India: COMPAT Penalizes Public Sector Insurance Companies For Bid Rigging

Last Updated: 14 December 2016
Article by   Trilegal

Facts of the case

The Government of Kerala initiated a bidding process for the purpose of selecting insurance service providers for the Rashtriya Swasthya Bima Yojna / Comprehensive Health Insurance Scheme for the years 2010- 11, 2011-12 and 2012-13.  In July 2015, the CCI found certain insurance companies - National Insurance Company Limited, New India Assurance Company Limited, United India Insurance Company Limited, and Oriental Insurance Company Limited, guilty of manipulating this bidding process.  Based on its findings, the CCI had imposed a total penalty of INR 671.05 crores on these insurance companies.

The principal argument of the insurance companies before the CCI and the COMPAT was based on Section 3 of the Competition Act, 2002 (Competition Act).  Under this Section, an agreement between 'enterprises' engaged in the provision of identical or substitutable services, which directly or indirectly results in bid rigging or collusive bidding is presumed to cause an appreciable adverse effect on competition.  The insurance companies argued that they constituted a 'single economic entity' and therefore any agreement between them was not between two 'enterprises' as envisaged under the Competition Act.  This argument was inter alia made on the basis that all the four insurance companies were operated and controlled by the insurance division of the Department of Financial Services (DFS), Government of India and the Central Government held 100% shares in each company.

The COMPAT rejected the argument of the insurance companies by relying on the provisions and legislative intent of the General Insurance Business (Nationalisation) Act, 1972 (GIBNA Act), under which the four insurance companies were created.  The COMPAT held that in terms of the GIBNA Act, the four companies were created in order to encourage competition and function as per business principles.  The COMPAT further held that the influence of the DFS does not detract from the independent, commercially and economically separate status of each of the four companies, which as per the GIBNA Act have been created as independent entities for competing with each other in the interest of efficiency.  Accordingly, the four insurance companies would not be considered as a 'single economic entity'.

Regarding the conduct of the insurance companies, the COMPAT held that it was an admitted fact that the senior officials of the insurance companies met and agreed that United India Insurance would be the lowest bidder in the tender floated by the Government of Kerala for the year 2010-11.  Subsequently, United India Insurance did emerge as the lowest bidder for 2010-11 and in subsequent tenders, thereby establishing the culpability of the insurance companies in rigging the bid process.

In response to this contention, the insurance companies argued that United India Insurance had incurred huge losses since the introduction of the Comprehensive Health Insurance Scheme, and therefore, it was decided by the insurance companies to share the burden of the losses and take risk mitigation measures.  They also argued that United India Insurance did in fact reduce its losses with the cooperation of the other insurance companies and the intention of the agreement was not to make supernormal profit.

COMPAT's order

Dismissing the arguments of the insurance companies, the COMPAT, in its order dated 9 December 2016, agreed with the CCI that the intention of the parties for manipulating the bids was irrelevant.  The act of bid rigging itself is prohibited under the Competition Act, and is presumed to cause appreciable adverse effect on competition in India.  The COMPAT also held that presumption in substantive law is irrefutable and conclusive – once a conclusion of bid rigging is reached, the contravention of the Competition Act is also established.

On the issue of quantum of penalty, while the CCI had imposed a penalty of 2% (of the maximum 10%) on the turnover of the insurance companies for the previous three years, the COMPAT reduced the penalty amount.  The COMPAT applied its earlier precedents on imposing penalty only on the relevant turnover and reduced the quantum of penalty to 1% of the relevant turnover for the previous three years.  Therefore, the penalty imposed on the four companies was reduced from INR 671.05 crores to INR 1.6 crores.

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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