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26 August 2022
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Bid-Rigging In Public Procurement: An Indian Perspective

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Lakshmikumaran & Sridharan

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Lakshmikumaran & Sridharan (LKS) is a premier full-service Indian law firm specializing in areas such as corporate & M&A/PE, dispute resolution, taxation and intellectual property. The firm, through its 14 offices across India works closely on litigation and commercial law matters, advising and representing clients both in India and abroad.
The Competition Commission of India ("CCI") in recent years, has become a vigorous regulator. Frequent, suo moto investigations, exemplary penalties to create a deterrent effect, and market studies...
India Government, Public Sector

The Competition Commission of India ("CCI") in recent years, has become a vigorous regulator. Frequent, suo moto investigations, exemplary penalties to create a deterrent effect, and market studies1 to better understand evolving markets are some of the actions taken by the CCI in the past few years. This zeal has equally translated into increased detection of anti-competitive practices of some of the more classic and obvious spheres of economic activity such as public procurement. One of the best examples of this is CCI's success with identifying and penalising anti-competitive conduct in the public procurement sector. The expeditiousness in dealing with such conduct, has been a catalyst for the growing maturity of antitrust jurisprudence in India.

The concerns arising in the public procurement sector are current and numerous. But the CCI is vigilant towards prohibited conduct, and scrutiny is only bound to get heightened from here on.

Bid Rigging

Bid rigging refers to conduct when competitors who otherwise would independently and competitively bid in a tender, enter into an agreement with one another to not compete against each other and to manipulate the process of bidding with the objective of distributing the resultant gains. Bid rigging agreements can manifest in the form of predetermined and collusive bid price, agreement to refrain from bidding against a fellow cartel member or even withdrawal from the bidding process altogether. The members of a cartel do not bid independently, but with the common object of the cartel in mind. Their modus operandi pertains to elimination of competition in the bidding process, resulting in mutual gain to the parties to the arrangement and detriment to the customers, competitors, and the market.

Section 3 (3) (d) of the Competition Act, 2002, ("The Act") prohibits all such arrangements between enterprises engaged in the manufacture or sale of similar or identical products or services in the same market and the same level, that directly or indirectly result in bid rigging or collusive bidding

Typically, bid rigging is undertaken through one, or a combination of the enlisted practices:

  • Collusive pricing –This can be done in the form of identical bids or pre-determined prices for bids of the colluding enterprises. Although reasonable explanations for multiple parties quoting identical/similar prices could exist (discussed later in the article), if premeditation or a tacit understanding between the parties is proved, it would be viewed as anti-competitive. Therefore, the onus to justify the identical bids, is on the parties.

Cover bidding – Deliberately submitting very high quotes which are unlikely to be accepted. This creates an incorrect implication that the bidding process has multiple active participants and is therefore competitive. In National Insurance Company Ltd. & Ors. v. Competition Commission of India,2 the CCI and subsequently the Competition Appellate Tribunal, New Delhi ("COMPAT") held that the appellants were cover bidding by virtue of conducting prior meetings wherein three out of four bidders agreed to submit escalated bids for the other to prevail. They were imposed with a modified penalty of 1% of their annual turnover.

Bid rotation – Bidders take turns at being the winner of tenders in the same sector or by the same authority. The other members of the cartel will increase the prices of their bids, with an implied understanding that in the upcoming bids, they will be rewarded similarly. If A wins the bid today due to B inflating his bid, he will do the same in another bid to ensure B's victory.3

Bid suppression – Bidders refrain from bidding or retract their previously submitted bids, pursuant to an agreement between them and other colluders. This is meant to eliminate competitive bids, so that the pre decided winner gets the contract.

Market allocation – Competitors allocate different segments of a market, or different geographical areas amongst themselves. They agree not to compete for certain markets and customers.

Proxy Bidding –Proxy bidders merely participate in the process to ensure that the tender is being secured within the particular time window and to a particular participant without the requirement of a re-call by the procurer. This was observed by the CCI in Nagrik Chetna Manch v. Fortified Security Solutions & Ors.4

Indian Jurisprudence, Where Is It Heading?

Bid rigging in specific sectors – Rampant but not unchecked

Indian Railways

The railways sector has been plagued by bid rigging which is evident from the large number of bid rigging cases relating to procurement by the railways. In June 2022, the CCI took suo moto cognizance5 and imposed penalties on 7 vendors of protective tubes. The vendors were accused of bid rigging by quoting mutually agreed prices in a tender to supply protective tubes to Indian Railways. The CCI found several e-mail communications between the parties regarding the tender. Some parties were also filing bids from the same IP addresses, despite geographical distance between them. The CCI imposed a penalty of 5% of the turnover generated from the sale of protective tubes for the three preceding financial years.

In another case in 2018,6 the CCI penalised 11 parties for rigging bids for the procurement of High-Performance Polyamide Bushes and Self Lubricating Polyester Resin Bushes. The allegations levelled stated that these parties were engaged in price determination pre bidding, quoting identical prices in their bids and allocating tenders amongst themselves, based on geographic area. The CCI found several incriminating e-mails discussing prices and allocation of tenders, commonality of IP addresses, common login time, etc. to establish the existence of a collusive agreement. Accordingly, the CCI imposed a penalty of 5% of the average turnover of the enterprises, generated from the sale of the respective products, for the three preceding financial years.

In the recent past, state agencies and government departments have proactively referred cases to the CCI regarding bid rigging. The case of Chief Materials Manager, South Eastern Railway v. Hindustan Composites Ltd7, is one such example. In this case, tenders were invited for the supply of composite brake blocks in different railway zones. It was alleged that identical bids were quoted by the bidders in the tenders floated by the South Eastern Railway and identical reductions in quoted rates were offered in the subsequent negotiations, despite geographical differences. The CCI during the investigation, discovered that an employee of one of the bidders maintained excel sheets of all allocations of tender quantities. These sheets along with e-mail communications were used as evidence against the parties. CCI stated that such e-mails constitute direct and incriminating evidence of involvement of the bidders since they had discussed every detail of the tenders and the process to rig the bid at every step. The CCI, while being critical of the parties and their anti-competitive conduct, acknowledged their cooperation in the investigation and ordered the parties to cease and desist from anti-competitive activities without levying any monetary penalty.

Agricultural

In the agriculture sector, the CCI investigated bidders8 for allegations of bid rigging in tenders invited by the Department of Agriculture, Government of Uttar Pradesh for soil sample testing. The bidders were accused of cover bidding to ensure non-cancellation of tender due to lack of bids. The CCI noted that some of the bidders issued fake work orders and work experience certificates to the enterprises who were submitting cover bids, to enable them in qualifying to participate in the tenders. As such, numerous bidders participating in the bidding process were found to have furnished false information to the Department of Agriculture, to qualify for the bids. Some of them did not even possess soil testing machines. The CCI imposed a 5% penalty on the average turnover of the three preceding years, upon enterprises found in violation. The office bearers were also similarly penalised.

Defence

The CCI has also investigated instances of bid rigging in sensitive sectors such as defence. The CCI's order pertaining to procurement of jungle boots, explosives' containers etc. by Government agencies as prescribed by the Directorate General (Supply and Demand) ("DGS&D") based on rate contracts, was challenged in the COMPAT in A. R. Polymers Pvt. Ltd. & Ors. v. Competition Commission of India & Ors.9 The challenged order was based on the bid rigging allegations against the appellants for quoting substantially similar price in a tender for jungle boots procurement. The appellants contented that the price quotations remained near identical due to the similar cost of the raw material. Contrarily, the CCI had observed that the profit margins of the appellants were varied and thus cost component must also vary for the quoted price to remain identical. The CCI had thereby imposed a penalty of 5% of the total turnover of the appellants. However, the COMPAT set the order aside since the investigation had failed to consider other essential parameters or 'plus factors' beyond mere identical quotation of prices. Other essential factors such as, strict manufacturing requirements as per the DGS&D, lack of ready marketability etc. were not duly evaluated.

Other Industries

The CCI in recent years has delved into investigations in fringe industries and relatively non-mainstream sectors and has taken up more suo moto investigations, such as in February 202210, when they investigated bid-rigging and cartelisation allegations in the tender floated by State Bank of India for the supply and installation of new signages/replacement of existing signages for branches/offices/ATMs. The CCI noted that the final bid position and even the final bid figures exactly matched the ones provided in the information sheets attached to the emails obtained from the enterprises under investigation. Such similarity in outcomes projected in e-mails and actual outcome of bidding was not considered coincidental. Call records of the bidders were also examined to establish they were in constant touch before the bidding. Consequently, the CCI imposed a penalty of 1% of the average relevant turnover of the enterprises for three financial years.

Bid rigging investigations into public sector companies

In In Re: Cartelization by public sector insurance companies in rigging the bids submitted in response to the tenders floated by the Government of Kerala for selecting insurance service provider for Rashtriya Swasthya Bima Yojna,11 the CCI imposed exemplary penalties worth INR 671 crores on 4 public sector insurance companies and held them guilty of bid rigging in a tender floated by the State Government of Kerala for selecting insurance service providers for Rashtriya Swasthya Bima Yojna for a period of 3 years.

Conclusion

The preceding discussion demonstrates the extent of bid-rigging present across industries in the context of public procurement. Given the extent of such anti-competitive conduct, it is necessary for government departments and public sector enterprises to implement in-built mechanisms to detect and discourage bid-rigging. Furthermore, the personnel dealing with tenders must be sensitised and educated regarding the Act. Moreover, businesses both large enterprises and medium and small enterprises need to be educated regarding conduct which constitutes a violation of the Act and the corresponding penal consequences. Given the year-on-year increase in detection of bid-rigging cartels both through references and suo moto actions of the CCI, businesses must also be proactive towards safeguarding themselves. Businesses are advised to conduct frequent competition law audits, compliance training and seek legal counsel at the earliest, if the need to prepare a defence arises.

Footnotes

1. https://www.cci.gov.in/economics-research/market-studies/details/19/1

2. MANU/TA/0060/2016

3. In A Foundation for Common Cause & People Awareness v. PES Installations Pvt. Ltd. & Ors.,[3] ("Hospital case")

4. Case No. 50 of 2015

5. Suo Moto Case No. 06 of 2020

6. Reference Case No. 03 of 2018

7. Reference Case No. 03 of 2016

8. Suo Moto Case No. 01 of 2020

9. 2016 CompLR 905 (CompAT) (hereinafter "A. R. Polymers")

10. Suo Moto Case No. 02 of 2020

11. Suo Moto Case No. 02 of 2014

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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