CCI penalises cement companies yet again!

CCI penalises cement companies yet again!

Cement companies have been at the centre of controversy over the price of cement. Top industry players are facing a couple of cases related to alleged cartelisation and price-rigging.

In what may be yet another blow to the big players of the Indian cement industry, the Competition Commission of India (CCI), on January 19, 2017, penalised certain cement companies for violation of provisions of the Competition Act, 2002 (Act). An enquiry was initiated pursuant to a reference made to the CCI for alleged rigging of bids submitted pursuant to a tender issued by the Director, Supplies & Disposals, Haryana (Haryana Authority) in August 2012.

The said tender was issued for the purpose of supply of cement to various government/boards/corporations in the State of Haryana and the conduct of certain bidders had resulted in the cancellation of the said tender. Aggrieved, the Haryana Authority approached the CCI and filed a reference against (i) Shree Cement Limited, (ii) UltraTech Cement Limited, (iii) Jaiprakash Associates Limited, (iv) JK Cement Limited, (v) Ambuja Cements Limited, (vi) ACC Limited and (vii) JK Lakshmi Cement Limited (collectively 'Cement Companies').

Readers may recall that CCI had re-imposed penalties, vide its order dated August 31, 2016, at the rate of (i) 0.5 per cent of the profit of certain cement manufactures for the years 2009-2010 and 2010-2011, and (ii) 10 per cent of the total receipts for two years on the Cement Manufacturers' Association (CMA), for violation of section 3(3)(a) and 3(3)(b) of the Act (Cartelisation Case). The above penalty was levied by CCI upon concluding that the cement manufacturers had acted in concert to fix cement prices and limit and control the production and supply of cement. However, several of the cement companies and the CMA have appealed the CCI order before the Competition Appellate Tribunal (COMPAT).

In the recent bid-rigging matter, the Director-General conducting the investigation (DG) inter alia found instances of (i) bid rigging and that the Cement Companies were not competing with each other in the year 2012; (ii) difference in the basic rates quoted by each of the Cement Companies for supply at different destinations and the same destination which according to the DG was possible by back calculation of price from the final tendered price of each destination; and (iii) the Cement Companies were acting in tandem and that there was a meeting of minds of the officials representing the Cement Companies. The DG also examined the correspondence between the officials of the Cement Companies including calls on telephone/mobile phones and mobile text messages and concluded that the Cement Companies are in contravention of the provisions of the Act. The Cement Companies, while denying all the allegations inter alia, made the following objections:

(i)The DG wrongfully employed wholesale price index as a tool for measuring the increase in bid prices;
(ii)There was no settled formal pricing formula for calculating the bid price;
(iii)The DG's investigation was faulty and lacked in-depth investigation and further that there was no adverse effect on competition in India; and
(iv)Disputed the statistics quoted by the DG.

The CCI determined the following issues for consideration:
(i)Whether the bid prices quoted by the Cement Companies were unusually higher than the bid prices quoted in the previous bids and whether such prices were arrived at independently by each of the Cement Companies;
(ii)Whether the lower quantities quoted by the Cement Companies were due to an arrangement to divide the total quantity among the Cement Companies to allocate the markets and whether the bid quantities were arrived at independently by each of the Cement Companies;
(iii)Whether the Cement Companies have in fact divided the market to secure the lowest bidder position; and
(iv)Whether the call details of the officials of the Cement Companies point towards a prior arrangement among the Cement Companies.
The CCI has held that the Cement Companies have failed to provide any material, on the basis on which the Cement Companies have quoted their respective bid prices. It also noted certain consistent and uniform price differences in the quoted price of all the Cement Companies as opposed to their respective previous bids to tenders in the previous years. The CCI observed that all those details are not consistent with the conduct in case they were competing with each other in a free and competitive market.
The CCI observed that in majority of the categories of bids, only a single cement company emerged as the lowest bidder which is significantly different from the pattern of the bid results for the previous tenders in 2008, 2010 and 2011, in which all the Cement Companies participated. The CCI also observed that all the Cement Companies were the lowest bidders in some or other destination, and none of the Cement Companies have failed to obtain a bid. The CCI also observed that Birla Corp and Cement Corp (not a party to the instant case) have not reduced the quantity in the bids from their previous years and unlike the Cement Companies, their behaviour did not undergo a change in the August 2012 tender.

Further, in this case, CCI upheld that the definition of 'agreement' under the Act is an inclusive and not an exhaustive one, and that the standard of proof required proving an understanding or an agreement would be on the basis of 'preponderance of probabilities' and not 'beyondreasonable doubt'. In case of 'agreements' as per the section 3(3) of the Act, once it is established that an agreement exists, it will be presumed that the agreement has an 'appreciable adverse effect on competition' and the onus to rebut the presumption would lie upon the defendants. CCI noted that in the instant case, the Cement Companies failed to rebut the said presumption. In the Cartelisation Case, the CCI, while imposing a penalty of Rs 6,714 crore, noted the action of the Cement Companies and CMA as being not only detrimental to the interests of consumers, but also as detrimental to the whole economy, as cement is a critical input in the construction and infrastructure industry and is thus vital for the economic development of the country. It can be observed that a higher amount has been levied in the Cartelisation Case due to the pernicious effect emanating out of the cartel and its impact on consumers. In the instant bid-rigging case, the CCI, while passing its order, noted that competition law disapproves even the agreements which are 'likely' to cause 'appreciable adverse effect on competition'.

However, while quantifying penalties, a distinction would have to be made between the agreements which actually cause appreciable adverse effect on competition and the agreement which are likely to cause such effects. Hence, in the instant bid-rigging case, CCI passed an order levying a penalty of 0.3 per cent of the past three financial years' average turnover of each of the Cement Companies amounting to Rs 205.73 crore.

By undertaking a perusal of most of the orders of the antitrust watchdog, it can be observed that the CCI generally takes into account inter alia the statistical data of the relevant years, past behaviour of the relevant entities, the general market circumstances of the relevant industry, etc., while determining the culpability of an enterprise under the Act. In the process, the CCI may uncover the nexus between various industry participants.

The companies need to be cautious that any transaction that they enter into or any arrangements/collaboration etc., with other entities in the same level of the production chain and/or with entities in different levels of a production chain and/or with any kind of association/forum/cooperative society etc., does not fall within the ambit of anti-competitive behaviour and/or abuse of dominant position as provided in the Act.

As reiterated by the CCI, it may also be prudent for market players to develop an intensive and robust competition law programme to create awareness and impart to their employees, appropriate training in competition law compliance and assessment of their business dealings and practices.

The article has been authored by Ashish Parwani, Partner, Rajani Associates. Co-authored by Yogesh M. Nayak, Associate, Rajani Associates.

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