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september 1, 2012 vol xlviI no 35 EPW Economic & Political Weekly14

Aditya Bhattacharjea (aditya@econdse.org) is with the Delhi School of Economics. Oindrila De (oindrila.de@gmail.com) is with the Indian Institute of Management Indore.

Cartels and the Competition Commission

Aditya Bhattacharjea, Oindrila De

The Competition Commission of Indias Rs 6,307 crore fi ne on 11 major cement manufacturers for cartelisation has been the biggest punishment that the body has imposed since it began functioning in 2008. A study of this and other cases in which the CCI has successfully completed enquiries shows the working of a very different law and commission from that of the earlier MRTP Act. The CCIs successes will hopefully send the right signals to all the stakeholders about the law and the consequences of its violation. However, there is enormous scope for improvement in both the Act and its enforcement before Indias competition policy is raised to international standards.

On 20 June, the Competition Commission of India (CCI) made headlines by imposing fi nes totalling Rs 6,307 crore on 11 major cement manufacturers and the Cement Manufacturers Association (CMA). They were found to have violated the Compe-tition Act by forming a cartel to coordi-nate their prices and limit production and supply of cement. This was by far the largest fi ne imposed by the CCI since it began enforcing the Competition Act 2002 three years ago. Apart from the fi ne, the CCIs verdict opens the door to follow-on claims for compensation by those who were harmed by the cartel, so that in principle every property devel-oper and individual who built a home or offi ce in recent years can apply for compensation from the cement fi rms. No wonder the news sent shock waves across the Indian business world, which had got used to regulators being ineffec-tive or captured by the interests they were meant to regulate.

In the area of antitrust (competition) policy, attempts to control cartels with the Monopolies and Restrictive Trade Practices (MRTP) Act of 1969 were inef-fective.1 More active enforcement should have been a corollary of the economic re-forms initiated in 1991, which abolished merger controls and freed producers from restrictions on pricing, product di-versifi cation, and capacity creation. But anti-cartel enforcement actually slack-ened: only seven cartel cases were decided by the MRTP Commission between 1991 and 2007 the same number as bet ween 1972 and 1976 and most of them were dismissed, either by the commission or the Supreme Court. The commission lacked the resources to undertake de-tailed investigations, and from the 1990s onwards it was overwhelmed by consu-mer complaints and contractual disputes

that had nothing to do with cartels or in-deed with competition. In the rare cases in which it could come up with evidence, the MRTP Commission could only issue cease and desist orders. In fact, two of these cases involved the CMA and some of the same cement producers who have now been fi ned by the CCI.2 It is a sign of the ineffectiveness of the MRTP regime that these complaints were initiated in 1990 and 2001, but the commissions o rders were handed down only in 2007!

The Competition Act, passed in 2002, was designed to be a much more modern and powerful competition law. Its en-forcement was unfortunately delayed. First there was a challenge to the consti-tutional validity of the procedures for appointing the chairman and members of the CCI, then a delay in drafting and passing an amendment bill that took care of the constitutional issues and also made several other changes in the Act, and then a further delay in selecting the chairman and members. The commis-sion was fi nally constituted and the sec-tions of the Act dealing with anticom-petitive agreements and abuse of domi-nance were brought into force only in early 2009. The MRTP Act was fi nally r epealed in September that year.3

The Competition Acts sections on car-tels are fairly potent. Unlike the MRTP Act, it clearly defi nes a cartel. Also, while Section 2(a) of the MRTP Act de-fi ned an agreement to include any ar-rangement or understanding, the corre-sponding defi nition in Section 2(b) of the Competition Act defi nes it to include any arrangement or understanding or action in concert...whether or not such arrangement, understanding or action is formal or in writing. Section 3(3) lists the four most pernicious types of cartel agreements (agreements to fi x prices, restrict supply, allocate markets or cus-tomers, or rig bids), and specifi es that they will be presumed to have an appre-ciable adverse effect on competition.4 This obviates the need for the CCI to prove anticompetitive intent and effects a requirement that had crippled the MRTP Commission. Furthermore, in addition to ordering discontinuation of

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Economic & Political Weekly EPW september 1, 2012 vol xlviI no 35 15

anticompetitive agree ments, the CCI can impose substantial monetary penalties on participants in a cartel: up to three times its profi ts or 10% of turnover, whichever is higher, for each year that the cartel agreement was in effect.

The CCIs fi rst cartel decision, handed down in May 2011, was, however, an a nticlimax. Three associations of Hindi fi lm producers (together representing 27 fi lm producers or production companies, many owned by the biggest names in Bollywood) had instructed their mem-bers not to release new fi lms for exhibi-tion, so as to secure a more favourable revenue sharing arrangement from multi plex owners. There was incon tro-vertible evidence of meetings and written instructions to association members, with a threat of suspension or boycott. But the Competition Commission let the producers off with token fi nes of Rs one lakh each, on the grounds that their boy-cott had begun before the anti-cartel sec-tion of the Act had come into effect, al-though it continued for a few weeks af-terwards and had a lasting effect on ticket prices.5 This was an unpropitious beginning for anti-cartel enforcement under the new law. But with its orders in the cement case and some other cases that we mention below, the commission has now shown that it means business. Despite a few misgivings that we have about its approach, we feel that this is a welcome development.

The Cement Case

The cement case6 was brought before the CCI by the Builders Association of India (BAI) under Section 19 of the Competi-tion Act, alleging concerted action by 11 cement companies7 to raise price by lim-iting supply and controlling production under the umbrella of the CMA, the asso-ciation of cement manufacturers com-prising 46 members (as of 31 March 2009) from both public and private sectors. Ac-cording to the informant, these 11 ce-ment manufacturers are the big players who collectively hold 57.23% of the mar-ket. The main arguments put forward by the informant (Commissions Order, para 2.13) was that the combination of successive increases in cement prices during 2008-10, decreasing capacity

utilisation, and increasing capacity in-stallation by these big players cannot be rationalised by any economic logic other than fi xing of prices and limiting of sup-ply. Moreover, during the alleged period of cartelisation, the operating profi t mar-gin of the industry was 26% on turnover, the second highest after mining. The BAI also cited newspaper reports to a ssert that all cement manu facturers i ncreased price uniformly in December 2009, and advance information of such a uniform rise had come out in a newspaper (Economic Times, 2 November 2009).

Following the procedure laid down in Section 26 of the Competition Act, after satisfying itself that the informant had a prima facie case, the commission order ed an investigation by its director general (DG). The DGs report pointed to cartelisa-tion based on circumstantial evidence such as parallel changes in fi rms prices, production and dispatch. After recording the objections of the cement fi rms, the commission referred to the defi nition of agreement in the Act and held that it did not require proof of an explicit agreement to raise prices. An agreement could be in-ferred from the intention or conduct of the parties and established by circumstantial evidence alone (Commissions Order, para 6.5.3). The commission observed that

parallel behaviour in prices, dispatch, sup-ply, accompanied with some other factors i ndicating coordinated beha viour among the fi rms may become a basis for fi nding contravention or otherwise of the provisions relating to anti-competitive agreement of the Act (para 6.5.8).

This approach to establishing collusive price-fi xing without direct evidence of an agreement is known internationally as the doctrine of parallelism-plus. The commission found several plus factors documented in the DGs report to be per-suasive. The CMAs member-fi rms had been collecting and sharing information on wholesale and retail prices all over the country, which would have facilitat-ed price coordination between them. Also, prices had increased soon after two CMA meetings. Capacity utilisation had fallen, and the growth rates of cement production and dispatches had been much less than that of the construction industry, the major user of cement.

These facts indicated that the fi rms had been limiting supplies in order to create scarcity and increase prices. The com-mission held that all these factors, in conjunction with the high correlation be-tween fi rms prices, production and dis-patch in each region, were adequate to establish that the cement companies had acted in concert and formed a cartel.

Other Recent Cases

Although the cement case has grabbed the headlines, probably because of the prominence of the players involved and the size of the fi nes imposed, the CCI had actually used circumstantial evidence to decide three other cartel cases earlier this year, resulting in much smaller fi nes on much smaller fi rms. All three cases involved collusive bidding for supplying public sector agencies. For want of space, we summarise the essential fea-tures of these cases very tersely.8

Forty-eight manufacturers were held to have colluded in responding to tender no-tices by the public sector oil marketing companies for procurement of liquefi ed petroleum gas (LPG) cylinders. This inves-tigation was ordered suo motu by the commission after the DG n oticed suspi-cious bidding behaviour in a nother case. Apart from characteristics of the market that were conducive to collusion, the com-mission was persuaded by evidence of identical or near-identical rates being quoted for cylinders in each state, despite the manufacturers having very different costs and locations, a pre-bid meeting of the suppliers, and their use of common agents for submitting bids. Three manufacturers of aluminium phosphide (a pesticide required for pres-ervation of foodgrains) were found to have submitted identical bids to the Food Corporation of India (FCI). Other circumstantial evidence included their divergent cost structures, simultaneous entry of the company offi cials into the FCI offi ce to submit bids, and boycott of a later tender by the same fi rms. A history of identical bids and boycotts by the same fi rms before Section 3 of the Com-petition Act came into effect in May 2009 was also regarded as supportive evidence, alth ough they could not be p enalised for such behaviour.

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september 1, 2012 vol xlviI no 35 EPW Economic & Political Weekly16

Ten explosives manufacturers were fi ned for boycotting an auction con-ducted by Coal India; again their re-2009 history went against them.

Assessment

One of the most prominent features of these cases is lack of direct evidence of collusion. This provides an opportunity for the fi rms to appeal. It also has some additional implications, which we exa-mine in the context of the cement case, alth ough they are also relevant to the others. The economic theory of optimal deterrence requires penalties to be cali-brated as a multiple of the amount by which each fi rm benefi ts from participat-ing in a cartel. Based on BAIs complaint, the DG and commission only focused on 11 players and did not pay attention to the rest of the market.9 There is a pos-sibility that the whole market was cartelised, or only a few of these 11 mem-bers were colluding, and therefore the penalty imposed is either less or more than optimal. On the other hand, if the commission believed that only these 11 members were involved, then there was a need to use non-cartelised fi rms (in-cluding public sector undertakings) as a competitive benchmark for the analysis of prices, production and capacity rather than focusing solely on the parallel b ehaviour of the named fi rms. Despite the fact that the 11 fi rms are big players and cover almost 60% of the market (in terms of sales), a question mark still re-mains on their ability to increase prices to such an extent when approximately 40% of the market is outside the cartel, coupled with growing demand and con-tinuous addition of capacity in the indus-try by almost all the players.

Moreover, the duration of an agree-ment is diffi cult to gauge without any direct evidence. In the present case, the commission only considered the time period between 20 May 2009 (the day from which Section 3 of the Act came into force) and March 2011 (since the DGs analysis consists of data up to March 2011), not on the basis of actual or even suspected duration of collusion. The d uration of the cartel is crucial information for levying the optimal cartel penalty. For example, in the European Union

(EU), the basic amount of fi ne is deter-mined by a specifi c percentage (the maximum limit is 30%) of the value of sales during the last year of the infringe-ment, multiplied by the number of years of infringement.10 In the United States (US), a specifi c percentage of total vol-ume of affected commerce for the entire time period of infringement is consid-ered for the fi ne.11 In the present case, without knowledge of the actual dura-tion, the commission calculated the fi ne on the basis of two years of infringe-ment. The optimum penalty would have been more or less depending upon the actual duration of the cartel.

A related matter which is a cause for concern is the determination of fi nes. In India, the penalty must not exceed the maximum of three times the profi t or 10% of turnover of each year of infringe-ment, whichever is higher. In the cement case, the commission decided to penalise 0.5 times the profi ts for 2009-10 (pro rata from 20 May) and 2010-11. In the other cases, the fi nes were varying per-centages of turnover, with no reason giv-en for the variation. We need clear guide-lines regarding the penalty. Moreover, factors other than size of cartel gain should be considered, as in many other jurisdictions. For ins tance, in the EU, these may include incre ase in fi nes due to aggravating factors such as repeated offence, leadership in the cartel agree-ment, refusal of cooperation, obstruc-tion, etc, or reduction in fi nes due to mit-igating factors such as immediate termi-nation of the agreement, limited partici-pation, effective cooperation outside a leniency programme, etc. However, all these differentiations are possible only if we have enough evidence of each p layers role in the cartel.

What would constitute direct evi-dence? In an earlier case involving the cement industry under the MRTP Act (RTPE 21/2001), the MRTP Commission passed a cease and desist order based on a letter sent by one of the cement manufacturers to its dealer stating that prices needed to be changed based on prices agreed to at a CMA meeting. After that experience, the fi rms would proba-bly not have left a paper trail of corre-spondence. But direct evidence can also

take the form of internal documents, which can be recovered by raiding the offi ces of suspected fi rms. Such dawn raids are frequently conducted by com-petition agencies in other countries. But the CCI does not seem to have used the powers it has been given under Section 41 of the Competition Act, 2002, as amended in 2007, which gives the DG the same a uthority as an inspector under Sections 240 and 240A of the Companies Act. If the DG, in the course of an investigation, has reasonable grounds to believe that relevant documents may be destroyed, mutilated, altered, falsifi ed or secreted, he can apply to the chief metropolitan magistrate of Delhi to carry out search and seizure operations to recover them. Further, according to the CCIs own Regu-lation 41, tape recordings, videos, emails, telephone records, account books and other kinds of records are admissible in any proceedings before it. It seems that the CCI has not conducted any search o peration to uncover such evidence.

Another means of obtaining direct evi-dence is through Section 46 of the Act, which allows for reduced penalties on cartel members who disclose vital evi-dence that helps nail their fellow cartelists. Such leniency programmes have led to a sharp increase in convictions in the US and EU. It seems that no fi rm in India has so far used this provision, per-haps because the probability of detection and anticipated penalties were perceived to be low. This probability would be raised by the imposition of substantial penalties in a few more cases;12 a few successful raids would raise it further.

How Policy Facilitates Cartelisation

Finally, one fact that emerged in the c ement case is of wider relevance. After the closure of the offi ce of the Develop-ment Commissioner of Cement Industry (DCCI) in 1989, the Department of Indus-trial Policy and Promotion (DIPP) under the Ministry of Commerce and Industry directed CMA to collect and submit wholesale and retail price, production and capacity data from across the coun-try, a task that was earlier performed by the DCCI (para 5.1.7 of the Order). In fact, the CMA had asked for clarifi cation from

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Economic & Political Weekly EPW september 1, 2012 vol xlviI no 35 17

DIPP whether to carry on with this prac-tice after enactment of the Competition Act, but was told to continue. Moreover, the DGs report also includes two minutes of CMA meetings where manufacturers met with union ministers and the DIPP secretary respectively. In the fi rst case, they discussed reduction in prices and in the second case, suppliers and prices at which cement would be supplied to gov-ernment departments in Uttar Pradesh was agreed upon (para 6.5.31).

This type of information exchange works as what is called a facilitating prac-tice in the literature on cartels, and con-tributed to the commissions fi nding of cartelisation. It is therefore ironic that it was being carried out under offi cial direction. The commission held that this does not absolve CMA or the cement com-panies involved in this exercise from run-ning afoul of the provisions of the Act. Moreover, the CMA had sought advice from the DIPP in 2008, well before the sec-tions of the Act relating to anticompetitive agreements were notifi ed in May 2009, and continued to collect and disseminate the information afterwards (para 6.5.19). However, we feel that the CCI, as part of the competition advocacy activities that it had been conducting since it was set up in 2003, should have alerted the DIPP to the anticompetitive consequences of its direc-tive. The CMA could also have been told not to circulate the information collected from its members, and to transmit it only to the DIPP. The commission could per-haps have issued interim orders to this e ffect much earlier.

In fact, several such offi cially-mandated facilitating practices are prevalent. It can be argued that the Legal Metrology (Packaged Commodities) Rules, which require fi rms to print the maximum retail price on pre-packaged commodi-ties, serve the same purpose. So might the fi xation of trade margins for drugs under the Drugs (Price Control) Order, 1995, which was noted in a rare cartel case in which direct evidence was found.13 There is, of course, a trade-off between avoiding cartel facilitation and protecting consumers from overcharg-ing by retailers. But perhaps the rules could be experimentally relaxed for cer-tain products to see whether retail prices

rise or fall. More recently, it was reported that the Union Ministry of Finance had directed the four state-owned insurance companies to share premium and claims data for major accounts, and to ensure that there is no competition between them in any corporate/group account.14 If true, this is an egregious case of state-directed cartelisation, and it remains to be seen whether the CCI takes cogni-sance. (Public sector enterprises are not exempted from the Competition Act, and only the sovereign functions of the state are excluded from its application.)

To conclude, we should appreciate the CCIs efforts in successfully completing the inquiries in these cartel cases which, we hope, will send the right signals to stakeholders consumer groups, busi-nesses and government departments about the law and the consequences of its violation. The DG investigations a ppear to have been highly professional, and the commissions orders meticulously marshal and assess the evidence, giving detailed expositions of the arguments raised by fi rms in their defence. However, there is enormous scope for improve-ment to raise competition policy to inter-national standards. As suggested in this article, some improvements are required in the Act itself whereas the others are related to enforcement. Esta blishing transparency and incorporation of clear cut criteria for penalties, collecting and using direct evidence rather than rely-ing on circumstantial evidence, and using competition advocacy to increase awareness among other government bodies are important take aways from our analysis of these early cases.

Notes

1 See De (2005) and Bhattacharjea (2008, 2010) for detailed discussion of the MRTP Commissions performance and analysis of selected cases.

2 RTPE 99/1990 and RTPE 21/2001. 3 See Bhattacharjea (2010) for an account of the

causes and consequences of the delay in enforcement, and a critical analysis of the Competition Act.

4 This presumption is rebuttable, and fi rms can attempt to use Section 19(1) of the Act to argue that their agreement had certain benefi cial effects, which are unlikely but not impossible to adduce in a cartel case. The commission does consider such arguments in cartel cases, but so far has not accepted them. As pointed out in Bhattacharjea (2010), the anti-cartel sections of the Act merely transfer to the fi rms the burden of showing that positive effects outweigh negative effects. They do not make cartelisation illegal

per se, which is the standard approach in most competition laws at least for the most perni-cious types of cartels. Per se illegality requires competition authorities to establish only that the fi rms entered into a cartel agreement, with-out going into its effects at all.

5 The commission also mentioned in this context that the MRTP Commission had given an injunction against the multiplexes in 2007. The order is available on the CCI website (www.cci.gov.in) under case 01/2009, FICCI-Multiplex Association of India vs United Producers/ Distributors Forum and Others.

6 Case No 29/2010, Builders Association of India vs Cement Manufacturers Association & Ors, o rder dated 20 June 2012.

7 Associated Cement Co Ltd, Gujarat Ambuja Cement Ltd, Grasim Cement, Ultratech Cement Ltd, Jaypee Cement, The India Cements Ltd, J K Cements (JK Group), Century Textiles & Industries Ltd (Century Cement), Madras Cement Ltd, Binani Cement Ltd and Lafarge India Pvt Ltd. In a later order that came to our attention after this article was written, the com-mission found that Shree Cements had also par-ticipated in the cartel and fi ned it Rs 398 crore, on the same basis as the other 11 fi rms (RTPE-52/2006, in re: Alleged Cartelisation by Cement Manufacturers, order dated 30 July 2012).

8 The cases are, respectively, suo motu case no 03/2011 (in re: suo motu case against LPG cylinder manufacturers), suo motu case no 02/2011 (in re: Aluminium Phosphide Tablets Manufacturers), and Case no 06/2011 (Coal India Limited vs GOCL Hyderabad & Ors).

9 The DG argues that since the top 12 companies hold 75% of production capacity, they only con-centrated on these companies for their analysis (para 4.2.6, Main Order).

10 European Commission (2006), Guidelines on the Method of Setting Fines Imposed Pursuant to Article 23(2) (a) of Regulation No 1/2003, C 210: 2-5.

11 United States Sentencing Commission, Guide-lines Manual, 2R1.1

12 In the wake of the publicity given to its order in the cement case, the CCI has come out with prominent advertisements inviting cartel members to use the leniency programme.

13 Case No MRTP C-127/2009/DGIR4/28, Varca Druggist & Chemist & Ors vs Chemists and Druggists Association, Goa. But see the sepa-rate orders by Geeta Gouri and R Prasad on the impact of fi xing trade margins on fi nal prices to consumers. This was one of the investigations transferred to the CCI after the MRTP Commis-sion was wound up. The minutes and corre-spondence of the chemists association estab-lished that they had not only agreed on fi xed trade margins, but had also limited the dis-counts that their members could offer, and restricted the number of chemists and stockists in each region.

14 Finance Ministry Cover for PSU Insurance Car-tel, Business Standard 5 July 2012 (http://www.business-standard.com/india/news/fi nance-min-istry-cover-for-psu-insurance-cartel/479441/).

References

Bhattacharjea, A (2008): Indias New Competition Law: A Comparative Assessment, Journal of Competition Law and Economics, 4(3), reprinted in Eleanor Fox and Abel Mateus (ed.), Economic Development: The Critical Role of Competition Law and Policy, Edward Elgar Publishing, 2011.

(2010): Of Omissions and Commissions: Indias Competition Laws, Economic & Political Weekly, Vol 45, No 35, 28 August.

De, O (2005): Identifying Cartels in India, MPhil, dissertation, University of Delhi.

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