India: Leniency Programmes In The Detection Of Cartels: An Overview Of The Approach

Last Updated: 12 September 2013
Article by Prakhar Chauhan

Most Read Contributor in India, December 2018

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."
Adam Smith

A cartel is a formal agreement among firms in an oligopolistic industry. Cartel members may agree on such matters as prices, total industry output, market shares, allocation of customers, allocation of territories, bid-rigging, establishment of common sales agencies and the and the division of profits or a combination of these1. Cartels are the cancers in the field of competition law, because of their similarity with the disease, by being not easily detectable and also involving a time consuming remedy. Detecting a cartel is a difficult job. These agreements between independent firms restrict competition in the market and are considered to be the most harmful anti-competitive practice. "By engaging in a cartel activity the firms can raise the prices, restrict output and are able to act collectively as if they were single monopolist. Thus profits increase, surplus income moves from the consumer to the producer, and there is a 'deadweight welfare loss' to society as a result2".

The three common components of a cartel are3

  • An agreement
  • Between competitors
  • To restrict competition

The report identifies four categories of activities which are considered as hard core activities4-

  • Price fixing
  • Output restrictions
  • Market allocation
  • Bid rigging

As per the OECD recommendation concerning effective action against hard core cartels, 1998 "hard core cartels are the most egregious violations of competition law".

It is for the detection of such Hard Core Cartels (HCC) that a leniency programme is used. A leniency programme attempts to regulate and detect cartels and offers an exemption or reduction in penalty which could be substantial, in lieu of cooperation from the informant. The enforcement authorities through a leniency programme can uncover and punish HCC without resorting to lengthy and costly court proceedings. However there are a lot of stages involved in this process which shall be discussed in detail in the context of India.

The Benefits of Leniency5

  • Improved collection of intelligence and evidence- It has been observed that there can be three methods of obtaining evidence; either by direct force, threatening company staff with sanctions in case of non cooperation and leniency. It has advantages over the other two in many aspects. Firstly, it can be used to obtain all kinds of information and is not just confined to existing documents and records as it is in the first case. Secondly it saves a lot of time and resources as the second method but also does not suffer from the problem of reliability as it is in the second method, the applicants know that there is no reward for providing wrong information, on the other hand this would invite penalties and a disqualification from being considered for leniency.
  • Increased difficulty of maintaining cartels- Maintaining a cartel is an enormous task; all the participants have to coordinate their behaviour on consistent and collusive strategies allowing the participants to increase their profits. A leniency programme can be very effective in situations like these; it increases the payoff of cheating for the deviator thereby making it difficult for the cartel to sustain. The higher is the incentive offered; higher shall be the chances of cheating.
  • Lower cost of adjudication- Leniency is a cost saving method, which does not involve the time taking court proceedings as the delinquent corporation would prefer not being held liable and getting an incentive in the form of a reduction or no penalty being imposed.

For a cartel to succeed the following six conditions must exist -

  1. The relevant product market to be cartelized, must raise high entry barriers for newcomers, so that they cannot undermine the pricing decisions of the cartel.
  2. The cartel members must produce a sufficiently large share of the product or service, that their decisions are not undermined by their existing rivals who are not the members of the cartel.
  3. The agreement between the cartel members must entail the control on output that each member would produce, the output is an important variable7.
  4. The cartel must be able to detect cheating on the cartel by cartel members.
  5. The cartel must be able to punish cheating effectively when it is detected.
  6. The cartel in any case should not be detected.

Detection of cartels through leniency programmes bolsters cartel deterrence, by increasing the expected probability with which sanctions will be applied; the leniency programme has a destabilizing effect on potential cartels, as only the first leniency applicant shall be granted leniency; it facilitates the prosecution and investigation as the leniency applicants provide them, which otherwise might not be available; leniency programmes induce cooperating companies to provide useful information on the existence of other cartels, which can be investigated subsequently (Amnesty Plus)8.

The use of concept around the world

The leniency programme adopted by any Competition Authority has some basic features on which the entire policy rests, it is necessary that the policy clearly sets out all the basic tenets in great detail. With its origin in the U.S.A9, the leniency programme adopted worldwide has more or less the same structure throughout, given various reservations by countries taking into account their respective market structure. The E.U. another major competition authority has a setup of its own, which indeed is a diverse branch in practice when compared with the U.S.A but in essence follows the same principles.

It is also very important to assess essentials of an effective leniency programme as they form the very basis of the success or failure of any Leniency regime. A serious commitment to punish, coupled with rewards for being first-in-class to report, incentives, confidentiality and predictability regarding all the stages of the programme are the most essential ingredients of an effective leniency programme. For effective and far-reaching results the leniency programme should be lucrative enough to attract the erring entities to submit themselves to the agency coupled with a heavy fine which creates deterrence and sends a clear message of either cooperating or being subject to heavy.

The Article intends to give an overview of the essentials and importance of an effective Leniency Programme. The European Union's Leniency Notice of 2006 and its previous versions, Articles 101-109 of the Treaty on the Functioning of the European Union (TFEU) and most importantly Regulation 1/2003 which succeeded the Council Regulation No. 17/1962, are the very essence of the European Competition Regulatory Regime with the Directorate General of Competition overseeing the enforcement.

The Sherman Act of 1890 and its subsequent amendment in the Clayton Act establish the founding principles of antitrust in the Country. The level of fines imposed before the Amnesty Programme in 1978 was low and therefore did not create much deterrence10. The fines now being imposed have gone up to $10,00,000 for individuals and a whopping $10,00,00,000 for corporations or an imprisonment for ten years or both as per the discretion of the court.

The Leniency Programme operated by the U.S. Department of Justice Antitrust Division, is the most effective tool in the history of criminal antitrust enforcement, and has been very successful tool in unearthing cartels and their prosecution. The adoption by over fifty countries of the U.S. model, in itself is a glaring example of the success of the model11. An important point which deserves to be mentioned is that it is the U.S. model which is reckoned with stringent criminal sanctions, which contrasts it from the E.U. Regime, which emphasizes on imposition of heavy fines.

Legal status of concept in India

The Indian scheme is governed by the Competition Commission of India (Lesser Penalty), Regulations 2009. The Competition Act 2002 (the Act), defines a cartel as-

"an association of producers, sellers, distributors and traders or service providers, who, by agreement among themselves, limit, control or attempt to control the production, distribution sale or price of, or, trade in goods or provision of services12".

The definition provides the background to the prohibition of agreements which distort competition and are per se illegal within the ambit of section 3 of the Act. There is a specific and exhaustive list of such anti-competitive acts and the manner in which they affect competition within India, which states that enterprises or association of enterprises which includes cartels and they13-

  • Directly or indirectly determine the purchase and sale prices
  • Limit or control the production, supply, markets, technical development, investment or provision of services
  • Share the market or source of production of provision of services by way of allocation of the relevant geographic market or the type of goods or services or even the customers
  • Directly involved in bid-rigging or collusive bidding.

The existence of a leniency programme to tackle "pernicious practice of cartelization" has "still not been used so far"14. This statement was issued in the wake of the Commission slapping a whopping fine of Rs 6307 crores on 11 companies involved in the cement cartel. The CCI ensured confidentiality regarding the identity and the information provided in order to impart confidence in the prospective leniency applicants regarding its programme. The Commission published a guide to the Regulations setting out the purposes and the results which it seeks to achieve through it.

In Kingfisher Airlines v. Competition Commission of India15 the Bombay High Court on an appeal by the petitioners, on the basis of an investigation conducted by the Commission on an allegation of sections 3 and 4 (transferred to the Commission by the MRTP Commission) found the petitioners' claim that the Commission is not empowered to investigate the case as the incidents took place before its existence, dismissed the appeal with heavy costs.

An improved "Marker System", an empowered Enforcement Agency i.e. The Competition Commission have been phenomenal in the enforcement of anti cartel mechanisms available within the body of the Act under sections 26, 27 and 46 have provided the Competition Commission with more teeth. However, the Lesser Penalty Regulation styled on the E.U. structure are yet to be full-fledgedly incorporated in the mainstream, which is evident from the fact that the Commission has the requisite resources to investigate cases and come up with a case against the delinquent company, but still the Chairman states that there has been no leniency applicant in a period of more than three years16, which is a clear indicative that the Regulation still lacks the requisites to enforce its decisions and has not been successful in attracting leniency applicants despite a clear procedural structure and transparency being incorporated in it. This creates a serious question whether the Commission has sufficient tools for enforcement.

This is primarily because of the fact that the policy lacks certainty and transparency, (a detailed discussion of which is not possible within the structure of this Article). However, since the Regulation is still in its formative years it would be harsh to test it on the touchstone of well established regimes such as that of the U.S. and the E.U., but issues of transparency and certainty which are very essential for the functioning of any Leniency Policy should be addressed at the earliest.

Drawing inferences from the U.S. and E.U. experiences India should gradually evolve a policy which is specific to the system and caters the need of detecting, investigating and deterring cartel activities. The effect of increased leniency directly affects cheating, more leniency results in increased cheating, it was suggested that the first two effects work together to produce the Race to Courthouse Effect. This framework can then suggest a more conclusive design of an optimal policy of leniency17. Incorporation of a policy keeping in mind the effects of leniency and the purposes which it serves can prove to be an effective design ideal for any country to adopt and follow, keeping in mind its requirements.

The need of the hour for the Commission is the harmonization of the Regulation of 2009 with successful and established Leniency regimes. Harmonization will help in creating deterrence and a crackdown on cartels worldwide providing uniformity and homogeneity in the practices, which has been a great cause of concern for firms18 worldwide. It will ultimately weed out shortcomings like certainty and transparency and attract more and more applications for leniency.

Footnotes

1 http://stats.oecd.org/glossary/detail.asp?ID=3157 (All the websites were visited between 4th June 2012 to 29th July 2012)

2 The Cartel Offence; Mark Furse And Susan Nash; Hart Publishing 2004; at page 11

3 Defining Hard Core Cartel Conduct: Effective Institutions, Effective Penalties: Report by the ICN Working Group on Cartels; available at: http://www.internationalcompetitionnetwork.org/uploads/library/doc346.pdf

4 Ibid

5 Leniency in Antitrust Enforcement: Theory and Practice: Wouter P. J. Wils; available at http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=456087

6 Federal Antitrust Policy: The Law of Competition and its Practice- Herbert Hovenkamp; Fourth Edn. Hornbook Series

7 The Lysine Cartel regulated the output, not the price.

8 Deterrence and Detection of cartels: Using all the tools and sanctions- Gregory J. Werden, Scott D Hammond and Belinda A. Barnett; The Antitrust Bulletin: Vol 56, No. 2/Summer 2011

9 Available at http://www.justice.gov/atr/public/speeches/206428.htm

10 Ibid

11 Immunity in Cartel Investigations: A U.S. perspective- Niall E. Lynch; available at

12 Section 2(c) Competition Act 2002 (Amendment Act 2007)

13 Section 3(3)

14 Be a cartel whistleblower and win: CCI; The Indian Express, New Delhi, Tuesday, July 24,2012

15 W.P. No 1785 of 2009 Bombay High Court; available at http://bombayhighcourt.nic.in/data/original/2010/WP180609310310.pdf

16 Be a cartel whistleblower and win: CCI; The Indian Express, New Delhi, Tuesday, July 24,2012

17 Optimal Corporate Leniency Programs- Joseph E. Harrington Jr.; available at: http://www.econ2.jhu.edu/People/Harrington/amnesty11-05.pdf

18 International and Comparative Competition Law: Dabbah; Cambridge 2010 at pp 106-110

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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