India: CCI Imposes Penalty For Bid Rigging, Restricts The Scope Of Single Economic Entity

Last Updated: 8 December 2017
Article by S.S. Rana & Co. Advocates

Introduction:

The Competition Commission of India (hereinafter referred to as "CCI") has passed an order dated October 5, 2017, wherein CCI imposed fines on Aditya Birla Chemicals India Limited, Grasim Industries Limited, Punjab Alkalies and Chemicals Limited, Kanoria Chemicals and Industries Limited (collectively referred to as "Opposite Parties") for bid rigging tenders of Delhi Jal Board (hereinafter referred to as "Informants") for supply of a water purification product.

Facts:

  • The Informant, a statutory body constituted under the Delhi Water Board Act, 1998, is engaged in water supply activities in the National Capital Territory of Delhi.
  • The Opposite Parties, registered under the Companies Act, 1956, are engaged in manufacturing of water purification chemicals including Poly Aluminium Chloride (hereinafter referred to as PAC").
  • The Informant has been procuring PAC from the Opposite Parties for purification of water through tendering process.
  • Two cases were filed by the Informant against the Opposite Parties wherein the Informant had alleged that in negotiations over the bid price of PAC, the Opposite Parties used to negotiate or decrease the prices to an equal extent.
  • The Informant had further alleged that the Opposite Parties were bidding collusively by quoting similar prices with a difference of INR 200-400 for certain quantity of PAC from the year 2006-07, till the year 2012. The same is alleged to be done to vitiate the whole purpose of tenders as the Informant had no other option but to accept the prices as determined by the Opposite Parties themselves.
  • CCI vide orders dated January 1, 2014, and January 16, 2014, had found prima facie the Opposite Parties to be in contravention of Section 3 of the Competition Act, 20021 (hereinafter referred to as "Act") and thereby directed the Director General (hereinafter referred to as "DG") to cause an investigation and submit a report.

Findings of DG:

  • The DG concluded that there was an understanding between the bidders for all tenders floated by the Informant they acted in a collusive manner to artificially jack up the bid prices without offering any real competition.
  • Accordingly, it was concluded by DG that these bidders contravened the provisions of Section 3(1) read with Section 3(3)(d) of the Act.

Analysis of CCI

CCI perused the report of the DG, submissions of the parties and other available material on record.

1. Single Economic Entity:

  • It was argued by the Opposite Parties that there is no question of collusion between the two entities on Aditya Birla Chemicals India Limited ("ABCIL") and Grasim Industries Limited (GIL) and since they constitute a single economic entity within the meaning of Explanation (b) to Section 5 of the Act2. Reliance was also placed upon orders3 of CCI wherein it was observed that agreements between entities that are part of the same 'group' would not be subjected to scrutiny under Section 3 (3) of the Act, since they are in the nature of 'internal agreements' and therefore, cannot be said to be a cartel.
  • CCI stated that public procurement is a process through which the public authorities acquire resources from outside suppliers either for its own consumption or for other purposes. Competitive bids are solicited from qualified suppliers from all over the country as well as from outside to get the best value and price for the work/ services, which the suppliers can offer. The supplier with the best deal i.e. offer that meets the requirements of the tender at the lowest or economical rate, is generally awarded the tender. Thus, it is clear that competition in a bidding process is an important aspect. A fair and transparent tendering process is a reflection on the procurer's conduct in the market
  • CCI further stated that GIL and ABCIL have culled out observations made in the above mentioned orders in isolation without appreciating the facts and circumstances in which such observations were made. Although in most of the cases, the concept of single economic entity was invoked, the references made therein were for making the parent entities vicariously liable for the conduct of their subsidiaries or for the concerted action of fixing price/limiting service undertaken. Further, it is noted that the judgments highlighted by GIL and ABCIL do not refer to any case of public procurement. None of these cases pertain to a scenario where two entities, which were part of a single economic entity, colluded to defeat a scheme of public procurement. Since public procurement involves use of taxpayer's money and consumer welfare, bid rigging should be viewed as one of the most pernicious anticompetitive conducts inviting serious penalty to serve as a deterrent.
  • Therefore, the plea of single economic entity as urged by GIL and ABCIL was rejected by CCI. CCI held that ABCIL companies are separate legal entities and that they participated in these tenders individually and separately. Where two or more entities of the same group decide to separately submit bids in the same tender, they have consciously decided to represent themselves to the procurer that they are independent decision making centres. Such behaviour, apart from manipulating the price discovery process of public procurement, was held to be contrary to the objective of the Act and should be condemned.

2. Bid rigging of tenders

  • Based on the reports submitted by DG and data available, the CCI held that ABCIL, GIL and GACL were acting in concert in respect of the tenders floated by the Informant during 2009-10 to 2014-15, for procurement of liquid PAC. Such an action resulted in bid rigging/ collusive bidding in terms of provisions contained in Section 3(3)(d) of the Act.
  • With respect to information submitted by KCIL as well as that gathered from other sources, DG did not find any evidence indicating contravention of the provisions of Section 3 of the Act against KCIL.
  • The CCI further stated that price competition is the keystone of an effective and well-functioning market. Any agreement that restricts such activity is bound to come under the scrutiny of the Act. An enterprise's conduct in the market should be a reflection of its independent commercial decision by intelligently adapting to the market conditions and understanding the conduct of its competitors.

Order:

  • The CCI found the present case fit for imposition of penalty under Section 27 of the Act.
  • To calculate the penalty to be imposed, CCI referred to the case of Excel Corp Care Limited v. Competition Commission of India & Anr.,4 wherein the Supreme Court had held that the penalty to be imposed on enterprises involved in anti-competitive practices should be calculated on the basis of 'relevant turnover' of the enterprise and not the 'total turnover'.
  • Accordingly, a penalty of INR 2.09 crore, INR 2.30 and INR 1.88 crore was imposed on ABCIL, GIL and GACL respectively.

Footnotes

1 Section 3 (1) of the Competition Act, 2002 states that any agreement which causes or is likely to cause an appreciable adverse effect on competition in India is deemed to be anticompetitive. Section 3(3) (d) states that an agreement or arrangement which directly or indirectly results in bid rigging or collusive bidding, shall be presumed to have an appreciable adverse effect on competition.

2 As per the section, "group" means two or more enterprises which, directly or indirectly, are in a position to — (i) exercise twenty-six per cent or more of the voting rights in the other enterprise; or (ii) appoint more than fifty per cent of the members of the board of directors in the other enterprise; or (iii) control the management or affairs of the other enterprise;

3 Exclusive Motors Pvt. Ltd. v. Automobili Lamborghini, [Case No. 52 of 2012] and Kansan News Pvt. Ltd. v. Fastway Transmission Pvt. Ltd. [Case No. 36 of 2011] 

For further information please contact at S.S Rana & Co. email: info@ssrana.in or call at (+91- 11 30562000). Our website can be accessed at www.ssrana.in

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