Concrete movement

CCI's fine on cement companies is welcome

The Competition Commission of India’s order on Thursday that the 10 largest cement companies and industry body Cement Manufacturers’ Association should pay a cumulative fine of Rs 6,307 crore, as a penalty for forming a cartel to control prices, is a welcome step forward for market regulation in India. It is the first order of such magnitude since the passage of the Competition Act, 2002, which was supposed to ensure free and fair competition, and has been viewed as an act of assertion by the Competition Commission of India (CCI). Each of the 11 entities will have to pay a penalty equal to 50 per cent of its declared profit in 2009-10 and 2010-11, within 90 days of the order’s passage. The order has several points of note. First, it specifies that written evidence of cartelisation is not necessary. Second, it says that proper cartelisation requires the “institutionalisation” of a system to “share prices, capacities and production” — which the cement industry was doing, it says, through the Cement Manufacturers’ Association. They colluded, the CCI maintains, to ensure that they did not utilise their full capacity, keeping supply low so that prices would not ease. Earlier this year, the all-India average for the price of a 50-kg bag of cement hit a historic high, of over Rs 300. The cement companies are expected to appeal this order.

 

Puzzlingly, share prices of the companies so censured did not react immediately, in spite of the fact that their cash pile has been severely eroded, and their pricing power cut into. It is possible that the market had already priced in the possibility of the CCI verdict being negative. A less sanguine possibility is that market participants simply do not believe that this regulatory action will be allowed to stand, or suspect that it will be weakened significantly by the politically powerful cement lobby. The cement industry may have many arguments in its defence, but it is important to ensure that the CCI’s landmark order is judged by the appellate authority on its merit alone. As markets grow in size and complexity, they will become more open to manipulation, and a robust, empowered regulator will be essential to protect market integrity and consumers’ interests. It will, thus, be in nobody’s interest for this, the first major such regulatory action, to be diluted or evaded. The chairman of the CCI, Ashok Chawla, has said that an investigation of practices in the tyre sector is at “an advanced stage” and that other probes are on in milk, pharmaceuticals and civil aviation. Anecdotally, several of these sectors have been seen to coordinate price increases and decreases, but a formal investigation of cartelisation, of course, requires more than that; as the order said, the institutionalisation of such coordination is what matters.

The government is in the process of examining whether the CCI’s regulatory ambit should be expanded to include the scrutiny of mergers and acquisitions. That, taken together with the CCI’s recent energy, is a good sign for robust, regulated capitalism in India. Some short-term pain for individual companies is a small price to pay for a more efficient, lower-cost economy in which capacity is properly utilised.