First-of-its kind order today may impose heavy fines on top 11 firms
After a year of investigating charges of price collusion and artificial scarcity, the Competition Commission of India (CCI) is set to pass an order tomorrow, accusing top cement companies of creating a cartel.
According to top CCI officials, though 39 cement companies were under the scanner, only the top 11 by revenue are likely to face penal action, of eight per cent of their average sales in the past three years. The order has been signed by all members of the Commission but is yet to be signed by its chairman, officials said.
If the order goes through, UltraTech Cement, Ambuja Cements and ACC, which control a third of the volumes in India, are likely to be impacted the most. Jaypee Cements, India Cements and Madras Cements, too, are expected to face action.
According to experts, a penalty of eight per cent might cost the cement makers 40-60 per cent of their net profits for the latest accounting year. Back of the envelope calculations by a research head of a Mumbai-based brokerage firm show the Aditya Birla Group might have to cough up the highest amount, of up to Rs 1,300 crore, followed by ACC at around Rs 650 crore. For JP Associates, it could turn out to be close to Rs 400 crore. In the case of India Cements and Shree Cement, the penalty is likely to be around Rs 300 crore each; for Ambuja Cement, it is likely to translate into a hit of around Rs 550 crore. The numbers, however, could not be independently verified from the CCI.
If the companies have to indeed pay such penalty, they may have to write it off as a one-time extraordinary item or pay from their cash reserves, an expert said. Spokespersons of the Aditya Birla Group, ACC and India Cements said they had not received any correspondence on this from CCI.
Any unfavourable verdict is bound to hurt profit and pricing power of cement makers. According to a Macquarie report, the penalty could lead to de-rating of cement stocks. "This order is likely to reduce the pricing power of cement makers and also could bring de-rating of the valuations multiple of cement stocks." confirmed Teena Virmani, vice-president, Kotak Securities.
The cement companies have been under fire for more than a year, as the competition watchdog began probing into the alleged cement cartelisation, following complaints from the realtors' body, Builders Association of India (BAI). BAI had alleged cement makers form 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.
The watchdog investigated the supply shortage issue and found cement companies were indeed operating far below their plant capacity, at around 70 per cent, the official said.
The case had also been taken up by the Serious Fraud Investigation Office (SFIO), which gave a report to the Union ministry of corporate affairs. According to the source, SFIO’s report also pointed towards a cartelisation among big players in the industry. The probe was initiated in 2010.
However, the cement companies, which have always denied charges of cartelisation, are expected to approach the Competition Appellate Tribunal to appeal against a penalty. “It’s a path-breaking order but I do expect a series of litigations to follow. It’s clear that institutions like Sebi (the Securities and Exchnage Board of India) 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,” said Balbir Singh, partner, DSK Legal. However, many believe, the companies are unlikely to find judicial respite, as the matter has been lingering for long.
Anil Singhvi, former managing director, Gujarat Ambuja Cements, said the reported penalty was “highly excessive and draconian, as eight per cent is not even the profit margin of many cement companies. I’m reminded of V P Singh’s government, when the bureaucrats went after industry almost on a witch hunt.”
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