Does exchange of price sensitive information between competitors, "forced" upon them by unique market conditions, which does not lead to fixation of sale price of a fast selling product , where ultimate sale price is regulated by the State procurement agencies and when such exchange of information is not implemented constitute a cartel? And what if such exchange takes place at the behest of buyers - State procurers? This issue, which may be unique to India, requires some debate and to my mind, is still not fully settled in India.
Although, as per the strict definition of "cartel" under section 2 (c) of the Competition Act, 2002 ( the Act) the answer would be an obvious "yes" since even an attempt to control on prices constitutes the offence but the answer may vary if one reads the charging section 3(3) of the Act, which requires "determination" of sale price as a mandatory requirement . Interestingly, the jurisprudence based on recent cases decided by the Competition Commission of India (CCI/Commission) is also slightly confusing on this issue.
Readers may recall that in 2018, in the case of an alleged cartel of sale of dry cell operated flashlights, CCI exonerated four manufacturers of battery operated flashlights , Eveready Industries India Limited("EIIL/ OP-1") , Panasonic Energy India Co. Ltd. ("PEIL/ OP-2) ") , Indo National Ltd ("INL/ OP-3") and Geep Industries (India) Pvt. Ltd. ( GIIL/ OP-4") along with the Association of Indian Dry Cell Manufacturers ( "AIDCM/ OP-5") ("Opposite Parties/ OPs") , of cartelization on the ground that mere discussion to increase prices amongst competitors cannot constitute cartel ,if such decision to increase prices , in not implemented in the market . In this case , CCI, ignoring the findings in the investigation, had exonerated these parties citing insufficient evidence to show that the cartel did in fact result in determining the prices of flashlights1, despite two Leniency applications filed by OP1 and OP2 , admitting exchange of strategic information and even discussion and decisions to raise prices amongst the OPs.
But in 2020, as if in a reverse in its stance , CCI held that cartel of domestic industrial and automotive bearings was proved due to one single meeting held between the four manufacturers, namely, FAG Bearings India Ltd. (now, Schaeffler India Ltd.). ("Schaeffler), National Engineering Industries Ltd. ("NEI"), SKF India Ltd. ("SKF?) and Tata Steel Ltd., Bearing Division ("Tata Bearing?), which merely discussed and agreed to seek increase in prices of the products from OEM buyers, due to increase in prices of steel, which the buyers were not ready to grant unless such demand for increase was made collectively. Of course, CCI did not impose any penalty on the said "cartel" due to this being considered as a peculiar case of a cartel forced by buyers, which was considered as a strong mitigating factor by CCI to avoid imposition of any financial penalty on the parties.
Now in recent past , in its order dated 24.9.2021 , CCI vide its order dated 24.9.2021 has penalized three beer manufacturers , namely , United Breweries Limited ('OP-1'), SABMiller India Limited ('OP-3'), Carlsberg India Private Limited ('OP-4') and the All India Brewers Association ( OP-5) on the basis of leniency petition filed by Crown Beers India Private Limited ('OP-2') and SABMiller India Limited ('OP-3'), both ultimately held by Anheuser Busch InBev SA/NV ('Ab InBev'), disclosing cartelization in relation to the production, marketing, distribution and sale of Beer in India, for violating the provisions of Section 3(3)(a), 3(3)(b) and 3(3)(c) read with 3(1) of the Act from 2009 to at least October 2018. The All-India Brewers' Association was penalized for providing the platform which enabled the cartelization between the parties.
CCI , taking cognizance from the Lesser Penalty Application filed , noted possibility of collusion, prima facie, among the OPs to (i) align the prices of Beer and (ii) seek/implement price adjustments in several States and Union Territories ('UTs') of India, irrespective of whether the model of distribution of alcohol (including Beer) therein was of corporation market, auction market or free market and hence by way of its order dated 31.10.2017 and directed investigation by the Director General (DG) .
DG investigation
DG in its investigation noted that, in India, control over production, distribution, transportation and taxation on alcohol falls under the purview of the states and union territories and there is no uniform policy governing the entire India and therefore different states and union territories in India use one of the four major route-to-market models for beer distribution and sale as follows:
- Corporation Model: The business is administered by the State Government through a separate public sector company or corporation that is wholly owned by the State Government. This monopoly corporation is in control of alcohol pricing, distribution, and retail (including in beer). By floating annual tenders, the corporation procures beer from manufacturers, either directly or through an agency, and then sells it to customers through a distribution network. DG held that in the state Andhra Pradesh, Odisha, Karnataka, Rajasthan and West Bengal OP-1, OP-3 and OP-4 had been in regular contact with each other prior to submitting their bids to the Corporations and even while seeking price revisions in EBP and MRP of their Beer variants offered for sale to the Corporations
- Auction Market Model: The relevant state excise authorities auction the license to sell liquor (including beer) in a specific geographical territory to an individual or company on a yearly basis. The items are distributed by the successful bidders' retail outlets, which are either owned by the bidders themselves or by other private parties authorized by the State Excise Authority to sell liquor products. DG concluded that OP-1, OP-3 and OP-4 coordinated amongst themselves to fix the prices of the Beer they sold (in Maharashtra, West Bengal and the UTs of Puducherry and Daman) to maintain their market share and also have identical MRPs approved by the State Government.
- Open/Free Market Model: Beer producers have the freedom to work with private distributors, who then sell to private shops. Manufacturers must, however, report their maximum retail price (MRP) and have it approved by the appropriate government department. Beer manufacturers have considerable flexibility when it comes to setting their MRPs. DG concluded that in Hybrid Market of Delhi, in order to get favourable price revisions from the State Government, OP-1, OP-3 and OP-4 joined hands to discuss their pricing strategies and exchanged cost cards to co-ordinate their prices
- Hybrid Model: This distribution market has characteristics of both the corporation and open market models. To acquire and distribute liquor products throughout the region, the state government establishes its own corporation. It also gives distributors and retailers open licenses to sell the product throughout the state.
It was further held by the DG that OP-1, OP-3 and OP-4 have also been sharing their periodical sales and sales data with each other as a monitoring mechanism to check that each has adhered to the 'understanding/agreement' reached among them Furthermore, it was discovered that the top management of these companies communicated quarterly sales and sales data with one another as a monitoring tool to ensure that everyone was following the 'understanding/agreement.'
The DG further stated that they collectively decided upon the strategy to oppose unfavorable policies by halting production and delivery in states where state governments increased excise tax due or decreased the ex-brewery price or MRP of beer. The DG discovered AIBA's involvement in the cartel through the recommendation of price hikes and facilitation of negotiations with excise authorities as well as among the Opposite Parties' senior management in relation to pricing.
DG also held that
OP-1 and OP-3 had an 'understanding' to share their off-take of old bottles from the market for reuse in their breweries. Further, they also agreed upon the rate at which they would procure such bottles from bottle collectors further they had also colluded amongst themselves regarding the number of truckloads of second-hand bottles each would buy for reuse in its bottling plants. They had also decided upon the rate at which they would buy such bottles from the market.
CCI forwarded copies of DG investigation report to each party for their response to the findings.
Response by OPs-
The thrust of the opposition by the OPs to the findings in the DG report , which were almost rejected by CCI contrary to its earlier findings in the Flashlight case and the Bearings case , ( supra) were on the following points:
- Highly regulated industry - The Beer market in India is highly regulated. In view of such regulations and control, the role of Beer manufacturers in the market is very limited.
- An information exchange was rather forced upon by market conditions should be distinguished from an anti-competitive cartel under Section 2(c) of the Act.
- As determination of prices of Beer is solely in the hands of the State and the Beer manufacturers are only price takers, the very question of the OPs making an attempt to determine the prices does not arise.
- DG has recorded only four instances of co-ordination amongst the OPs in disrupting the supply of Beer in the states, i.e., in Odisha (for less than two months during 2015), in Maharashtra (for about two months during 2017), in West Bengal (about two months during 2018) and in Rajasthan (for about one week during 2018) which too were necessitated due to arbitrary actions of the State Governments.
- A mere occurrence of a meeting/exchange of information does not signal or establish the possibility of an 'agreement'. Further, in most cases, exchange of information among OP-1 and other OPs was not even implemented/realized.
- By communicating with each other, the OPs were only trying to exert countervailing power in response to the market power of the monopsonist State Authorities. Information exchange as identified by the DG, were on account of directions from certain State Corporations itself. competition on pricing amongst Beer manufacturing companies was diminished not due to the conduct of OP-1 or other OPs but owing to the arbitrary interference by the State Governments and State Corporations.
- State Authorities not approached by the DG- The DG has not reached out to any State Corporation to: (i) corroborate the evidence already collected; (ii) seek additional evidence; or (iii) seek their views on the functioning of the Beer industry in India.
Further mitigating factors were pleaded by individual directors and key managerial persons of the OPs.
CCI Observation
Based on the evidence acquired by the DG about communication between OP via official emails, personal emails, SMS texts, WhatsApp messages, along with the deposition statements of the OPs, CCI agreeing with the DG's findings, conducted an independent state-by-state review of the OPs' anti-competitive behavior.
From the state wise investigation CCI concluded that at least in the following States of /UTs, cartelization amongst the OPs as follows, stands established
- Andhra Pradesh - Price co-ordination between OP-1 and OP-3 in 2009 and 2013
- Delhi - Price co-ordination between OP-1, OP-3 and OP-4 through OP-5 in 2013
- Karnataka - Price-co-ordination between OP-1 and OP-3 from 2011 to 2018 with OP-4 joining in from 2012, and cartelisation between OP-1 and OP-3 with respect to supply of Beer to premium institutions in the city of Bengaluru in 2010;
- Maharashtra - Price co-ordination between OP-1 and OP-3 from 2011 to 2018 with OP-4 joining in from 2012, cartelization between OP-1 and OP-4 to restrict/limit the supply of Beer in 2017, and sharing of market between OP-1, OP-3 and OP-4 from 2013 to 2017
- Odisha - Price co-ordination between OP-1 and OP-3 in 2009 and 2010, price co-ordination by OP-4 in 2015 and 2016 and cartelization between OP-1, OP-3 and OP-4, through OP-5, to restrict/limit the supply of Beer in 2015-16.
- Puducherry - Price co-ordination between OP-1, OP-3 and OP-4 in 2017Suo Motu Case No. 06 of 2017 174
- Rajasthan - Price co-ordination between OP-1, OP-3 and OP-4 through OP-5 from 2011 to 2018 with OP-4 joining in from 2014
- West Bengal - Price co-ordination between OP-1 and OP-4 through OP-5, from 2012 to 2018, and cartelization between OP-1 and OP-4, through OP-5, to restrict/limit the supply of Beer in 2018.
With regards to the other states/UTs CCI concluded that no specific findings of cartelization had been made out. Apart from price coordination and limiting or restricting beer supply in various states or union territories, the DG had discovered that UBL and SABMiller were in agreement on the purchase of second-hand bottles. On this point CCI had concluded that from the evidence of communications amongst OP-1 and OP-3, cartelization amongst them from at least 2009 to 2012 in the purchase of second-hand bottles is clearly established. Further CCI held that OP-1 and OP-3 had also agreed upon the rate at which they would procure such bottles from the bottle collectors. They closely monitored each other's purchase of old bottles.
The Commission relied on several e-mail communications submitted by UBL and deposition statements of various Opposite Parties' officials to conclude that OP-1 and OP-3 guilty of contravention of the provisions of Section 3(3)(a), 3(3)(b) and 3(3)(c) read with 3(1) of the Act from 2009 to at least October 2018. Further, the Commission holds OP-4 guilty of contravention of the provisions of Section 3(3)(a), 3(3)(b) and 3(3)(c) read with 3(1) of the Act from 2012 to at least October 2018 and OP-5 guilty of contravention of the provisions of Section 3(3)(a) and 3(3)(b) read with 3(1) of the Act from 2013 to at least October 2018 and directed the parties to cease and desist from engaging in any practice, conduct or activity that has been deemed in the current order to be in violation of section 3 of the Act. However, no contravention was found against OP-2. Further In accordance with section 48 of the Competition Act, four officials from UBL and Ab InBev, six officials from Carlsberg, and the Director General of AIBA were found accountable for their respective companies' or associations' anti-competitive activity.
On the issue of imposing monetary penalty CCI decided to impose on the parties @ 0.5 times profit for each year of the continuance of the cartel or 2% of the turnover for each year of the continuance of the cartel, whichever is higher. With regard to OP-5, CCI decided to impose, penalty @ 3% of the average of its turnover for the last three preceding financial years of the cartel.
In terms of value CCI imposed a hefty penalty to the tune of INR 751.83 Crore on UBL, INR 120.56 Crore on Carlsberg and INR 0.6 Crore on AIBA.
COMMENT- As stated, the order seems another shift in the stance of CCI in so far as the degree of proof of cartels is concerned. Here the Commission seems to have apparently ignored the (i) allegedly arbitrary interference by the State Governments and State Corporations, which, as per the defense, forced the parties to coordinate and exchange information between them, which were used by the buyers to get the lowest prices and (ii) the non-implementation of the agreement between parties which did not result in determination of the final sale prices of beer , which admittedly were fixed by the State Governments. Neither during the investigation by the DG nor during the inquiry by the Commission, these factors seem to have been considered, which if examined may have given a different perspective to the findings, particularly, considering the two earlier decisions of the CCI where such defense was accepted and either the parties were exonerated, or no penalties were imposed. Noticeably, all these three investigations were initiated based on leniency petitions, which makes it difficult to ignore the contradiction in CCI's approach.
This article first appeared on the Antitrust and Competition Law Blog on 11 January 2022
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