Author- Saumya Poddar , a Student of ICFAI University, Dehradun
ABSTRACT
On 31st August 2016, a landmark judgment was passed by the Competition Commission of India (CCI) in the case of Builders Association v. Cement Manufacture Association. In this case, 11 cement manufacturing companies were found to have formed cartels by collectively reducing the supply and creating artificial scarcity to inflate cement prices and make insignificant profits.
This conduct violated sections 3 and 4 of the Competition Act, 2002 which address anti-competitive agreements and abuse of dominant position respectively. The Competition Act, of 2002 is designed to foster healthy and fair competition in the market and ensure sustainable competition among various market players. It defines some practices as anti-competitive, including cartel formation. Cartes, which involve agreements among competitors to control the production, distribution, sale, or fixing price of the product are classified as horizontal agreements. This arrangement between enterprises at the same production stage.
Given the significant role of the Indian cement industry in the economy, the order was issued upon the directive of the Competition Appellate Tribunal (COMPACT) for a fresh order by CCI within three months of its previous order.
Facts
The Builders Association of India, a society registered under the Societies Registration Act, filed the complaint against the Cement Manufacturers Association (CMA) and 11 cement companies under section 19(1)(a) of the Competition Act alleging cartelization in violation of section 3 (3) (a), 3(3) (b) and section 4 of the act. The complaint contended that companies through CMA, exchanged price-sensitive information. The CCI issued a prima facie order indicating the potential violations and directed the Director General (DG) to further investigate the matter.
Issue raised
Preliminary issue
The respondents questioned the DG’s investigation, specifically the use of data from before 20 May 2009, the date when section 3 of the Competition Act came into force. The CCI ruled that merely examining data from before this date does not equate to applying the Competition Act retrospectively. Additionally, the CCI cited the Bombay High Court decision in Kingfisher Airlines V. CCI, which supported the view that if the effects of actions taken before 20 May 2009 persisted, the CCI had the authority to review such conduct.
Substantive Issue
1. whether the respondents’ action constituted an anticompetitive agreement under section 3 of the Act.
- Whether the conduct amounted to an abuse of dominance position under section 4 of the Act.
Observation of CCI and Director General
The DG observed that significant reduction in the capacity utilization made by the companies and continuous divergence in the cement price index. Additionally, some non-CMA member companies were present at meetings, raising further suspicion. CCI noted high growth in the construction sector during 2009-10 and 2010-11 at 7% and 8 % contrasted with lower growth in cement production which was 4.74% and 4.75% respectively, indicating artificial scarcity created by the companies.
The DG concluded that there was likely an agreement among companies to reduce capacity utilization during peak demand periods, resulting in increased prices of cement and therefore increased profitability of all companies.
The CCI also assessed whether there was an abuse of the dominant position, determining that the market featured numerous players and no single entity or group could operate independently of competitive pressures or unduly influence competitors or consumers in its favor (as per explanation (a) to section 4 of the Competition Act). Regarding violations of sections 3(1)(a) and (b), the CCI scrutinized the following facts and arguments: Market Structure of the Cement Industry: As noted earlier, the CCI observed that no entity could be considered dominant within India’s prevailing market structure. The industry consists of twelve cement companies, collectively holding approximately 75% of the total capacity in India, with around 21 companies controlling about 90% of the market share in terms of capacity. Given the market’s oligopolistic nature, each company considers the likely responses of others when making decisions, particularly regarding pricing. In such a setting, collusion among companies is feasible and can be inferred from circumstantial evidence.
Respondent’s contention
The CMA and 11 cement companies contested the merits and procedural aspects. The CMA argued that its right to natural justice was violated as it was denied the opportunity to cross-examine the witnesses. The CCI however, referred to regulation 41, which grants the DG discretion to accept or reject the request of cross-examination. Thereby rejecting the respondents’ claim.
The companies contended that the cement industry is homogenous and oligopolistic, with similar input costs leading to price similarity, due to similar input costs required for the production, not due to the collusion thus their act is not violative under sec 3 (3) of the Act.
They argued that mere price similarity is not enough to prove cartelization, citing the report of the Organization for Economic Co-Operation and Development (OECD) stating mere information exchange is not enough to prove ‘agreement between the parties and said that there is no direct evidence that is showing such cartel.
CCI Decision on Anti-Competitive Agreement
- The Competition Commission of India by using data on price, production, supply, CMA reports and testimonies, concluded that the respondent had formed a cartel, violated the Competition Act, and harmed the existing competition.
- The CCI found that CMA served as a platform for cement companies to exchange sensitive information such as price, production, and cost leading to collusive behavior.
- The CCI emphasized that this conduct not only harmed consumers but also impacted the entire economy, given the cement industry’s critical role.
- The CMA was ordered to cease collecting and sharing price, production, and dispatch details.
- The CCI emphasized that trade-associated activities must not involve anti-competitive practices.
- Penalties were imposed on the companies based on their annual turnover as follows: Rs. 1147.59 crores on ACC, Rs. 1163.91 crore on ACL, Rs. 167.32 crores on Binani, Rs. 274.02 crore on Century, Rs. 187.48 crores on India Cements, Rs. 128.54 crores on J K Cements, Rs. 490.01 crores on Lafarge, Rs. 258.63 crores on Ramco, Rs. 1175.49 crores on UltraTech, and Rs. 1323.60 crores on Jaiprakash Associates Limited. Additionally, a Rs. 0.73 crore penalty was imposed on the CMA.
- The CCI warned all those who are found to be involved in such activity must ensure that discussions do not inadvisedly or intentionally lead to anti-competitive behavior.
Appeal before Hon’ble Competition Appellate Tribunal (COMPAT)
The companies approached COMPAT, which ordered them to pay 10 percent of the penalty imposed by the CCI
CONCLUSION
In this case, the companies were found to have engaged in an anti-competitive agreement that controlled prices and affected the production and supply in the cement industry. such agreements have been presumed to have an adverse appreciable effect on competition. The Competition Act aims to curb such practices to maintain healthy competition in the market, ensuring consumers do not suffer due to arbitrary corporate actions. Thus, this case set a precedent highlighting the potential consequences for companies attempting to manipulate the market.
To ensure healthy competition, appropriate regulation should be established to monitor such activities, especially in oligopolistic markets like cement, petrol, steel automobiles, etc.
Implementing the whistleblower system as seen in US and European courts, could help detect and dismantle cartels by allowing market participants to report discrepancies. Increasing awareness about these issues could further aid in identifying and preventing anti-competitive practices.
SOURCES
http://www.mondag.com/article.asp?article_id=530452&signup-t
FAQ’s
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