The Indian Competition Authority identifies cartels but does not impose any penalty amidst the COVID-19 pandemic (South Eastern Railway / Hindustan Composites)

The Indian antitrust watchdog has changed its modus operandi in the ensuing pandemic, by taking a softer stance on cartel-like behaviour in the Micro Small and Medium Enterprises (MSME) sector. In July 2020, the Competition Commission of India (‘Commission’), while proving the existence of a bid-rigging cartel among manufacturers and suppliers of railway brake blocks, decided to let off the companies without a penalty. It is the second consecutive decision in which the commission merely passed a cease and desist order against a proven cartel. Previously, in a suo moto case, the commission found striking evidence of collusion among four companies in the sector of industrial and automotive bearings. It is imperative to note that under Section 27(b) of the Competition Act, 2002 (‘Act’) the commission is empowered to impose a penalty upto 10% of the average turnover of the cartel or three times the amount of profit made by such an arrangement. On the contrary, in both the cases, the commission was of the opinion that “ends of justice” would be met by a strong warning and no penalty. This new approach has raised concerns on the efficacy of cartel investigations and the weakening of competition enforcement in India. [1]

Unraveling the Commission’s Order

Pertinently, in the case of Chief Materials Manager, South Eastern Railway v/s Hindustan Composites Ltd. & Ors  [2], the informant(s) alleged that ten manufacturers and suppliers indulged in bid rigging by quoting identical bids in response to a tender issued by the Indian Railways. In subsequent negotiations, these companies quoted identical reductions in their bid, which was unusual as each negotiation was undertaken separately. Similar instances were reported across the country in various other railway divisions. The commission clubbed all the cases and passed an order under Section 26(1) of the Act, directing the Director General (“DG”) to begin investigation.

The DG collected evidence that included email, messages and whatsapp conversations between the Opposite Parties (‘OP’), to prove that all the ten OPs were indulging in cartelisation in the period of 2009 to 2017. The commission considered the detailed email exchange aimed to rig the bidding process as incriminating evidence against the OPs. It was argued by the OPs that, (i) there was no Appreciable Adverse Effect on Competition (AAEC) as a result of their cartelisation, and (ii) they have no control on the price and quantity as they are mere suppliers to a monopolistic buyer i.e. the Indian Railways. The commission while dismissing OP’s contentions, illustrated that there is a presumption of AAEC for any agreement that falls under Section 3(3) of the Act. This presumption can only be rebutted by placing evidence to the contrary or on the basis of the balancing provision provided under Section 19(3) of the Act. After a holistic examination, the commission thus concluded that the parties were not successful in evading the statutory presumption sans any credible evidence. With regards to their second contention of Railways being a monopolistic buyer, the commission believed that the direct accrual benefits from the bargaining made by the Indian Railways goes to the consumer and therefore any form of bid-rigging by the vendors will be in flagrant violation of the Act.

Similarly, in the case of In Re:Cartelisation in Industrial and Automotive Bearings  [3], the commission found sufficient evidence of cartelisation among four companies in the industrial and automotive bearings market. In the suo moto case, the commission observed that the prices of steel (necessary raw material for manufacturing bearings) started increasing from 2009 onwards due to coordination amongst the five companies. The idea was to pass on the profits to the Original Equipment Manufacturers (OEM) and to customers in the distribution segment of the market. The DG concluded from emails and minutes of the meetings that the companies shared confidential information with a clear intent to manipulate the price. The commission found the parties guilty of contravening Section 3(3) of the Act, as the prices quoted by the companies had an impact on the OEMs, and there was sufficient evidence against the OPs of entering into price fixing arrangements thereby causing AAEC in the market.

A Look into the New Approach

In March 2020, the country entered into a nationwide lockdown due to the pandemic. The regular working of the commission was duly affected, and the regulatory body started adapting to the new normal. In both the cartel cases, the commission acknowledged the poor state of the economy and the existing liquidity crunch in the market. In the South Eastern Railway Case, the commission considered the active participation and co-operation of the companies as mitigating factors. The commission was of the opinion that the objective of the Act is to correct irregularities by streamlining the behaviour of market participants and not necessarily to penalise market players. Being cognizant of the hardship faced by the MSME sector, the commission let off the cartel participants with a cease and desist order. Similarly, in the suo moto case, the commission believed that the present scenario did not call for the imposition of a monetary penalty. In both the cases, the commission put forward a strongly worded warning asking the companies to not enter into such arrangements in the future.

Conclusion

This is for the first time in the Indian jurisprudence, that contravening companies escaped penalty, even though the consequences of their actions were proved to disrupt competition in the market prior to the pandemic. At the same time, the European Commission has been aggressive in its imposition of penalty for the violation of antitrust laws, and has recently fined € 260 million in a cartel settlement [4]. The menace of bid rigging is viewed very sharply by the proponents of stricter enforcement. Previously, the Supreme Court of India had observed that effective enforcement in cartel cases is important not only to sanction anti-competitive conduct but also to deter other similar practices [5]. It will now be interesting to see if the new approach by the commission is a suitable precedent to correct market behaviour or just a one time concessional measure during the pandemic.

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Abhishek Tripathy, The Indian Competition Authority identifies cartels but does not impose any penalty amidst the COVID-19 pandemic (South Eastern Railway / Hindustan Composites), 10 July 2020, e-Competitions Competition Law & Covid-19, Art. N° 96574

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