Relying on incriminating evidence including emails and WhatsApp messages, the Competition Commission of India (CCI or Commission) held 10 manufacturers of brake blocks guilty of cartelisation. In its order dated 10.07.2020, the CCI ordered Hindustan Composites Limited (HCL) and 9 other bidders to cease and desist from indulging in collusive bidding. However, the Commission took a lenient view in the light of the prevailing economic downturn due to the pandemic and imposed no penalty in the case.
Various zonal departments of railways (Railways) filed a complaint before the CCI alleging that 10 brake blocks manufacturers and suppliers (Opposite Parties) engaged in collusive bidding. It was alleged by the Railways that the Opposite Parties submitted identical bids in response to tenders for procurement of composite brake blocks (CBB) and subsequently quoted identical deductions. Several notable names including Industrial Laminates, Rane Break Limited and Daulat Ram Brakes were thereafter investigated by the Director General (DG), the investigative arm of the CCI.
Section 3 of the Competition Act, 2002 (the Act) prohibits agreements that cause or are likely to cause an appreciable adverse effect on competition (AAEC). Section 3(3) specifically prohibits cartelisation and horizontal agreements including agreements that firstly determine sale or purchase prices1 ; secondly share the market or source of production2 or thirdly results in bid rigging3 or collusive bidding.4 A presumption of AAEC exists in the case of horizontal agreements.
INVESTIGATION BY THE DG
The DG, in a consolidated investigation report, concluded that the Opposite Parties indulged in cartelisation. The DG relied on the following evidence to reach its conclusion:
- call detail records,
- messages exchanged through WhatsApp and SMS,
- an excel sheet maintained by an employee of HCL which recorded the allocation of tender quantities amongst the Opposite Parties.
Through the aforementioned means the Opposite parties used to agree on the prices and quantities they would quote in various tenders floated by the Railways for procurement of CCBs. Further, officials of 8 of the 10 Opposite Parties admitted to forming a cartel to indulge in bid rigging.
SUBMISSIONS OF THE OPPOSITE PARTIES
The Opposite Parties made various submissions before the CCI. Notably, it was argued that firstly, even though they had cartelized, no AAEC was caused in the relevant market, secondly, the Railways as a monopolistic buyer enjoys countervailing buying power5 in the market allowing it to determine the price/quantity and thirdly, the Opposite Parties should be given the benefit of reduced penalty since they have made full, true and vital disclosures relating to the alleged cartelisation.
CCI'S FINDINGS AND FINAL ORDER
The CCI agreed with the DG that the Opposite Parties had indulged in cartelisation. The CCI relied on the clinching evidence found by the DG, stating that "nothing can be more incriminating than these." It gave the following reasons to disagree with the arguments of the Opposite Parties:
- In response to the submission that no AAEC has been caused, the CCI said that Section 3 prohibits not only those agreements that cause AAEC but also those that are likely to cause AAEC. Further, agreements mentioned in Section 3(3) are presumed to cause AAEC and it is for the Opposite Parties to rebut the presumption. None of the Opposite Parties presented convincing evidence to rebut the same.
- The argument that the Railways enjoys the ability to determine the prices and, therefore, the Opposite Parties cannot be held guilty of cartelisation was also rejected by the CCI. It stated that in view of direct accrual of benefits to the passengers, the Railways is free to negotiate the best possible price with the vendors. However, any bargaining done by the Railways does not detract from the factum of bid-rigging indulged in by the Opposite Parties.
THE CCI, THEREFORE, HELD THE OPPOSITE PARTIES TO HAVE CONTRAVENED SECTIONS 3(3)(A), 3(3)(C) AND 3(3)(D) OF THE ACT. THE COMMISSION FURTHER ORDERED THE OPPOSITE PARTIES TO CEASE AND DESIST IN FUTURE FROM INDULGING IN PRACTICES THAT CONTRAVENE THESE PROVISIONS.
Interestingly, the CCI refused to impose any penalty on the Opposite Parties for the following reasons:
- the Opposite Parties have cooperated with the DG and admitted their role in the cartelisation.
- some of the Opposite Parties are Micro, Small and Medium Enterprises (MSMEs) with small turnovers in the CBB market. These MSMEs need to withstand the impact of the current economic situation arising due to the global pandemic, and
- the ultimate objective of the Act is to discipline the behaviour of market participants. A cease and desist order, in this case, would fulfill the said objective.
The CCI's decision to impose no penalty on the Opposite Parties deserves special attention. It cannot be denied that Indian MSMEs have been hit hard due to the current pandemic. Nearly 50 per cent of MSMEs have witnessed a 20-50 per cent impact on earnings due to Covid-19, according to a survey conducted in the latter half of May 2020.6 While the government has announced a Rs 3 lakh crore Emergency Credit Line Scheme for MSMEs7 , disbursement of credit has been slow. With this backdrop, the decision of the CCI offers some respite for the MSMEs involved in the case.
However, the Commission's decision can be criticized for being shortsighted and insufficiently reasoned. The CCI provided a blanket respite to all Opposite Parties based on vague considerations like 'small annual turnovers', 'economic hardships' and 'cooperation in investigation'. Instead, the Commission should have analysed the latest balance sheets of each vendor and decided appropriate penalties. Thereafter, reductions should have been given based on each party's financial health and degree of cooperation.
A significant number of companies have suffered financial adversity due to the ongoing pandemic. Companies found violating the Act are now likely to seek similar respite from the Commission on account of economic hardships. In the absence of a well-reasoned decision in the instant case, the CCI will find it tough to defend the precedence it has set.
1. Section 3(3)(a) of the Act.
2. Section 3(3)(c) of the Act.
3. Bid Rigging or Collusive bidding means any agreement between enterprises engaged in identical or similar production or trading, which results in eliminating or reducing competition for bids or adversely affecting or manipulating the bidding process
4. 3(3)(d) of the Act.
5. Countervailing buying power is the ability of a buyer to influence the terms and conditions on which it purchases goods.
6. Nearly half MSMEs witness 20-50% impact on earnings due to COVID-19 pandemic: Survey, 'The Economic Times', https://economictimes.indiatimes.com/small-biz/sme-sector/nearlyhalf-msmes-witness-20-50-impact-on-earnings-due-to-covid-19- pandemic-survey/articleshow/76404729.cms?from=mdr
7. Emergency Credit Line Guarantee Scheme: From eligibility to interest rate, everything about Government's Rs 3-lakh crore collateral free loan 'The Economic Times', https://economictimes.indiatimes.com/small-biz/money/emergency-credit-line-guarantee-scheme-from-eligibility-tointerest-rate-everything-about-governments-rs-3-lakh-crore-collateralfree-loan/articleshow/76167840.cms?from=mdr
Originally published by INDIAN LEGAL IMPETUS® on JULY 2020. Vol. XIII, Issue VII
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