CCI Verdict - Decidedly Circumstantial!

CCI Verdict - Decidedly Circumstantial!

The Competition Commission of India recently imposed heavy penalties on 10 major cement companies in India on charges of indulging in cartelisation. A look at the ramifications of the CCI decision.
On June 20, 2012, in a first-of-its kind order, the Competition Commission of India found 11 cement companies guilty of cartelisation and imposed a penalty at the rate of 0.5 times of their profit for the year 2009-10 and 2010-11 for violation under Section 3 of the Competition Act, 2002. The total profit of these companies for financial year 2009-2010 was about Rs 12,632 crore and the CCI penalty amounted to Rs. 6,306.59 crore. Additionally, the CMA was also fined Rs 73 lakh for providing a 'platform' to the cement companies and facilitating cartelisation, which is 10 per cent of its total receipts for these two years.
The decision of the CCI came on a plea filed by the Builders Association of India alleging that cement manufacturers have formed a cartel to fix the commodity's retail prices at almost similar levels. There were also charges of these companies reducing production to inflate prices. In June 2010, acting on a complaint filed by the Builders Association of India (BAI), the Competition Commission of India (CCI) probed the cement industry in India for evidence of collusive behaviour. It is important to note that the DG restricted himself to the 10 cement companies named, owing to the fact that such companies were the prominent participants in the market and the key players in this whole arrangement. The DG limited the period of contravention from 20 May 2009 to 31 March 2011.
According to the BAI, although the Government had issued various concessions and tax subsidies along with petrol and diesel reductions, cement companies through an agreement, caused an increase of Rs 5 per bag between December 2008 and February 2009.
No dominant player
In its observations the DG found that as per the prevailing market structure, no player can be said to be dominant. The Indian cement industry is dominated by twelve cement companies having about 75 per cent of the total capacity with about 21 companies controlling about 90 per cent market share in terms of capacity. From this, the CCI deduced that collusion between companies is possible and can be adduced from circumstantial evidence. The lack of direct evidence was the chief objection taken by the cement companies. However, the DG noted that circumstantial evidence is of no less value than direct evidence to prove cartelisation. The CCI held that the cement companies interacted using the CMA as a platform, which gave them an opportunity to determine and fix prices. Further, the CCI noted that the CMA published factory wise production and despatch statistics of each company and circulated such information amongst its members. This collation and sharing of price, production and despatch data was sensitive and made co-ordination easier amongst the cement companies.
Price, production and despatch parallelism
After conducting an economic analysis of price data, the CCI noted that there was a positive correlation in the prices of all companies. Similarly, the production figures across cement companies (in a particular geographical region) showed strong positive correlation. Additionally, it was observed that the despatches made by the cement companies were almost identical for the period from January 2009 to December 2010. The cement companies argued that the parallelism in both production and despatch is on account of the commoditised nature of cement, the cyclical nature of the cement industry and the ability of competitors to intelligently respond to the actions of their competitors. The CCI rejected these arguments and stated that given the nature of data exchanged between the parties, parallelism could not be a reflection of non-collusive oligopolistic market conditions.
Limiting and controlling production, supply and price
In the order, the CCI suggested that whilst cement manufacturers increased capacity utilisation during the last four years, their production has not increased commensurately. This "deliberate act" of shortage in production and supply by the cement companies and almost inelastic nature of demand of cement in the market resulted into higher prices for cement.
However, the cement companies, which have always denied charges of cartelisation, are expected to approach the appellate tribunal to appeal against a penalty.
Indian Cement Review
sought reaction from cement companies on the penalty levied by CCI, but none of the cement companies responded to calls and emails. However, a spokesperson of a large cement company under condition of anonymity said, "We are in the process of reviewing the CCI order and we will take suitable course of action in due course of time. We operate under our code of ethical practices and do not indulge in cartelization." In tersely-worded identical press releases to the media, Ambuja Cements clarified saying "ACL contests the allegations and findings against the company. ACL will appeal against this order to the Appellate Tribunal and will seek a stay on the aforesaid penalty," while ACC stated that "We feel aggrieved by this order and will appeal against it before the Competition Appellate Tribunal." Also, Anil Singhvi, former managing director, Gujarat Ambuja Cements, said "It is very hard to believe that there can be a very effective cartelisation for a very long period in cement industry which has about 45 to 50 players. I can understand for a couple of months it can work, but finally the competitive forces work."
The BAI Trustee D L Desai, who spearheaded the case against the cement companies justified the penalty saying "the provision for penalty is three times the net profit for the year, but the CCI has imposed just 0.5 per cent of the net profit for two years, so it's a proper penalty." Speaking about evidence of cartelisation, Desai said, "While the installed capacity of cement companies increased every year, the capacity utilisation was decreasing and the cement prices were increasing. If the cement demand was rising, why was capacity utilisation decreasing? Also, the cement prices were moving in similar range across the country." Desai pleaded for reasonableness on the part of cement companies, stating "The cement companies are not in the business for charity, they are in the business for profit. They should make reasonable profit, but they should not indulge in profiteering."
Balbir Singh, partner, DSK Legal, commented on the cartelisation issue saying "It's a path-breaking order but I do expect a series of litigations to follow. It's clear that institutions like SEBI and CCI are no-nonsense bodies and have a wider responsibility. But our cement companies lack the balance sheet strength of many of their Western counterparts."
Cement companies in India have witnessed dramatic growth facilitated by the decontrolling of the sector in 1989, the same year the Cement Manufacturers' Association was established. Almost from the time the sector has been decontrolled, it has been under the scrutiny of the government for 'acting in concert' or the formation of cartels. The first accusation of cartelisation of the cement industry came in 1991 by the Monopolies and Restrictive Trade Practices Commission. The cement companies then denied all allegations stating that the sudden price increase was due to the increase in cost of manufacture.
What next?
The penalty imposed by CCI will dent the financials of cement companies, hence the companies are bound to challenge the CCI order in the appellate tribunal and in the courts. After all, the cement companies are not going to pay up without a fight considering that the penalties imposed would hit them hard. The CCI has relied on circumstantial evidence which may or may not corroborate actual facts. It remains to be seen whether the circumstantial evidence relied upon by the CCI stands the scrutiny of the tribunal and/or the courts. Whatever be the outcome of the case, it is certain that the cement companies would henceforth remain wary of the developers' bodies closely monitoring their goings-on and correlating the cement price movement and the capacity utilisation of cement manufacturers.

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