India: CCI Discusses Factors That Led To Record High Penalty

Last Updated: 5 May 2017
Article by Manjula Chawla, Ritika Ganju and Tushar Thimmiah

India is the second largest cement producing country after China. The big players of the industry have been under the scanner of the Competition Commission of India (CCI) and were heavily penalized in 2012 for colluding to engage in anti-competitive activities.

In the case of a complaint by the Builders' Association of India against the Cement Manufacturers' Association (CMA) and 11 major cement companies, the CCI found the cement companies to be parties to an anti-competitive "agreement", in violation of section 3 of the Competition Act, 2002. The companies challenged the order before the Competition Appellate Tribunal (COMPAT) on the grounds it violated the principles of natural justice. The COMPAT set aside the order and directed the CCI to re-adjudicate the case.

In a final order passed by the CCI on 31 August 2016 the CCI not only imposed its heaviest penalty to date – `63.17 billion (US$960 million) – but also analysed certain factors and facts that it viewed as evidence of collusive conduct by the industry players in an oligopolistic market.

In the order, the CCI rejects the argument that an agreement between the CMA and third parties was a necessary prerequisite for an anti-competitive agreement under section 3(3) of the act. The CCI observed that the definition of "agreement" under the act is wide and includes any arrangement, understanding or action in concert, whether or not formal or in writing or intended to be enforceable by legal proceedings.

Noting that it is usually hard to find any direct evidence of an anti-competitive agreement, the CCI observed that in most cases, the existence of an anti-competitive practice or agreement must be inferred from coincidences and factors which in the absence of any plausible explanation would constitute circumstantial evidence. The CCI found that several factors, behaviours and patterns working simultaneously led the defendant cement companies to gain undue profits at a time which was not conducive to such profitability. Neither arguments nor substantial data or proof could refute this finding.

Information sharing was key to this case. The defendant companies exchanged information on a platform provided by the CMA and interacted on a regular basis at CMA meetings. The CMA collected information on pricing, targets and production from the cement companies and made it available to all CMA members. From this the CCI deduced that the CMA provided a platform for the cement companies to collaborate and fix prices and thereby facilitated anti-competitive behaviour of the cement companies.

With respect to the above observation, the CCI relied on the order passed by the European Court of Justice in the matter of T-Mobile and others (2009), which held that: "An exchange of confidential information between competitors is tainted with an anti-competitive object if the exchange is capable of removing existing uncertainties concerning the intended market conduct of the participating undertakings".

Another key factor for the CCI was the degree of "price parallelism". To determine if the cement companies were in sync on pricing, a correlation analysis of data on pricing trends collected independently by the CCI was conducted. The analysis showed that cement prices moved in tandem during the relevant period. The cement companies argued that the prices are decided on market feedback but they were unable to substantiate this argument.

The CCI further found that there were no logical reasons for a decline in production, dispatch and capacity utilization in the cement industry even when activity in the construction sector picked up in 2010-11. The CCI attributed the decline to a deliberate and planned reduction in capacity utilization to manipulate and control the supply of cement in the market and raise prices. The high profits secured by the cement producers were seen as proof that their plan to pursue anti-competitive activities had succeeded.

As a prime task to set free the invisible hand of demand and supply, the CCI seems to be seeking to ensure that market supply and demand balance each other in all industries. The above case sets a precedent which inspires confidence in the implementation of the competition law in India. The careful collection of all relevant data, thoughtful application of established principles of competition law derived from foreign judgments and most importantly the size of the penalty in the case demonstrate the determination and the seriousness with which the CCI intends to deal with anti-competitive behaviour especially in high-stakes industries.

This article was first published in the April 2017 issue of the India Business Law Journal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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