Time to take trade cartelisation seriously
Vice-chancellor, Rajiv gandhi national University of Law, Punjab
THE Competition Commission of India (CCI) recently imposed a collective penalty of over Rs 1,788 crore on five tyre companies for indulging in alleged cartelisation. The regulator also imposed a penalty on the Automotive Tyre Manufacturers’Association (ATMA). This was in consequence of collusion between these companies which was in contravention of Section 3 of the Competition Act, 2002. A cartel is said to exist when two or more enterprises enter into an explicit or implicit agreement to fix prices, limit production and supply, allocate market share or sales quotas and engage in collusive bidding or bid-rigging in one or more markets. These four types of agreements between enterprises engaged in similar or identical trade of goods or provision of services are known as horizontal agreements. These are presumed to have an appreciable adverse effect on competition and are void.
In exercise of powers vested under Section 19 of the Act, the CCI may enquire into any alleged contravention of the provisions of Section 3 of the Act. It may do it either suo motu or on receipt of a complaint by a whistleblower alleging such a violation. Furthermore, the Central or State government or any other statutory body may also direct the CCI to take cognisance of any illicit action by an entity in the relevant market. If the CCI finds a prima facie case, it directs the Director General (DG) to carry out a detailed investigation. On the basis of the DG’s report, objections are invited. The CCI conducts oral hearings and if it finds that an agreement is anti-competitive or that a cartel exists, it may impose penalties.
The distinctive features with which the CCI identifies cartels are secrecy, concealment activities by companies, retaliation threats such as temporary price cuts or through isolation of the cheating member. Additionally, the CCI has the power to award lesser penalties in lieu of information from members of a cartel themselves under Section 46 of the Act.
The cartel enforcement regime by the CCI can be divided into the amount of penalty imposed by it and evaluation of the methodology used to penalise them. The penalties provided under the Act are those related to civil offences i.e., cease-and-desist order under Section 27 (a) and civil fines or penalties under Section 27 (b). Civil penalties contained in the latter provision have two components — general for all types of agreements and abuse of dominance and the other part is specific for cartel agreements, which are more severe in nature. The prescribed limit for general civil penalty is not more than 10% of the average of the turnover for the three preceding financial years, the limit for the specific penalty for the cartel is up to three times of its profit for each year of the continuance of such agreement or 10% of its turnover for each year of the continuance of such agreement, whichever is higher.
A comparison of the turnover-based penalty and profit-based penalty depicts that aggregate turnover during the cartel’s life is highly likely to be larger than the average of the last three years’ turnover. This is trivially true for cartels lasting three or more years; but even for a one-year cartel, it is true if the turnover in the cartel year is higher than the average annual turnover of the non-cartel years. In general, longer-lived agreements will attract a much harsher penalty under the cartel-specific penalty regime than the general penalty regime. Also, it is easy to figure out that three times the profit will always be higher than 10% of turnover if the profit/sales ratio is more than 3.33%, which is on the lower side under normal circumstances. So, the profit-based cartel penalty will normally be higher than the turnover-based penalty. Finally, a penalty based on actual profits will always be higher than one based on the excess profits (overcharges) attributable to collusion.
The penalty status of the cases in which the Commission found a contravention of Section 3(3), and their current status in the higher courts (National Company Law Appellate Tribunal and the Supreme Court) is that there are 16 cases where only cease-and-desist orders were passed under Section 27 (a) and no fines were imposed. In half of these cases, non-imposition of penalty was due to similar penalty imposed on the respective firms/associations in a concurrent case. In four other cases, restrictive contractual arrangements were modified/removed; hence, no penalty was imposed. Further, the methodology for cartel sanctions under the Act provides that the calculation should be done on the basis of the firm’s profit during the whole period of cartelisation. The law provides for total profit rather than excess profit. However, the CCI has rarely used profit in fine calculation in a majority of the cases decided in the last three years. This is so as the cases which came before it were of trade associations where distributors who constituted the associations had very small income or turnover.
Under the Indian law, it can be stated that the assessment of cartels is further complicated by the inconsistent pattern of penalties imposed by the CCI. Even the rough, exploratory calculation shows that fines are considerably below optimal than what was statutorily permissible. This has been due to several reasons such as the use of the turnover rather than profit base, calculations based on an average of three years (with either base) rather than the actual duration of the cartel, penalties at much lower rates than the allowable maximum, imposition of penalties on the revenue of trade associations which would be a tiny fraction of the turnover or profits of their members, failure to impose enhanced penalties on recidivists (such persons have involvement in multiple cartels even after previous sanctions or penalties imposed on them), imposition of penalties in only a single case when offences were established in multiple similar cases and the waiver of penalty on state-owned enterprises or MSMEs.
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