Regulation Governing Cartels in India: An Analysis
In August 2016, the Competition Commission of India (CCI) levied an immense penalty it has levied to date – a whopping 63.2 billion rupees- in the infamous Cement Cartel case. The origin of the Cement Cartel case was a complaint filed by the Builder's Association of India. The complaint alleged that: employing the Cement Manufacturer's Association (CMA) as a platform, 11 cement manufacturing companies had limited the production and supply and were engaged in fixing the price of cement. The CCI discovered that the cement manufacturing giants had indeed used the CMA as a platform to fix prices, and instantly imposed penalties on the 11 companies. The cement manufacturing companies appeared before the former Competition Appellate Tribunal (COMPAT), and appealed the CCI's decision. The COMPAT, setting aside the CCI's order, remanded the case back to the CCI on the grounds of due process, and violations of the principles of natural justice.
Consequently, the CCI acquiesced to hearing the case anew and passed an order finding that the 11 cement manufacturing companies had fixed cement prices, limiting and controlling the production and market supply of cement, in contravention of section 3(1), 3(3)(a), and 3(3)b of The Competition Act of 2002. It must be noted that the standard of evidence that CCI relied on to reach its decision was a "preponderance of probabilities." The ever-combative cement manufacturing companies and the CMA once again appealed against the CCI's decision to the National Company Law Appellate Tribunal (NCLAT).
It was not until July 2018 that the NCLAT issued its much-awaited decision – it had dismissed the CMA's appeal and had upheld the CCI's decision. The cement manufacturing companies contested this decision by stating that the government of India had specifically required the CMA to assimilate and forward cement price and production data to it. Therefore, no incriminating inference should be drawn from the CMA's forwarding of such data to the Department of Industrial Policy and Promotion (DIPP). To this claim, the CCI and NCLAT argued that the information that the DIPP had authorized for collection had never been meant to be shared with individual cement manufacturing companies.
However, in its monthly executive summaries, the CMA has published and circulated various details relating to cement prices and production to all of the cement manufacturing companies. Furthermore, to uphold its ruling, the NCLAT leaned on the fact that the standard of evidence to prove a cartel case in India is one of "balance of probabilities", as opposed to the "beyond reasonable doubt" standard underlying criminal law. Therefore, the NCLAT relied on corroborative evidence, including price parallelism, similarities in dispatch patterns, production coordination, and low-capacity utilization to deduce that the 11 cement manufacturing companies were involved in a cartel.
Adam Smith, in a fit of righteous indignation, defined cartels as conspiracies against the public for how they impair the rights of consumers. According to the Office of Fair Trading of the United Kingdom, a cartel is a clandestine, verbal, and often informal agreement between businesses not to compete with each other. Essentially, these limit output with the single-minded objective of increasing prices and magnifying profits. These goals are attained by means of price fixing, allocation of production, the sharing of geographic markets or product markets, and engagement in collusive bidding or bid-rigging in one or more markets. The bottom line is that cartels restrict competition, and the offshoots of their functioning include the misallocation of resources and the deterioration of consumer welfare.
The Competition Act
The Indian Competition Act 2002 (Competition Act) is the legislation regulating anti-competitive conduct in India, and the Competition Commission of India is the statutory authority overseeing the enforcement of the competition law. The CCI is aided in its duties by its investigative arm, the Office of the Director-General (DG); its duties involve the achievement of the objectives of the Competition Act, namely the prevention of practices causing an appreciable adverse effect on competition (AAEC), the promotion of competition in the market, and the protection of the freedom of trade and the interests of the consumer.
The Competition Act's stance on Cartels
Section 2, sub-section (c) of the Competition Act defines the term cartel as "an association of producers, sellers, distributors, traders or service providers who by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or, price of or trade in goods or provision of services."
Section 3 of the Competition Act categorically proscribes the creation of certain anti-competitive agreements, such as agreements between or among competitors (horizontal agreements, like those of cartels), and agreements between actors at different levels of the production chain (vertical agreements). Agreements that are not in line with provisions of Section 3, i.e. agreements that provide for bid-rigging, price-fixing, etc. are presumptively deemed void.
To certify the existence and functioning of a cartel, the CCI must establish that the competitors had entered into an agreement with the explicit goal of fixing prices, limiting supply, sharing markets, or rigging bids.
Once a cartel is found to exist, by default, it is hypothesized to cause an appreciable adverse effect on competition (AAEC), unless the agreement is anchored to an efficiency-enhancing joint venture. While this presumption is rebuttable, alleged cartelists have very rarely succeeded in opposing the same. The CCI is also invested with the power to search and seize documents, and to collect evidence via raids to establish the existence of a cartel agreement.
According to Section 19 of the Competition Act, The CCI is authorized to initiate inquiries into anti-competitive agreements or unilateral conduct of its own volition, upon receipt of any relevant information, or based on a reference from any statutory authority. To determine if an agreement violates Section 3, the CCI is required to consider an exhaustive list of factors, including foreclosure of competition, barriers to entry, and benefits to consumers.
Section 19 also sets forth an exhaustive list of factors to define the relevant product and geographic markets before evaluating and assessing competition. The Competition Act also empowers the CCI to impose penalties, in addition to granting them the power to issue cease and desist orders.
Under Section 27 of the Competition Act 2002, the CCI may impose a penalty up to three times the offender's profit for each year that the prohibited agreement has been in effect; or 10% of its turnover for each year that the prohibited agreement has been in effect (whichever is higher).
In May 2016, the Supreme Court of India issued a clarification stating that the "relevant turnover", as opposed to the "total turnover" of the enterprise in question should be taken into consideration when evaluating the penalties to be imposed on the transgressor. In Excel Crop Care Limited v. CCI & Anr. (Civil Appeal No. 2480 of 2014), the Supreme Court stated that "the penalty cannot be disproportionate and it should not lead to shocking results"; further it ascertained that the relevant turnover would be "more in tune with the ethos of the Competition Act and the legal matters which surround matters pertaining to the imposition of penalties." In these contexts, relevant turnover refers to an entity's turnover with regard to products and services that have been hurt by such contravention.
Section 48(1) of the Competition Act presupposes guilt solely on the individuals who held responsibility for the conduct of the company at the time of the infringement. Notably, Section 48(1) provides leeway for this presumption to be rebutted should the relevant individuals be able to demonstrate that the infringement was committed without their knowledge; rebuttal is also permissible if the concerned individuals had exercised due diligence to prevent the same. Under Section 48 (2), however, the consent or neglect of these individuals is established de facto by their involvement and rescinds rebuttal as an option. Furthermore, Section 48 (2) of the Competition Act is not limited to the persons in charge of the company and thoroughly extends to any individual involved with the company's contravention. The cases of Sports Broadcasters (Case Number 02 of 2013) and Dry Cell Batteries (Case Number 06 of 2016) are prime examples; both saw the former employees of the opposite parties being penalized under Section 43 for contravention of the Competition Act. With respect to individuals associated with a company's cartel conduct, the maximum penalty that can be imposed as per Section 27 of the Competition Act is 10 percent of his/her income for each year of the continuance of such conduct by the company.
As illustrated earlier in the Cement Cartel case, the decisions of the Competition Commission of India can be appealed before the National Company Law Appellate Tribunal (NCLAT), and further, before the Supreme Court of India.
Cartel Enforcement Activity
The Competition Commission of India has been immensely agile in its action against cartels. Right up to 2018, sixty-three percent of the cases investigated by the Commission exclusively pertained to cartelization. As of 31 July 2017, one hundred thirty-six (136) of six hundred sixty-nine (669) orders issued by the CCI bore substantive discussions on cartelization. Between 2018 and 2019, the Commission decided forty-eight (48) enforcement cases out of a total of sixty-eight (68) which included instances of abuse of dominance and anti-competitive agreements alike. Since 1 April 2019, the Commission has imposed penalties in five cartel cases.
The following are critical decisions of the enforcement authorities pertaining to cartelization:
In the Flashlights case (Suo Motu Case No. 01 of 2017 In Re: Alleged Cartelization in Flashlights Market in India), the Commission held that there was no violation of Section 3 of the Competition Act despite the active exchange of information between competitors. This was on account of the agreement to fix prices not having been implemented; therefore, the presumption of an appreciable adverse effect on competition (AAEC) did not holdfast.
In the Rajasthan Cylinders case (Civil Appeal 3546 / 2014), the Supreme Court conclusively ruled that, despite identical prices issued by bidders and a trade association congregation, there had been no collusive bidding. The parallel pricing was attributed to the nature of the market and not collusion.
Dawn Raids and the Leniency Regime
The Commission has been successful in employing dawn raids and leniency applications as implements in their battle against cartels in India.
As per Section 41 (3) of the Competition Act, the Director-General is empowered to conduct dawn raids. Dawn raids are conducted by the Director General's personnel at the premises of companies that are suspected of violation of the Competition Act; these typically start in the morning of a working day and last the whole day. The director-general is possessive of a wide range of powers to wield during a dawn raid, which include using reasonable force to access the premise to be searched; sealing the premises; examining books and other records related the business; seizing any documents; examining any person on oath, and employing the notes from a deposition as evidence. To guard against abuse of power, the director general's powers are underlined by limitations which prevent him from conducting a raid without a search warrant and the presence of two independent witnesses, from accessing documents protected by attorney-client privilege, and from searching any area outside the scope of the warrant.
The Director General's Office has been increasingly engaging in dawn raid investigations with the goal of cracking down on alleged anti-competitive practices. There have been only six (6) instances of dawn raids in India since the inception of the CCI, three of which have been conducted in the past twelve months. This sudden spike in dawn raids can be justifiably attributed to the Supreme Court's ruling in Competition Commission of India vs. JCB India Ltd. on 15 January 2019, where it was ruled that documents seized by the Director general during a raid can be employed as evidence during an inquiry. As per the data available in the public domain, the Director-General has conducted raids at Glencore over alleged collusion over the price of pulses, at Eveready Industries, and at the French firm Mersen over alleged collusion in pricing equipment sold to Indian Railways and Climax Synthetics Private Ltd, among others.
The Competition Commission has sought to induce cartel participants into breaking rank and whistleblowing about their fellow cartelists via their leniency program, under the Competition Commission of India (Lesser Penalty) Regulations of 2009.
As per the Competition Act, any member of a cartel can opt to file a leniency application with the Competition Commission, prior to the Director-General Office's submission of its investigation report, seeking a reduced penalty in exchange for "full, true and vital disclosure of information and evidence of substantial value". This categorization could include without being limited to information pertaining to the existence of the cartel, its members and duration.
If the applicant provides valuable information that was previously unknown to the CCI, it is capable of granting a reduction in the penalty of up to 100 percent to the first leniency applicant, up to 50 percent to the second leniency applicant and up to 30 percent to any subsequent applicant.
The leniency regime has been an immensely successful endeavor, given that several investigations and orders have been issued pursuant to leniency applications. Furthermore, the recent orders passed by the CCI under the leniency regime highlight the factors the CCI employs whilst determining the quantum of reduction in penalty, i.e. the stage at which the leniency application is made, the standard of evidence, etc. The year 2018 saw a case involving bid-rigging between two broadcasting companies, Globecast and Essel Shyam Communications Ltd (ESCL); the CCI found that the parties had violated section 3(3)(d) of the Competition Act by swapping sensitive bid-related information with the vested purpose of broadcasting various sporting events such as cricket, Formula One and hockey. Notably, the CCI approved a 100 percent penalty reduction for Globecast on account of its submission of evidence that enabled the CCI to form a prima facie opinion regarding the existence of the cartel, including email correspondence articulating the submission of bids in a colluded manner, sensitive price information, and a forensic report containing mirror images of confiscated laptops and mobiles. While ESCL also furnished additional information to the CCI in its leniency application, it was granted only a thirty per cent reduction since the CCI had already referred the matter to the Director-General for investigation at the time of receiving its application.
It is important to note that the evidentiary value of the leniency applications is of the essence. In the aforementioned case of the alleged cartelization in the flashlights market in India (Suo Motu Case No. 01 of 2017), the CCI stated unequivocally that, in the absence of implementation of a price-fixing agreement, it does not consider the exchange of commercially sensitive information between competitors to be sufficient to establish contravention of section 3 of the Competition Act.
The Competition Commission of India is a proactive regulator and has notably been undertaking advocacy initiatives in order to add to the discourse between market competition regulators and potential leniency applicants. Accordingly, there has been an exponential increase in the number of leniency cases in India which is reflective of a thorough awareness of the leniency regime in the country. Concurrently, there is a conspicuous trend in the number of bid-rigging issues, especially in the domain of public procurement. Given the havoc that anti-competitive activities can wreak on the sustainable economic development of the country, the Competition Act needs to be thrust into the limelight now more than ever.