LCI Learning

Share on Facebook

Share on Twitter

Share on LinkedIn

Share on Email

Share More


COMPETITION LAW & CARTELIZATION

BY: Sowmya Suman

People, who combine together, to keep up prices, do not shout it from the housetops. They keep it quiet. They make their own arrangements in the cellar where no one can see. They will not put anything into writing nor even into words. A nod or wink will do. Lord Denning

A cartel can be a result of either explicit agreements or implicit collusion. Explicit agreements occur when the cartel members actually meet to decide how to control the market. Because such collusion is illegal in jurisdictions with effective competition laws, such a agreement is secretive in nature. It may be a result of secret meetings, which might involve nothing more than a casual lunch or a coincidental meeting at any forum of industry executives.

Cartels have the capacity to adversely affect consumer welfare and the economy of a country. The most common activity undertaken by cartels is price-fixing which eventually results into artificial increase in prices.

According to the Hard Core Cartel: Organization of Economic Co-operation Development (OECD) Third Report on the implementation of the 1998 Recommendation, Japan has estimated that recent cartels raised prices on an average by 16.5 per cent. In Sweden and Finland, competition authorities observed price fall of 20-25 per cent following enforcement action against asphalt cartels. In the United Kingdom, the football replica kits case has resulted in long-term price reduction to the extent of 30 per cent following the enforcement action of the Office of Fair Trading. In Israel, the competition authority observed that prices fell by approximately 40-60 per cent after it uncovered a bid rigging cartel among envelope producers. Estimates in the United States suggest that some hard core cartels can result in price rise of up to 60 or 70 per cent. Based on a review of a large number of cartels, it is estimated that the average overcharge is somewhere in the 20-30 per cent range, with higher overcharges for international cartels than for domestic cartels.

The harmful effects of cartel have also been elucidated in the European Union XXXII Report on Competition Policy, 2002. It states that cartels diminish social welfare, create allocative inefficiency and transfer wealth from consumers to the participants in the cartel by modifying output and/ or prices in comparison with market-driven levels. Engaging in cartels to avoid the rigours of competition can result in the creation of artificial, uneconomic and unstable industry structures, lower productivity gains or fewer technological improvements and sustained higher prices. Furthermore, the weakening of competition leads to a loss of competitiveness and threatens sustainable employment opportunities.

The effect of cartelization is seen more in the developing countries. The instances of cartels in India have been witnessed in various sectors like, cement, tyres, steel, family planning device (Copper T), etc. India has also been a victim of international cartel in soda ash, bulk vitamins, petrol, etc. The business houses are affected most by cartels as the cost of procuring inputs is augmented or choice is restricted making them uncompetitive, unviable or be satisfied with less profits. This is mainly due to the absence of competition regime and inefficient investigating mechanism for detecting and prosecuting domestic as well as international cartels.

Incidences of Cartels International & Indian

Price-fixing in the petrol sector

According to OECD Annual Report on Competition Policy Developments in Brazil (2002), the Administrative Council of Economic Defense (CADE) has fined Sindiposto, an association of petrol stations, and its President a total of approximately US$ 105,000 after Sindiposto was found to have engaged in price-fixing by having advised its members to set prices and profit margin for fuel sales, as well as concerted price increases. According to a CADE official, cartelization attempts of the petrol sector in Brazil has been a subject of more than 30 investigations by the Brazilian competition authorities out of a total of about 260 cartel investigations. According to information released by the Secretariat of Economic Law, 56 per cent of cartel complaints relate to the petrol sector.

Cement Cartel

In Argentina, five cement companies were prosecuted for operating a cartel that lasted for 18-years from 1981 to 1999 and the Argentine authority imposed a total fine of US$ 107 million, which is more than three times the highest fine assessed by Argentine authority in any previous case. Romania also fined total EUR 28,500,000 on its three cement companies for their participation in a cement cartel and the fine represented 6 per cent of the companies annual turnover.

International Vitamin Cartel

In April 2003, the Korea Fair Trade Commission (KFTC) decided to issue corrective order and impose surcharge on six vitamin producers belonging to Switzerland, Germany, France, Japan and the Netherlands, who participated in the vitamin international cartel. The amount of surcharge aggregated more than USD 3 million in total.

These six companies, accounting for 90 per cent market share in the world bulk vitamin market, agreed to allocate the sales volume and coordinate price of bulk vitamins such as vitamin A, E, B5, D3, and Beta Carotene in the global market. Vitamins A, E and beta-carotene are important inputs for the production of foods, medicine, cosmetics and animal feed. Bulk vitamin is used in manufacturing animal feeds, medicine, foods and cosmetics. The concerned industries in Korea were learnt to have imported bulk vitamin of about US$185 million during the above period from the six companies. As the conspiracy affected the Korean economy throughout the 1990s, the behavior of these firms affected all Korean citizens, who were prevented from benefiting from the price reductions that would have resulted from a competitive market.

Soda Ash Cartel

In September, 1996, American Natural Soda Ash Corporation (ANSAC) comprising of six American producers of soda ash attempted to ship a consignment of soda ash at cartelize price to India. Based on the ANSAC membership agreement, the MRTP Commission held it as a prima facie cartel and granted interim injunction in exercise of its powers in terms of section 14 of the Monopolistic and Restrictive Trade Practices Act, 1969. The Supreme Court, however, overturned the order of the Commission inter alia, on the ground that it did not give it any extra territorial reach to restrict.

Trucking cartel

It is often seen in the trucking industry that freight rates are fixed by the truck operators to eliminate competition from the market. This is done without any liberty to the members of the truck operator union to negotiate freight rates individually. A Cease & Desist order against Bharatpur Truck Operators Union vide order dated 24.8.1984 in RTP Enquiry No.10/1982, Goods Truck Operators Union, Faridabad vide order dated 13.12.1989 in RTP Enquiry No.13.13.1987, Rohtak Public Goods Motor Union vide order dated 25.8.1984 in RTP Enquiry No.250/10983 were passed by the MRTP Commission. However, no fines were imposed.

Cartelization in the bidding process of Railways

Business Standard of 2nd July, 2008 carried a news item stating that according to a Competition Commission-sponsored Report, cartels, bid rigging and corruption plague Indian Railways procurement, which runs into thousands of crores every year. The Energy Research Institute (TERI), commissioned by the Competition Commission of India (CCI), revealed that in 2006, nine firms participated in a tender for procuring high speed cast steel bogies, of which seven quoted the same price of Rs. 99,638/- per bogies for less than 50 per cent of the requirement. The Report concluded that there are cartels operating in railway procurement.

The Audit Report of Comptroller and Auditor General of India (CAG), 2006, examined 19 items and highlighted that there was cartel formation in nine out of 31 tender cases examined for pre-decentralization period. The Report also provided that there was cartel formation in 47 tender cases issued by zonal railways for the same item after decentralization.

Anti-competitive Agreements under the [Indian] Competition Act, 2002

Section 19 of the [Indian] Competition Act, 2002 (the Act) provides that CCI may inquire into any alleged cartel (anti-competitive agreement) on receipt of any information from any person, consumer or their association or trade associate. To avoid furnishing of false information, the Competition Act prescribes for payment of very high fee, for the information furnished to be entertained by CCI, hence, making the probability of receiving wrong information, almost nil.

Anti-competitive Agreements are those agreements which causes or are likely to cause Appreciable Adverse Effect on Competition (AAEC). The Act provides for two kinds of Anti-competitive Agreements i.e., horizontal agreements which are presumed to have AAEC and vertical agreements having AAEC which is to be determined by rule of reason.

Agreements between the enterprises at the same stage of production chain are termed as horizontal agreements. For instance, agreement between two rivals is a horizontal agreement. In cases of agreements between rivals for fixing prices or for limiting production or for sharing markets, there is a presumption under the Competition Act that such agreements cause or are likely to cause AAEC.

Vertical agreements, on the other hand, are those that are between enterprises at different stages of the production chain. For example, an agreement between the manufacturer and a distributor is a vertical agreement. The presumptive rule as applicable to horizontal agreements does not apply to vertical agreements. The question whether the vertical agreement is causing AAEC is to be determined by rule of reason, which essentially means that the positive as well as the negative impact of such agreement on competition will have to be taken into account before coming to any conclusion.

Joint ventures which increase efficiency in production, supply, distribution, storage, acquisition or control of goods or provisions of services are not presumed to have AAEC. Since exports do not impact markets in India, horizontal agreement(s) between exporters is exempted from the mischief of anti-competitive agreements under the Act.

Cartels are included in the category of horizontal agreements presumed to have AAEC. Establishing AAEC is the key factor before any agreement is termed to be anti-competitive and declared void. In case of horizontal agreements that are presumed to have AAEC, the burden of proof shifts on the enterprise or person against whom the charge is framed. Such agreements includes

(1)  directly or indirectly fixing the prices;

(2)  limiting or controlling production, supply, markets, technical development, investment or provision of services;

(3)  sharing or allocation of geographical area of market, customers or in any other similar way; and

(4)  directly or indirectly resulting in bid-rigging or collusive bidding.

Detecting Cartels

According to the report prepared by ICN Working Group on Cartels, the fight against cartels is legally and practically a uphill task. Firstly, cartelists are by definition secretive about their illicit behaviour, and therefore agencies have to undertake great efforts to detect cartels. Secondly, agencies need additional powers and skills to collect sufficient evidence to mount a viable case against uncooperative defendants. Thirdly, only in the cartel area, do agencies operate sophisticated leniency programmes to destabilize such conspiracies. Fourthly, the investigation of international cartels tests the limits of agencys jurisdictional reach. Last but not the least, the growing trend to criminalize cartel behaviour obliges many agencies to work to a particularly high standard of procedure and proof.

Special skills are required for cartel busting which are different from the skills required for investigation and prosecution of other infringements of competition law. The focus is on proving the existence of an arrangement itself rather than establishing its impact on the market in economic terms.

Section 19 of the Act provides that CCI may inquire into any alleged cartel on receipt of any information from any person, consumer or their association or trade associate. To avoid furnishing of false information, the Competition Act prescribes for payment of very high fee, for the information furnished to be entertained by CCI, hence, making the probability of receiving wrong information, almost nil.

Section 41(2) of the Act, 2002 confers upon the Director General, in the discharge of his duties, the powers as are vested in a Civil Court under the Civil Procedure Code, 1908.  By virtue of this section, the Director General is empowered to summon, demand production of documents, receive evidence on affidavit and issue commissions for the examination of witnesses or documents. The Director General or any person investigating under his authority has the powers as are vested in the Inspector in terms of sections 240 and 240A of the [Indian] Companies Act, 1956. Thus, the Director General or any person investing under his authority also has the power to demand production of documents and evidence which are in the custody of a body corporate and power to search and seizure with the approval of the First Class Magistrate having jurisdiction where he has reasonable grounds to believe that books, papers or documents may be destroyed.

Leniency Programme International Experience

Since the harmful effects of cartel have gained global recognition and consensus, many countries have developed special tools to fight cartels. Amongst others, leniency programme is the most important and effective tool. Leniency programme is somewhat akin to the concept of Plea Bargain/ pardon under the Criminal Law, where, in respect of the offence committed, the guilty admits the offence and agrees to bring home the guilt of others.

According to Global Competition Review on Anti-trust Reviews of the Americas, the proliferation of leniency or amnesty programme has significantly contributed in the development of national and international anti-cartel enforcement in prosecuting national and international conspirators. It provides the enforcement authorities a highly effective tool for bursting cartel activity. It provides cartel members a strong incentive to inform about the co-conspirators. The intention of a leniency programme, through increased detection of cartels, is to increase the level of compliance with anti-trust or competition laws, which then benefits the community through increased competition. Predictability, transparency and consistent application are the hallmarks of a successful leniency programme.

The two important dimensions of a leniency programme are: (i) the criteria for being awarded amnesty, including the stage of the investigative process at which leniency is possible, the maximum number of firms that can apply for leniency, and the eligibility criteria for leniency; and (ii) the extent of penalties that are waived when amnesty is awarded to any firm.

Leniency provision under the [Indian] Competition Act, 2002

Leniency provision is incorporated under section 46 of the Act. If the requirements of section 46 are met, CCI is empowered to impose lesser penalty in cartel cases.

Section 46 provides that, if any producer, seller, distributor, trader or service provider included in any cartel, which is alleged to have violated section 3, has made a full and true disclosure in respect of alleged violations and such a disclosure is vital, the CCI may impose upon him a lesser penalty than as prescribed under the Act or rules or regulations. However, lesser penalty shall not be levied where before making such disclosure, the report of investigation directed under section 26 has been received. Further, lesser penalty shall be imposed only in respect of the producer, seller, distributor, trader or service provider included in the cartel, who has made full, true and vital disclosures.

The provision for lesser penalty under section 46 shall cease to operate if the person making the disclosure does not continue to cooperate with the CCI till the completion of proceedings before the CCI. Section 46 further provides that any producer, seller, trader or service provider included in the cartel shall also be liable to imposition of penalty, if in the course of proceedings, he had i) not complied with the condition on which the lesser penalty was imposed by the CCI; or ii) given false evidence; or iii) the disclosure made is not vital.

Further the CCI, under section 33 of the Act is empowered to, by order, grant interim/ temporary injunction, during the pendency of an inquiry, restraining all members or any member of the alleged cartel from carrying on such act until the conclusion of such inquiry or until further orders, without giving notice to the parties, where it deems necessary.

Conclusion

Cartels have inherent characteristics to adversely affect the economy. The artificial price rise seen in the cartel cases, endorses this fact. The ultimate victims of cartelization are the consumers and the business houses. Cartels not just have monopoly over price of a product but also restrict other private market players to enter in the market. Cartel formation will be difficult and unsustainable if effective competition persists in the market. However, high concentration, homogeneity of products, excess capacity, high dependence of the consumers on the product, high entry and exit barriers give a favourable environment to the cartels to grow. The effect of recent instances of cartels detected in the petroleum sector, railways, cement, cartel in drug industry detected in the US etc. makes it evident that cartelization undoubtedly is a catalyst for fiscal irregularities.

The Prohibition of Anti-Competitive Agreements presumed to have AAEC, i.e., cartel, would be one of the core enforcement areas of the Competition Act once it is made effective. The Act has well defined and clearly laid out provisions which discourage the formation of cartels. The provision of search, seizure and raid has also been clearly laid down in the Act. Its effectiveness largely depends on the formation of the investigating team and coordination with the other agencies. Thus, the need for and usefulness of requisite capacity building to undertake Search and Seizure is unavoidable to make meaningful use of the provisions of the Act in detecting cartels. Further, the Competition Act empowers the CCI to impose heavy penalty for entering into anti-competitive agreements. The CCI may impose upon the co-conspirators involved in a cartel a penalty of up to three times of its profit for each year of the continuance of such agreement or ten per cent of its turnover for each year of the continuance of such agreement, whichever is higher.

It is, therefore, imperative in the larger interest of the consumers and the economy as a whole to urgently operationalise the Competition Act in letter and spirit.

(Author is a Consultant, Global Tax Advisory at Ernst & Young)


"Loved reading this piece by AEJAZ AHMED?
Join LAWyersClubIndia's network for daily News Updates, Judgment Summaries, Articles, Forum Threads, Online Law Courses, and MUCH MORE!!"






Tags :


Category Legal Documents, Other Articles by - AEJAZ AHMED 



Comments


update