REGULATORY: Global Competition Law: India Coal Complaint Sets Off Explosive Fine by Suzanne Rab

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The Competition Commission of India (CCI), India’s antitrust watchdog, has fined ten explosives companies a total of 600 million rupees (approximately USD 11.5 million/ EUR 8.7 million) for rigging bids put out by Coal India Limited (CIL). The CCI imposed a fine on the explosives manufacturers representing three per cent of their average three-year turnover.

India’s crackdown on cartels and abusive market practices

India’s modern competition law under the Competition Act 2002 (Competition Act) has been implemented in stages over the past decade. Section 3 of the Competition Act, which came into force only in May 2009, is the substantive provision in Indian competition law dealing with anticompetitive agreements or arrangements. This section prohibits any agreement in respect of production, supply, distribution, storage, acquisition, or control of goods or provision of services that causes, or is likely to cause, an appreciable adverse effect on competition in India. Any agreement or arrangement that infringes this prohibition is void. This provision is modelled on the EU competition law prohibition of anticompetitive agreements in Article 101 of the Treaty on the Functioning of the EU (TFEU) and is similar to section 1 of the U.S. Sherman Antitrust Act of 1890 (the “Sherman Act”).

Section 4 of the Competition Act, also effective from May 2009, is the substantive provision in Indian competition law dealing with abuse of a dominant position. This provision is modelled on the EU competition law prohibition of abuse of dominance contained in Article 102 of the TFEU and has some parallels with section 2 of the Sherman Act.

If an agreement is found to infringe the prohibition in section 3(1) of the Competition Act it will be void and unenforceable. The CCI may impose fines of up to ten per cent of the average turnover of the parties for the last three years in the case of violations of section 3 or 4. A company found to have engaged in cartel activities (including price fixing, market and customer allocation, and bid rigging) may be fined the greater of three times the profit or ten per cent of turnover (whichever is greater) for each year of the cartel.

Application to collusive bidding practices

Government-owned coal producer, CIL, made a complaint to the CCI alleging anticompetitive practices and abuse of a dominant position, contending that the main explosives suppliers in India had formed a cartel controlling around 75 per cent of the market since 2005.[1]

CIL alleged that the manufacturers quoted pre-determined prices, threatened to stop supplies, and boycotted electronic reverse auctions held by CIL to finalise its suppliers for explosives. CIL, which apparently accounts for 65 per cent of India’s coal production, claimed that it was unable to obtain a fair deal for certain products including bulk explosives, cartridge explosives, fuses, and detonators, due to the alleged cartelisation.

The CCI decided unanimously that there was concerted action on the part of the manufacturers to manipulate CIL’s bidding processes, in violation of section 3 of the Competition Act. Given that the parties were found by the CCI to represent, collectively, around 75 per cent of the Indian explosives market, the CCI concluded that there was an appreciable adverse effect on competition in India.

The CCI imposed a fine on the explosives manufacturers representing three per cent of their average three-year turnover. The penalties range from 28,500 rupees (approximately USD 545/ EUR 423) to 289 million rupees (approximately USD 5.5 million/ EUR 4.3 million).

Comment

The decision is indicative of a steady stream of cases from the CCI as it begins to implement the new competition law provisions. The following observations may be made:

First, the CCI found that the manufacturers had quoted identical rates between 2004 and 2007 but that they could not be sanctioned for practices that predated the implementation of sections 3 and 4 of the Competition Act. In the early stages of adoption of cartel laws, the enforcement authority’s powers may inevitably be more limited and may not fully capture the often long-standing nature of cartelization in an industry. Even so, now that the new regime is in its third year of operation the CCI has shown that it will not be shy of using its powers.

Second, although the complainant raised both section 3 and 4 claims, the CCI emphasised the coordinated nature of the behaviour it found to be infringing. Moreover, where there is evidence of an agreement or concerted practice a competition authority like the CCI will not have to prove dominance. It should be noted that there has been a fair mix of cartel and abuse of dominance cases in India and also cases raising both claims on the same facts. The first of these was a case against United Producers, Distributors Forum, and The Association of Motion Pictures and TV Programme Producers. The three parties collectively comprise 27 film-producing entities and were each fined 100,000 rupees (approximately USD 1,900/ EUR 1,500) for engaging in concerted action to restrict screening of films. In February 2012, the CCI fined 48 liquid petroleum gas cylinder makers 1.65 billion rupees (approximately USD 33 million/ EUR 25 million) for bid rigging during tenders invited by Indian Oil Corporation (Indian Oil). The case marked the first energy sector fines by the CCI for breach of the modernised Indian competition law and is reported in our April newsletter, available at http://www.kslaw.com/library/newsletters/EnergyNewsletter/2012/April/article8.html.

Third, the fines in this latest case, at three per cent of average turnover, fall short of the ten per cent maximum. It was expected that the implementation of modern competition law in India and, particularly, the ability to impose fines from May 2009 would give the CCI the armoury to combat anticompetitive practices more aggressively than under the Monopolies and Restrictive Trade Practices Act 1969, where there were no such powers to impose penalties. However, the cases to date have not resulted in particularly significant fines in absolute amounts or by reference to other jurisdictions, even when recognising the different market contexts. In 2010, the European Commission (EC) imposed a total of EUR 2.87 billion in fines in respect of cartel cases. In 2008, the EC imposed a record fine of EUR 896 million on one company alone (Saint-Gobain) in the car glass cartel, being the largest ever fine imposed on a single company in an EU cartel case. While it is certainly not argued that the CCI needs to achieve a similar high level of fines in absolute comparative terms, there remains an expectation that it will use its penalty powers assertively. There is a risk that given expectations, the CCI may rush too fast and go from ‘zero to 100 miles an hour’ in using its maximum fining powers in cases which may not warrant the upper level. A fine balance needs to be struck between the deterrent effect of fines and inspiring respect among businesses that the law will be applied consistently and only after a robust examination of the evidence.

Fourth, only one manufacturer formally pleaded a defence. The others adopted the Director General (the investigating arm of the CCI) findings without raising objections or observations. It should not be overlooked that the Competition Act provides the CCI with the power to impose lesser penalties or “leniency”. If the CCI is satisfied that any member of a cartel has contravened the provisions of the Competition Act, but has made full and true disclosures in respect of the alleged contraventions and such disclosures are “vital”, the CCI may impose a lesser penalty than that prescribed under the Competition Act. The Competition Commission of India (Lesser Penalty) Regulations notified by the government on 13 August 2009 contain provisions relating to the power of the CCI to impose lesser penalties. However, none of the companies is reported to have applied for leniency in this case. The case may be contrasted with the first grant of leniency by the CCI’s counterpart in Pakistan as also reported in this issue. In a landmark decision on 4 April 2012, Pakistan’s Competition Commission granted Siemens total immunity from fines for its cooperation in a cartel investigation relating to bid rigging in supplies to power companies.

Fifth, the CCI dismissed certain of CIL’s claims due to insufficient supporting evidence. These included allegations that the manufacturers colluded to limit and control the supply of explosives and colluded to rig bids in 2009 and 2010. Observers have questioned what appears to be relatively slim reported evidence and reasoning supporting the CCI’s conclusions. The CCI found that a total of ten companies were involved in a bid rigging cartel, apparently based on the facts as found by the CCI that they did not participate in a competitive auction, and that two of them wrote a virtually identical letter to CIL. The CCI has not articulated in its public pronouncements why such circumstances indicate the existence of a cartel. Greater transparency on the CCI’s reasoning would enhance legal certainty.

Finally, the timing of the CCI’s decision in this case is interesting and illustrates the potential for complaints to be made both by and against leading market players. CIL’s complaint of 20 February 2012 was made within a few months of a complaint made against it by the Explosives Manufacturers Association of India (EMAI) for allegedly procuring 20–22 per cent of its requirements from a single manufacturer and without inviting bids. In July last year, the CCI decided in favour of CIL rejecting claims that the coal company had abused a dominant position and was involved in discriminatory pricing in favour of Indian Oil.

Where next for competition law enforcement in India?

Horizontal concerted action (cartels) is generally regarded as the most damaging form of anticompetitive conduct by businesses and should be a priority for competition law enforcement efforts, at least in the early stages of implementation of new competition laws. It will be interesting to see how the CCI adjusts its case-enforcement priorities between horizontal concerted actions and abuse of dominance cases going forward. The CCI’s imposition of fines in this recent cartel case shows the CCI strenuously asserting its cartel enforcement jurisdiction. At the same time, its publicly disclosed reasoning as to the finding of an “agreement” and the level and quality of the evidence relied on, have not been beyond question.
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[1] According to published reports, the explosives manufacturers concerned include Gulf Oil Corporation, Ideal Industrial Explosives, Solar Industries India, Blastec India, Indian Explosives, Emul Tek, Regenesis Industries, Techno Blasts India, Black Diamond Explosives and Keltech Energies.


Suzanne Rab
London
+44 20 7551 7581

srab@kslaw.com
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