taking into consideration the relative amounts of the market shares of other companies, impedes the possibility to approach this market by new companies.
The Agency will come to a decision to recognize a company as a Dominant Subject on the ground of market analysis and of the market share of the company. In this event, the Agency should notify the company in writing about its decision. The Agency will draw up a register of Dominant Subjects in the market of Kazakhstan, including in the regional and urban markets of Astana and Almaty.
The Agency will monitor continuously the operation of Dominant Subjects who shall then be required to submit reports on their financial and economic activities, convey information on the transfer of titles on shares/securities in their companies, and submit information of their throughput, sales prices as well profitability.
The Scope of Governmental Regulation
Building up a business
If a foreign company investing in Kazakhstan plans to establish a Kazakh company or a branch of the foreign company, and its share in the appropriate market would exceed 35% of the total market, this company may be regulated by the Agency. In this event, the foreign company shall apply to the Agency with the request for prior consent to establish a new company or branch in Kazakhstan.
It is supposed that compliance with this requirement is not realizable practically for the foreign company since, before establishment of the Kazakh company or branch, will find it rather difficult to define on its own whether their shares will exceed 35% of the market. On the other hand, receipt of the Agency’s consent can take about 30 calendar days.
Procurement and Development of Business
The foreign company may also come within the purview of governmental control by the Agency as follows:
• in the event that the foreign company, solely or jointly with other entities, procures share/voting stocks in the Dominant Subject that is the Kazakh company, and gains an opportunity through this fact to hold over 20% of shares/voting stocks in the Dominant Subject;
• in the event that the foreign company, solely or jointly with other entities, receives the capital or the intangible assets of the Kazakh or other foreign company, for purpose of ownership of use, provided that the balance sheet value of the assets to be acquired exceeds 10% of the total balance sheet value of the plant and intangible assets of this company holding them;
• in the event that the foreign company, solely or jointly with other entities, acquires the rights relating to the Kazakh company, which enable (the company) to determine the conditions of conducting latter’s business or to act as its executive board (for example, execution of the contract on management).
In event of the latter, it is not quite clear what “acquisition of the rights enabling (a company) to determine the conditions of conducting business” mean? For example, does acquisition of 100% of share/voting stocks in the company, which is not the Dominant Subject (i.e. meaning the actual acquisition of the right to determine the conditions of conducting business), come within the purview of governmental control? Unfortunately, the antimonopoly legislation does not provide a clear answer to this question.
The foreign company shall apply to the Agency with the request to give own prior consent in the event that: (1) the assets’ total value of the acquirer (acquirers) or alienator (alienators) is 100,000 times as much the sum of Month Specified Rate that amounts to $657,000; or (2) one part of the bargain is the monopolist; (3) or the buyer is the group of entities who control the operation of the seller. The period of waiting for prior consent can last up to 30 calendar days from the date of receipt of the request. In the event that the total value of the assets of the acquirer (acquirers) or alienator (alienators) is 50,000 times as much the sum of Month Specified Rate that amounts to $328,500, the foreign company shall notify the Agency within 15 calendar days from the date of bargaining.
Reorganization and Liquidation of Business
The Agency will control the processes of reorganization and liquidation of Dominant Subjects as well, for the purpose of preventing negative affects to the competition environment. This body will provide consent to reorganize and liquidate a Dominant Subject.
Operating Activities of Business
Abuse of a Dominant Position in the Market. For the purpose of preventing possible abuses in the market of Dominant Subjects, the legislation bans the following: (1) to set high and low monopoly prices; (2) to dictate terms, which are beyond the scope of the agreement, or terms, which discriminate against other parties among other market participants; (3) to remove goods from merchandising in order to create or maintain a shortage or in order to raise prices; (4) to create obstacles to entry into a market by other subjects; (5) to breach pricing procedures; (6) to unreasonably cut down or eliminate the production of goods experiencing consumer demand.
The process of monitoring the pricing on the part of the Dominant Subject aims to prevent setting unreasonably high or low monopoly prices. The monopolistic high price is one that is set by the Dominant Subject in the corresponding goods market in order to inflict unreasonable expenses and/or to earn additional income due to an abuse of its dominant position. The low price set by a monopoly is one that is set by the Dominant Subject in order to restrict competition by means of eliminating competitors from the goods market.
The Dominant Subject shall be required to notify the Agency regarding forthcoming price increases and reasons for its occurrence, and will be required to submit documents that support the justification for the price increase.
The Agency has a right either to approve the future price increases or to deny permission to do so, and will notify the Dominant Subject if the Agency finds an absence of grounds for the raising of prices. The Dominant Subject, having received this notice, shall then be required to maintain the prices of the supplied goods. The Agency may establish governmental regulation on the prices of the Dominant Subject’s goods by means of fixing their prices for a duration determined by the Agency, if the following two conditions are met: the Dominant Subject fails to notify and co-ordinate the price increase with the Agency, and in addition breaches the terms of antimonopoly legislation more one time within a calendar year.
The Agreements Restricting Competition. Agreements between Dominant Subjects and companies, which are able to cover 35% of a total market, are forbidden in the event that they (1) restrict or eliminate competition, generate illegitimate benefits due to a limitation of output or removing goods from circulation; (2) reduce or eliminate without tangible reason the overall production of goods experiencing demand or orders of consumers; (3) divide a goods market on the basis of geography, by sales volume or purchases, by assortment of goods to be sold, by range of sellers or customers; or (4) refuse to conclude agreements with specific sellers and customers; in addition, it is forbidden to set and maintain common prices in the market, including by means of collusion.
Additionally, the agreements (concerted practices) of the Dominant Subject with the supplier or the purchaser of goods are forbidden in the event these would cause a restriction of competition and/or the infringement of interests of other companies and individuals. The existing of these agreements may be evidenced with (1) the existence of information exchange among the representatives of the companies by means of private meetings, phone conversations, communications by telex and fax; also (2) public announcement of prices (distributing a new price list, a price advertising) to consumers, agents and intermediaries, and through various unions (associations), where these companies are members.
Unfair Competition. In addition, the Agency monitors and takes measures preventing unfair competition, whose basic types are: the use of an illegitimate trade name of the company, which could potentially mislead or actively misleads consumers; dissemination of false information damaging the reputation of a competitor or its products; dictating to the counterparts additional trade terms, which are beyond the scope of the agreement, by their nature or commercial purpose; distribution of advertising or some information containing correct comparison with the competitor’s goods; in advertising materials: a fraudulent misrepresentation or concealment of the real properties, quality, and prices concerning the products; the receipt, use or public disclosure, without their owner’ consent, of scientific and technical, industrial, and other information, containing commercial and official secrets; also using give-away prices to achieve advantages in competition.
Liability for Breach of the Antimonopoly Legislation
A breach of antimonopoly legislation in Kazakhstan will result in administrative and criminal responsibility.
So, according to the Code of the Managerial Responsibility as of January 30 2001, administrative responsibility is indicated for actions such as (1) administrative infringements, (2) unfair competition, (3) an abuse of the dominant (monopoly) position in the market, also (4) other breaches of the antimonopoly legislation provided that these deeds have no basis for criminal penalties. Depending on the type and severity of the breach, a penalty may be imposed to a company as an administrative fine up to the amount of 1,000-2,000 Month Specified Rates ($6,565-$13,130), and to officials up to the amount of 100-400 Month Specified Rates ($650-$2,625). Additionally, the income earned due to these breaches may be confiscated through a court decision.
According to the Criminal Code of the Republic of Kazakhstan as of July 16 1997, restriction of competition may result in criminal responsibility as a result of following actions: (1) setting or maintaining high or low monopoly prices, (2) market division, (3) restricting access to a market, (4) elimination of economic subjects from a market, in addition to (5) setting or maintaining common prices provided that the aforesaid actions have resulted in significant damage to a citizen, an organization, or the state (as for these actions, damage to a citizen is considered significant if it exceeds 100 Month Specified Rates, and significant damage to organization or the state would exceed 500 Month Specified Rates). Criminal responsibility for the breach of antimonopoly legislation may result in the form of fines, arrest, imprisonment or deprivation of liberty without a further right to fill the specified positions. The property may be confiscated by a court decision as well.
In addition to this provision, a court may annul at the suit of the Agency the agreements signed by and between the companies (fully or partially) with the breaches of the antimonopoly legislation. As a last resort, the company may be liquidated through a judicial procedure. If it would be proved satisfactorily that applicable requirements of the antimonopoly legislation failed to be complied, the court may also annul the state registration of the company or the branch
As presently constituted, a rather developed system of governmental regulations of the restriction of monopolistic activity and the protection of competition has been created and is functioning in Kazakhstan. The body liable for governmental policy in this field possesses considerable legal and administrative resources as well. However, the existing system is not perfect: despite the evident achievements, there are still a number of problems including the above-mentioned, which are not regulated, fully or partially, by current legislation.
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