International Journal of Law and Legal Jurisprudence Studies

CARTELISATION: RECENT TRENDS AND ISSUES FACED BY INDIA-Pranav Pathak ,IV year, B.A., LL.B. (Hons.), NALSAR University of Law, Hyderabad

Abstract

A major reason for increase in cartelisation has been the liberalisation of the Indian economy which brought with itself a wave of de-regularisation and new found independence to enterprises to manage their affairs. Cartelisation is a major hurdle to healthy competition. One of the main objectives of competition law is to stop private players from obstructing market economy and monopolising the market and cartelisation works against this very basic principle and is one of the many ways by which private players obstruct market economy. This short note examines the evolution of definition of cartelisation from being close to non-existent in the MRTP act to its present version in the Competition Act. It talks about the issues India has faced in the recent past and things the nation has to ready itself for in the future. The note while elaborating on the shortcomings of the current law and giving related suggestions also discusses the recent cases of tyre and cement cartelisation in India and how the Indian competition law should adapt itself to deal with international cartelisation which can have really adverse effects as witnessed in the Vitamins cartel case.

Introduction

Adam Smith famously remarked in The Wealth of Nations, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”[1]

Arguably the major objective of Competition law is to stop private players from obstructing market economy and monopolising the market so that there is free and fair competition which will promote consumer welfare, increase production efficiency, maintain the quality of goods produced and keep dominance in check. Cartelisation works against this very basic principle and is one of the many ways by which private players obstruct market economy.[2]  Firms do tend to restrict competition by entering into collusive agreements to fix prices and outputs, and they often take exploitative and exclusionary steps as means to achieve this vicious end and it may even happen that some major players in the market join hands and enter into a joint venture or some other form of combination to prevent new players from coming up while they rule the roost.[3]  Such tactics only encourages unfair practices, becoming a hindrance in the development of a free and fair economy and an ideal Competition Law would be that which is able to address this problem and curb it. Many critics were all praise for the legal devices used in the U.K. Competition Act, 1998 to control cartelisation and allied threats and this act was undoubtedly an inspiration for India to draft its own Competition Act in 2002,[4] but perhaps an introspection into what India has achieved and faced so far and what lies in the future; is much needed.

Anti-Competitive Agreements and Cartelisation

Before the Competition Act no anti-competitive law in India had explicitly and comprehensively defined cartel, though it was implicitly covered under Section 33 (1) d of the Monopoly and Restrictive Trade Practises Act, 1969.[5] A cartel is often described as a horizontal agreement that provides for price fixation, customer and territory allocation, set distribution of goods and services, bid rigging, restriction of supply etc. and may be formed by an association of persons or enterprises.[6]  It may be said that it is one of the more malevolent forms of violation of competition law as it unequivocally damages competition and causes loss to the market economy and free competition, and it is owing to this seriousness of cartels they are subject to the per se rule in United States, United Kingdom and even in India.[7]  This basically means that cartels violate the law simply by the reason that they are in nature of restraint of trade and it is immaterial whether they actually harm someone.[8] Cartel is defined in section 2(c)[9] and Section 3(3)[10] says that any sort of price fixation, bid rigging and allocation of territory will be presumed to have an adverse effect on competition.  Section 3(3) of the Indian Competition Act is in tandem with the UNCTAD’s Model Law of Competition.[11] The definition of cartel is very broad and inclusive covering both trade and competition and covers any and everything that may try to limit competition, restrict or inflate prices, control production and make arrangements that bars entry of new players or cause them hindrance.  The Competition Commission of India (CCI), while inquiring into the alleged contraventions of section 3(1) or 4(1) may, if it opines that there exists a prima facie case order an investigation by the Director General (DG).

Cartels have been a subject of heavy litigation since the time of Monopolies and Restriction of Trade Practices Act, 1969 and have been a major aspect of the Competition Act, 2002. It has been ruled in Alkali Manufacturers Association of India v. Sinochem International Chemicals Co. Ltd. [12] that in any economic field a greater dimension has to be given to the word “cartel” to include all sort of combinations, which are anti-competitive. The Supreme Court has defined the word cartel in Union of India v. Hindustan Development Corporation[13] saying that “cartel, therefore is an association of producers who by agreement among themselves attempt to control production, sale and price of the product to obtain a monopoly in any particular industry or commodity. It may be any combination the object of which is to limit or control trade or production, distribution, sale or price of the goods or services.”

A cartel may be formed for a variety of reasons which are reflected in the definition itself but for the sake of elucidation it may be stated that the main driving factors behind the formation of a cartel are avoiding price wars, selling at a uniform price, dividing territories where each enterprise can practise local monopoly, restricting production by having fixed quotas, creating impediments to entrance of new players and even distributing profits among themselves.[14] Even attempt to control is deemed to be a part of cartelisation i.e. if some entities have an intention to achieve monopoly by combination or the probability of monopolisation of a relevant market and makes an attempt to control any part of the trade in the goods or provision of services then it shall be treated as an attempt to control.[15] This principle has also been stated in Copperweld Corp v. Independence Tube Corp.[16]

Issues faced by India

There are many issues which India or for that matter any system of competition law in the world would face; like the extent to which the unilateral conduct of firms with market power should be controlled, the extent to which transactions can be modified, the price which a new player or customer should pay to access an essential facility, the relationship between intellectual property and competition law and to what degree should a merger be prohibited.[17]  A one point solution of all these problems would be to scrutinise and keep an eye on agreements between independent firms which smell of restriction and establish a hierarchy and severity of cartelization involved and set up penal provisions accordingly which may amount to imprisonment for the more serious offences. Some other policy questions include whether sanctions should be available against individuals as well as companies and the extent of leniency which can be given to whistle-blowers from within the cartels.

Cement Cartelization in India

In India cartels have been alleged in various sectors like cement, tyres, trucking, steel, family planning devices (Copper T) and the like.[18]

India is the second largest manufacturer of cement in the world after China and so the existence of cement cartels in India does not comes as a surprise.[19] Ever since liberalization and decontrol, cement manufacturers have been accused of cartelization and recently in 2007 the Monopolies and Restrictive Trade Practices Commission[20], New Delhi ruled that cement manufacturers have indeed been acting in a manner attracting Section 33 1 (d) of the MRTP act and passed a cease and desist order against the manufacturers.[21]  The Director General brought a case against the Birlas, ACC and JK group houses alleging that they control 50 per cent of the total cement production and have an arrangement that allows them to control cement market, prices, distribution etc.  However there was no direct evidence of an arrangement and the court relied on the ruling given in Union of India v. Hindustan Development Corporation[22] saying that there has to be proof of agreement among the concerned parties to act in concert and that such agreement may be tacit or inferred.[23]

Recently in 2012 the Builders Association of India filed a case against the Cement Manufacturers’ Association alleging violation of Sections 3 and 4 of the Competition Act and setting up of cartel which was anti-competitive in nature.[24]  The court held that an existence of written material was not necessary to prove a common understanding or agreement and it is sufficient if the activities of the companies imply the existence of such an agreement.[25] The fact that production and dispatch of the companies were fluctuating in a similar manner was considered critical evidence. It was held that the act of limit and control of production and supplies in the market caused upward movement in the price of the cement and that the deliberate act of shortage in production and supplies by the cement companies and the almost inelastic nature of demand of cement in the market resulted into higher prices in the cement. Thus it was held that the cement companies acting together had actually limited, controlled and also attempted to control the production and price of cement in the India market. The act was held not only detrimental to the cause of the consumers but also to the whole economy since cement was a crucial input in construction and infrastructure industry vital for economic development of the country and appropriate penalty was imposed.[26]

The buck did not stop here and on further complaints the Competition Commission of India (CCI) ordered further probe by the Director General (DG) who submitted his report on May 30, 2011 and in which he stated that the prices of cement had risen in an eerily similar way although the cost of sale had increased only marginally.[27] An article published in the Business Standard stated that major cement producers along with Cement Manufacturers’ Association (CMA) divided the whole market into five zones, which enabled them to control the supply and fix prices by forming a cartel and that according to the DG’s investigation report, CMA formed a high power committee and the prices of cement were discussed in its meetings.[28]

The 2012 Tyre Cartelisation Controversy

In the year 2011 it appeared that another major cartel in India is soon to be busted and this came to light in the backdrop of consumers having to face steep price hike on tyres, increasing the costs of maintenance of their vehicles. It was alleged that the major players of this industry had conspired together to create an artificial price hike of tyres and charges were levied against the Automotive Tyre Manufacturers’ Association (ATMA) and the major players in the market which included Apollo Tyres Ltd, MRF Ltd, JK Tyre and Industries Ltd, Birla Tyres and Ceat Ltd and it was alleged that they control 95 per cent of the industry.[29] A much publicised litigation took place in the case of All India Tyre Dealers’ Federation vs. Tyre Manufacturers[30] in which the commission observed that “certain industries provide a structural basis that is conducive for cartelization and that that tyre industry in India, being highly oligopolistic and concentrated in nature, having entry barriers and a homogenous product, is conducive for cartelization but there are other factors that dilute the above structure and create conditions which do not sustain the maintenance of a cartel.”[31] The Commission was of the opinion that price parallelism per se may not violate the provisions of the Act and that in certain cases price parallelism could have been dictated solely by economic reasons and that it was not a violation of the Competition Act if it does not result from the alleged concerted action. The Commission also weighed various parameters and held that the presence of other mitigating factors such as the bargaining power of the Original Equipment Manufacturers known as the OEMs, who constitute a majority of the customer base, and the options to replacement consumer to retreat, diluted the factors suggesting collusive actions. It also held that the levy of anti-dumping duty on the imported tyres suggested that cheaper options were available and hence the existence of cartel cannot be established.

India and International Cartelisation

Another issue which India faces is lack of tie ups with other governments or signing up international treaties to handle international cartels that have effects in many different countries, given that national laws apply only to harm that occur in national jurisdiction, and some countries have no anti-cartel laws at all, case in point being Information Technology cartels and Vitamin cartels.[32] International price fixation if done by a multinational company is bound to hit India because of the simple reason that there are Indians who are buying the goods of that company and if that company is minting profit out of the cartel it is because there are Indians who are paying higher prices for their goods. In 2005 Samsung, the South Korean giant had pleaded guilty and paid a criminal fine of more than US $300 million for its role in the dynamic random access memory (DRAM) industry which is the second largest criminal antitrust fine in history (second only to the Vitamin cartel case).[33] Three companies and five individuals were charged in a fine totalling more than US $646 million.[34] The relevance of this case is that its ramifications were felt all over the world but somehow Samsung got away by paying damages only in USA, perhaps a well drafted International Competition Law or the signing of a multilateral treaty would prevent the occurrence of such events in future.

The world was shocked when consumer goods giants Unilever and Proctor and Gamble were fined £ 280 million for setting up soap and washing powder related multi-national cartel.[35] It has to be noted that Surf, Tide and Lux are some of the leading brands in India which are produced by these MNCs.

Another estimate which comes from a study done by Simon Evenett and Julian L. Clarke says that Indians in total paid excessive money amounting to over US $ 25.71 million but India was not able to bring such cartels to justice nor could it get any money from the settlement amount due to absence of proper laws and international agreements.[36] Although the new Competition Act has incorporated the effects doctrine where the competition commission can make an enquiry into events happening outside India and negatively effecting Indian economy, but the practical application of this provision and how properly can such investigation be done is something which we will come to know over time. It is an established fact that the developed world is coming all guns blazing against cartelization and is pushing for the maximum when it comes to establishing deterrence and the US $ 646 million fine on Samsung bears testimony to the fact. What it means is that Multi-National Companies will now push to establish cartels in the developing world where there is an absence of competition law or where it is not well drafted. Absence of proper deterrence is an invitation to enterprises to form cartels.

As of now the institutions engaged in battling cartelization internationally include Organization for Economic Co-operation and Development, International Competition Network, United Nations Conference on Trade and Development and the World Trade Organization.[37] For India, cooperation with these organizations and entering into multilateral and bilateral agreements is the need of the hour.

The Vitamins Cartel Case

This case involved the top players of vitamin industry like Rhone-Poulenc of France, Takeda Chemical of Japan, Roche AG and BSF of Germany who all formed a cartel dividing up the world market and fixing price all over the world in the 1990s.[38] Of these producers the French giant Rhone-Poulenc defected and exposed the entire cartel under the US leniency laws but not before the cartel had enjoyed a free run of ten years during which they duped the entire world out of millions of dollars and the worse hit were developing nations.[39] Roche paid a fine of US $ 500 million and the total fine collected exceeded US $ 1 billion in US alone. It was estimated that the developing world paid an awe-inspiring total of US $ 2700 as overcharge during the 1990s and that regimes with a weak system of competition law suffered more. India alone suffered a loss of US $ 25 million.[40]

What India can learn and change

Though the Indian Competition Act has provided for a comprehensive law to deal with anti-competitive conduct there are certain areas which need consideration. One issue in point may be certain enterprises which are being deregulated particularly those which are new and involve information technology like telecommunication services.  The definition of predatory price is unsatisfactory in that the level of cost of production of goods or the provision of services below which a price would become a predatory price should not have been left to be determined by regulations made by the commission, leaving the principle unknown and therefore uncertain. The principle on which a relevant cost of production is determined and the factors considered should be known to the industry and acceptable so that the defence of mistake of fact and absence of any regulation is not taken by any enterprise which is trying to abuse the economy by misusing its dominant position or by setting up of cartels.[41]

Another criticism of the Indian Competition law vis-à-vis cartels has been the shift from rule of reason as envisioned early in Section 38 of the Monopoly and Restrictive Trade Practices Act to the per se rule which does not allow for the fact that certain groups might be formed without prejudicing the public and are not necessarily in the nature of trade restriction or malpractice.[42] There are many competition laws in the world which provides for exemptions in certain cases of cartelisation for example crisis cartels that provide for industries in decline or recession to revamp themselves and export cartels which try to regulate trade in a manner which is beneficial to the nation.[43] Often a cartel prohibition has been introduced with a condition that creates an exemption to the prohibition but in recent decades such exemptions have been mostly done away with but still in certain cases cartel exemptions should be allowed, provided that they meet certain specific criteria like being in public interest and the range of such exemptions should only reduce with time.[44] As of now the only mitigating provision is section 46 of the Competition Act 2002 which gives leniency to certain cartels on giving some vital disclosures.

While certain ‘gateways’ may be given to cartels in some cases where it is in nature of public interest, there should be enough deterrence to stop the more harmful ones. Generally strong cartels are run by rich conglomerates and so stiffer penalties are often justified and that is why in UK there is no cap on upper ceiling of fine while in India the fine cannot be more than 10% of the turnover or three times the profit made by the cartel.[45]  In India too it will only be in the interest of the economy that this ceiling is raised.

India does not treat an economic crime as grave as cartelisation as a serious criminal offence while in many other countries cartelization is treated as a grave criminal offence owing to the serious negative effect it has on a country’s economy and UK and as many as nine OECD countries have such a provision which includes imprisonment for long terms (limited to three years in India) in addition to other penalties.[46] The Competition Commission has the power to imprison the violators of its orders for a maximum period of three years. Further there should be a special provision dedicated to the Director of the Company who if found guilty of ant-competitive practices like cartelisation should be imprisoned for a considerable duration which should not be less than 10 years owing to the seriousness of the crime.

India can incorporate provisions similar to those in the US and Korean Law which enables a private citizen who exposes a cartel of entities who use government fund, to get a share in any compensation money received.[47]  This was put in effect in light of huge economic loss faced due to these cartels.[48]

The times are changing and now more than 111 countries in the world have well drafted Competition Law in place while 22 years back the number was just 30[49] and consequently competition authorities are more competent than ever before to eradicate these hard-core cartels.  India itself got its first comprehensive Competition Legislation in 2002 and now where we go from here is anybody’s guess but it only seems imperative that the future holds in establishing more deterrence by coming up with new tools that are needed to eradicate cartelisation and perhaps the time has come that we go beyond companies and start making individuals liable for their anti-competitive acts.

*IV year, B.A., LL.B. (Hons.), NALSAR University of Law, Hyderabad.

[1] Richard Wish, Control of Cartels and other Anti-Competitive Agreements, in Competition Law Today: Concepts Issues and The Law in Practice  77-79 (Vinod Dhall  ed., 2007).

[2] T. Ramappa, Competition Law In India 22-23 (2d ed. 2009).

[3] Vinod Dhall, Overview: Key Concepts in Competition Law, in Competition Law Today: Concepts Issues And The Law In Practice 3,4 (Vinod Dhall ed., 2007).

[4] Adi P. Talati And Nahar S. Mahala, Competition Act 2002 Law, Practice And Procedure 5-7(2nd ed. 2006).

[5] G.R. Bhatia, Combating Cartel in Markets: Issues and Challenges, 1 Comp. L.R. 37, 38-39 (2003).

[6] T. Ramappa, Competition Law In India 22-23 (2d ed. 2009).

[7] D.P. Mittal, Competition Law And Practice 155 (2d ed. 2008).

[8] Id. at 155-156.

[9] Competition Act, ch. 1 , § 2(c), (2002).

[10] Competition Act, ch.1, § 3(3), (2002).

[11] United Nations Conference On Trade And Development  Model Law On Competition § 3 (2007).

[12] Alkali Manufacturers Association of India v. Sinochem International Chemicals Co. Ltd., [1999] 98 Comp. Cas. 333(CLB).

[13] Union of India v. Hindustan Development Corporation,  (1994) AIR 988 (SC).

[14] D.P. Mittal, Competition Law And Practice 155 (2d ed. 2008).

[15] Id.

[16] Copperweld Corp v. Independence Tube Corp., 467 US 752, 754-756 (SC 1984).

[17] Richard Wish, Control of Cartels and other Anti-Competitive Agreements, in Competition Law Today: Concepts Issues and The Law in Practice  77-79 (Vinod Dhall  ed., 2007).

[18] G.R. Bhatia, Combating Cartel in Markets: Issues and Challenges, 1 Comp. L.R. 37, 38-39 (2003).

[19] Nidhi Singh, Cement Cartelization in India and Europe, Competition Comission Of India, http://cci.gov.in/images/media/ResearchReports/NidhiInterns160311.pdf,  (last updated February27, 2014).

[20] Hereinafter MRTP.

[21] Id.

[22] Union of India v. Hindustan Development Corporation,  (1994) AIR 988 (SC).

[23] Nidhi Singh, Cement Cartelization in India and Europe, Competition Comission Of India, http://cci.gov.in/images/media/ResearchReports/NidhiInterns160311.pdf,  (last updated February 27, 2014).

[24]Builder’s Association of India v. Cement Manufacturer’s Association, (2012) CompL.R. 629 (CCI).

[25] Id..

[26] Id..

[27] Sushmi Dey, Busted: ‘Cartelising’ cement firms,Business Standard,http://www.business-standard.com/article/companies/busted-cartelising-cement-firms-112062600067_1.html  (last updated  February 25, 2014).

[28] Id.

[29] Pankhuri, Cartelisation and role of law,Juris,http://jurisonline.in/?p=5155 (last updated February 20, 2014).

[30] All India Tyre Dealers’ Federation vs. Tyre Manufacturers, (2013) Comp. L.R. 92 (CCI).

[31] Id.

[32] James Sean, Cartels-Fixing for a fight,  Economist, http://www.economist.com/node/1108553 ( last updated January 30, 2014).

[33] Dwayne Edward, Antitrust: Commission fines DRAM producers € 331 million for price cartel; reaches first settlement in a cartel case, Ctr. On Policy, http://europa.eu/rapid/press-release_IP-10-586_en.htm (last updated July 30, 2010).

[34] Richard Wish, Control of Cartels and other Anti-Competitive Agreements, in Competition Law Today: Concepts Issues and The Law in Practice  80-81 (Vinod Dhall  ed., 2007).

[35] Graeme Wearden, Unilever and Procter & Gamble fined £280m for price fixing, The Guardian, April 13, 2011, at A5.

[36] Joie Chowdhury, Private International Cartels- An overview, Cuts International Working Paper,http://www.cuts-international.org/pdf/PIC-5-2006.pdf(last updated July 27, 2013).

[37] Id.

[38] G.R. Bhatia, Combating Cartel in Markets: Issues and Challenges, 1 Comp. L.R. 37, 40-42 (2003).

[39] Id.

[40] Richard Wish, Control of Cartels and other Anti-Competitive Agreements, in Competition Law Today: Concepts Issues and The Law in Practice  80-81 (Vinod Dhall  ed., 2007).

[41] T. Ramappa, Competition Law In India 24-25 (2d ed. 2009).

[42] T. Ramappa, Competition Law In India 77 (2d ed. 2009).

[43] David J. Gerber, Global Competition: Law, Markets and Globalization (1st edn, OUP 2012) 311.

[44] Id. at 312.

[45] Vinod Dhall, Overview: Key Concepts in Competition Law, in Competition Law Today: Concepts Issues And The Law In Practice 19 (Vinod Dhall ed., 2007).

[46] Id. at 19-20.

[47] Richard Wish, Control of Cartels and other Anti-Competitive Agreements, in Competition Law Today: Concepts Issues and The Law in Practice  77-79 (Vinod Dhall  ed., 2007).

[48] Id.

[49] Anestis S. Papadopoulos, The International Dimension of EU Competition Law and Policy (1st edn, Cambridge University Press 2010) 258.

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