The Prime Minister’s assurance in restoring India’s investment status has so far created further confusion in GAAR failing to dispel the doom and gloom. On the other hand, the recent ruling by the Competition Commission (CCI) on cement cartelisation promises more excitement in going forward in implementation, appeals, not to speak of how the parties are going to be impacted in future.
India is the second biggest producer of cement in the world. The current case is based on the information submitted under Section 19(a) of the Competition Act (‘Act’) by the Builder’s Association of India, an intermediary in the consumer chain. Statistics establish that post decontrol of the cement sector, the prices increased, which is inevitable when market forces take over. However, the upward trend remaining constant, and an enquiry against the existing players including the Cement Manufacturer’s Association (CMA), which is a party in the CCI proceedings as well, was initiated under the MRTP Act before the MRTP Commission (MRTPC) in 1999. The Commission arrived at a finding of direct and indirect evidence of concert under section 33(1)(d) of the MRTP Act against which an appeal was filed in the Supreme Court, granting leave to appeal and staying the MRTP order. An affidavit of compliance was directed to be filed by the Appellants, which was not done. Neither the Apex Court, nor the MRTPC flagged this noncompliance.
The present complaint is in a sense continuation of the same cause of action. The market structure however has somewhat changed, with new entrants and regrouping. The Director General’s (DG) report observes that two major groups, Holcim which controls ACC & Ambuja and Birla which controls Ultratech – occupy 40% of the market share with a pan-India presence, while the second rung, of which JP and JK Groups are prominent, comprise 18 players and dominate the balance share along with the third category of small plants. The industry is oligopolistic, given the nature of the product, but given the demand, the prices are far from competitive.
Cement cartels are not specific to India, European nations have had their experiences with cartelisation. Essentially, the EC Treaty, notably Article 81-1, the efficient detection system and imposition of heavy sanctions have worked as effective deterrents. CCI in its order has noted that Holcim and Lafarage were penalised for cartelisation in the European Union and other jurisdictions.
The DG report has based its submissions on certain assumptions on market zone categorisation geographically, production and demand wise. It also compares the cement price index with that of similar items such as coal, electricity, to conclude, the price changes were only upward, very frequent and cost of production was not a factor. Even the government’s stimulus packages in 2008 failed to reduce cement prices, while coal, petrol and other prices fell, cement prices increased. The profit margins of the companies were unreasonably high. On concert, the DG’s data collection on prices claimed a strong indication of price parallelism based on indicators such as price movement for all companies in a given period of time in different zones of the country. The CCI has observed that this is not entirely disputed by the parties in their replies. The other major allegation is deliberate non utilisation of the increased production capacity, even during periods of high demand. The main thrust for the findings on cartelisation are based on the role of CMA.
The defences of the major companies are on similar lines denying that CMA provided a platform for data exchanges. Some companies claimed downshift in prices and that the DG had failed to establish price volatility, disregarded the utilisation of the capacity addition and use, attributed allegations of price parallelism which at best were indicative and not substantive indicators of cartelisation, particularly as the nature of the commodity normally led to parallelism. It was alleged that a proper consideration of the markets was not carried out.
The most vociferous arguments are on the issue of concert and the role of CMA. The CMA, an industry body was directed by the DIPP in the decontrolled regime to collect and submit data for retail and whole-sale cement prices and was required by the DIPP, to collate and submit the data pertaining to indicative retail prices, essentially acting as a clearing house. It transpired during the DG’s examination that CMA had formed a high power committee of its members and their meetings provided a platform for exchange of information of price information and what followed thereafter. CMA has protested, stating that several large companies such as ACC and Ambuja were not members, and as such the inference was speculative, and while at best it could form a basis for being treated as violation of the Act, but no adverse inference can be impugned.
CCI has however observed that even the companies which resigned from CMA’s membership attended meetings and all these facts, with the figures establish coordinated action and concert without any accrual or benefit to the customer. Production and benchmarking exercises were undertaken by the CMA was not denied; this could not be done without knowledge of the numbers. Based on these submissions, the Commission held that the economic evidences and the fact of the high powered committee and other meetings under the aegis of CMA collation and dissemination established a coordinated act of contravention of sections 3(3)(6) of the Act read with section 3(1) and 27.
The operative portion includes ‘cease and desist’ directions against the parties and against CMA to disengage from collection and circulation of price data to its members. The penalty on the players exceed Rs 6,000 crore being based on 50 per cent of profits of the period of contravention on the eleven accused parties which is payable by mid September. Experience in other jurisdictions indicates penalties to be the best deterrent against cartelisation. While the parties are bound to approach COMPAT it is unlikely that COMPAT will overturn CCI’s ruling – but its’ possible for a good lawyer to highlight loopholes in any ruling – for example the picking and choosing of parties who should be penalised, whether the quantum of penalty can be assailed on various grounds, including the disproportionate imposition. The ruling seeks to address the lack of clarity in who are the Contravening Parties and the period of contravention, not dealt with in the DG’s report, and is one of the weak links, particularly as its arguable that the penalty is excessive, given that the period of contravention is relatively brief. Indeed, the amount is so excessive that the effect on the financials of the parties in some cases is irreparable. CCI’s reliance on the indirect evidence can also be assailed as inadequate to justify an indictment of cartelisation. With this and more ammunition and rhetoric, if the penalty is reduced, the purpose will be served. But will the parties abide by the cease and desist?
Kumkum Sen is a partner at Bharucha & Partners Delhi Office and can be reached at firstname.lastname@example.org