India: Competition Commission's Perspective On Lifting The Corporate Veil When Determining Bids From Sister Concerns

1.         INTRODUCTION

In a recent order1 dated October 5, 2017 (the "Order"), the Competition Commission of India (the  "CCI") found Grasim Industries Limited ("GIL"), Aditya Birla Chemicals (India) Limited ("ABCIL")  and Gujarat Alkalies and Chemicals Limited ("GACL") in contravention of Section 3(1) read with  Section 3(3)(d) of the Competition Act, 2002 (the "Act') for rigging Delhi Jal Board ("DJB")  tenders, which were floated for the public procurement of Poly Aluminium Chloride  ("PAC") used in  the purification of water.

2.         BACKGROUND

Following  the information  filed by the DJB, alleging GIL, ABCIL, GACL and Kanoria Chemicals and  Industries Limited ("KCIL") (collectively, the "Opposite  Parties")  of collusively tendering and  price cartelisation over a series of annual tenders for the public procurement of PAC, the CCI had,  in its prima facie opinion, found the Opposite Parties to be in contravention of the provisions of  Section 3 (Anti-Competitive Agreements) of the Act. Accordingly, the Director General was directed  to investigate the matter.

DJB asserted that it had been procuring PAC for the purification  of water through annual tenders  and each year, in response to those tenders, the Opposite Parties not only quoted identical or  nearly identical prices (with a difference in range of only INR 200-400) in their bids but also  indulged in collusive price setting by decreasing prices from the quoted price by the same extent  during the negotiation rounds.

It is pertinent to note that as the Opposite Parties are the only manufacturers of PAC in the  market, conforming to the standards laid down by the Bureau of Indian Standards and the DJB had no  scope for procuring PAC at an economical price.

3.         KEY HIGHLIGHTS OF THE ORDER

3.1       Single Economic Entity

One of the defenses raised by ABCIL and GIL before the CCI was that there could be no allegation of  collusion between them as they constituted a single economic entity within the meaning of  Explanation (b) (Meaning of 'Group) to Section 5 (Combinations) of the Act, as they have common  management, promoters, directors and shareholders. It was further submitted that the central  marketing team was responsible for the evaluation of tenders, determination of the proposed  approach and the final submission of bids to the tender issuing bodies, including submissions for  DJB tenders. Moreover, the same set of personnel were taking all key business decisions for both  companies.

However, in this context, the CCI observed that in every tender application, ABCIL and GIL  submitted separate bids and that if they were in fact a single economic entity, they had no reason  to participate individually instead of as one entity and create the impression that the bids submitted by them were intended to be competitive in nature  at every stage of the bidding process.

The CCI finally held that ABCIL and GIL cannot take the benefit of being a single economic entity  while also taking the benefit of bidding and posing as separate legal entities for the purpose of  the tendering process. The CCI also settled and clarified the legal position that the definition of  "group"  under Section 5 does not apply to proceedings relating to anti­ competitive agreements  under Section 3.

GACL being a company floated by the Government of Gujarat was not held to be part of the single  economic entity, but the CCI proceeded to impose a penalty on the basis of the reasoning set out in  the following section.

3.2       Reliance on Circumstantial Evidence

While the CCI conceded that no direct evidence had been afforded in order to establish the  existence of an "agreement' between the Opposite Parties, the CCI concluded that the presence of an  "agreement'  could be adduced by relying on certain 'plus factors'  (that is, certain additional  evidence, which when assimilated together, could be tangible enough to arrive at a conclusion that  the prices quoted in the bidding process were a result of concerted action or a result of 'meeting  of the minds').

On analysis of the facts of the case, the CCI identified certain 'plus factors', which it  considered substantial enough to ascertain that there existed no room for a plausible alternate  conclusion to be drawn:

Such 'plus factors' include:

(a)       the proximity of the bid prices quoted and negotiated by the Opposite Parties;

(b)        the extremely small margins between the bid prices of ABCIL, GIL and GACL year after  year, notwithstanding the variable and fixed costs of production;  and

(c)        given that the data shared by GACL showed a sustained and constant low cost of  production as compared to the other bidders, GACL was able to reduce the price of the bid submitted  by them, but was not willing to do so.

3.3       Penalty

The CCI proceeded to impose a penalty of INR 2.30 crore (approximately USO 350,000), INR 2.09  (approximately USO 320,000) and INR 1.88 crore (approximately USO 289,000) on ABCIL, GIL and GACL,  respectively.

Keeping in line with the settled legal position in the Supreme Court judgment of Excel Crop Care v.  CCI, the penalty was levied at the rate of 8% (eight per cent) of the average relevant turnover of  GIL and ABCIL for the preceding three years and at the rate of 6% (six per cent) in the case of  GACL.

4.         INDUSLAW VIEW

The  notion  of  competitive  bidding  by  seemingly  separate  legal  entities  (which  in  fact   have  common  day-to-day management) has been frowned upon by the CCI and it has made a clear  statement that it will come down hard on such entities that bid under the fa9ade of separate legal  entities.

This decision is a welcome and rational approach by the CCI, essentially preventing sister concerns  from bidding at prices that increase the likelihood of a member of the group winning competitive  tenders.

By denying the applicability of section 5 of the Act (benefitting single economic entities) to the  competitive bidding process, the CCI has essentially  clamped  down on collusion  between   seemingly separate legal entities,  directed by common management.

Footnote

1  Ref Case No.s 03, 04 and 2013 (also available at http://www.cci.gov.in/sites/default/files/Ref.Case%20Nos.%2003%20%26%2004%20of%202013.pdf  )

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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