This article has been written by Abhinav Khadikar from NMIMS Kirit P Mehta School of Law, Mumbai

Introduction:

When someone hears the word ‘cartel,’ they immediately think about a situation where a drug lord exists who runs a huge drugs racket across countries in South America. They imagine a situation where these lords meet and set boundaries for their business and fix the prices at which they will sell drugs. Along with this, they create agreements to wipe out the scope of competition to prevent other potential entities from entering the drugs market as a manufacturer or seller. Basically, competition is minimal and the only way to defeat the lord is through gruesome methods or federal intervention. Yes, movies and TV shows have created such stereotypes but to some extent, such types of media do teach what a cartel is.

A healthy competitive environment is necessary for growth of economy. It is so necessary that the Competition Act, 2002 (Hereinafter “the Act”) was enacted to safeguard said healthy competitive environment. Cartels are a threat to competition and this threat is countered by provisions of the Act and the Competition Commission of India (Hereinafter “CCI”). As mentioned before, cartels are through certain agreements which are anti-competitive agreements and for the sake of protection of competition, the act prohibits such agreements. The article gives an overview on the provisions related to prohibition of such agreements.

Cartel:

Cartels are defined under section 2(c) of the Act. It essentially includes a collusion between includes an association of producers, sellers, distributors, traders, or service providers who by agreement control or attempt to control production, distribution, sale, and price of trade in goods or provision of services. What essentially happens is that such agreements are generally made to restrict competition from other parties. The parties which are already enjoying their position in the market would naturally want to ensure that they gain as much profits as possible. Being part of a cartel allows them to restrict the profit being shared amongst parties not part of the cartel. What happens is that when such agreements have been made to restrict competition, they are called Anti-competitive agreements.

Anti-Competitive Agreements:

These agreements are covered under section 3 of the Act. It includes agreements between enterprises or persons or associations thereof. While these agreements are mentioned above, an agreement is termed to be anti-competitive when said agreement causes or is likely to cause an “appreciable adverse effect on competition (Hereinafter ‘AAEC’)” within India. This means that even if an agreement has been made outside India, it would be prohibited if it causes or is likely to cause an AAEC within India. Such agreements are void. When determining whether the agreement causes or is likely to cause an AAEC, the CCI takes into consideration any or all the six different factors mentioned in section 19(3) of the Act which are:

1. Creation of barriers to new entrants in the market;
2. Driving existing competitors out of the market;
3. Foreclosure of competition by hindering entry into the market;
4. Accrual of benefits to consumers;
5. Improvements in production or distribution of goods or provision of services;
6. Promotion of technical, scientific, and economic development by means of production or distribution of goods or provision of services.

If the agreement contains conditions solely for the purpose of protecting intellectual property rights protected under certain specified laws or if the agreement is solely related to export, then such agreements are not termed prohibited as per section 3(5) of the Act. Anti-competitive agreements are divided into two parts which are horizontal and vertical agreements. Agreements related to cartels are covered under horizontal agreements.

Horizontal Agreements:

A horizontal agreement is an agreement between enterprises or persons or associations thereof including cartels where the agreement operates at the same level of production or distribution chain. Under section 3(3), certain horizontal agreements are stated to be prohibited if they are presumed to cause an AAEC. This presumption is rebuttable. However, the burden of proof that there is no AAEC due to the agreement lies on the parties who entered said agreement. The agreements which are prohibited are agreements that:

1. Directly or indirectly determine sale or purchase prices. In other words, the competitors fix the prices instead of letting the prices be determined freely based on demand and supply. Such an agreement is deemed to be anti-competitive.
2. Limit or control supply, production, markets, technical development, investment, or provision of services. It means that any agreement to limit the availability of goods or services or an agreement to specialise in certain products or range thereof or technologies will be deemed to be anti-competitive.
3. Share or divide markets by way of agreement to allocate customer base or geographical location. Basically, an agreement between competitors where they will not conduct business in each other’s geographical location or with each other’s customer base. Such an agreement is anti-competitive.
4. Directly or indirectly results in bid rigging or collusive bidding. It includes agreements wherein competitors agree to not submit a bid or they submit an unsuccessful bid solely for one competitor to win the bid. Such agreements are deemed to be anti-competitive.

There is an exception. If parties to the agreement can prove that they share common economic incentives, and work under day-to-day control of the same entity, then such an agreement would not be prohibited. However, when two or more enterprises from the same group of enterprises have entered into an agreement, then it is not necessary that their agreement would not be prohibited under section 3(3) of the Act. The decision whether the exception applies is simply on the facts and circumstances of each case.

Remedies Against Cartels and Anti-Competitive Agreements:

The procedure for inquiry is given under section 26 of the Act. If after inquiry, the CCI finds that there exists an anti-competitive agreement, then as per section 27 of the Act, it shall pass all or any of the following orders:

1. Direction to discontinue and not re-enter such agreement;
2. Imposition of penalty not exceeding 10% of the average of turnover for the last three preceding financial years;
3. Direct Modification of the agreement;
4. Direct enterprises to adhere to any orders that are passed by the CCI;
5. Pass any other order as it may deem fit.

There is however a way for offenders to get leniency from the CCI in their orders. Under Competition Commission of India (Lesser Penalty) Regulations, 2009 read along with section 46 of the Act, any member of the cartel can file a leniency application in front of the CCI. This must be done before the director general submits the investigation report to the CCI. A reduction in penalty may be granted if said member seeking leniency discloses full, true, and vital information and shares evidence of substantial value. It is necessary for the party making said disclosure to cooperate with the CCI till the end of proceedings. When considering whether to impose lesser penalty or not and the extent to which said penalty can be reduced, the CCI shall give due regard to:

1. The stage at which the applicant has come forward with the disclosure;
2. The evidence already in possession of the CCI;
3. The Quality of the information received;
4. The entire facts and circumstances of the case.

Prominent Case Laws:

Delhi Jal Board vs Grasim Industries

In this case, Delhi Jal Board was procuring certain water purification chemicals including a substance called poly aluminium chloride (Hereinafter “PAC”) from certain opposite parties through tendering process. It was found that the opposite parties colluded with each other to artificially jack up the bid prices. The opposite parties contended that the exception applies to them as they are part of the same Group, they cannot be called as a cartel. However, this argument was rejected by the CCI. Reasoning was given that even if two of the parties were part of the same group, they acted separately as they submitted their bids separately. This showcases that there existed a conscious decision to represent themselves as independent thinking centres in front of the procurer. Since they are separate and their actions quite clearly show that the agreement causes or is likely to cause an AAEC due to bid rigging, they were fined a hefty amount.

The Cement Case

In this case, 11 cement manufacturers were alleged to have colluded with each other to raise prices by limiting supply and controlling production under the umbrella of cement manufacturers association. These manufacturers held around 57% of the market share and their actions severely indicated that they have involved themselves in the act of price-fixing. The determination was highly based on circumstantial evidence such as parallel changes in firms’ prices, production, and dispatch. The CCI cleared up that the agreement does not have to be explicit in nature. Conduct of parties and circumstantial evidence alone may possibly indicate the existence of an anti-competitive agreement. Based on this reasoning, the CCI concluded that the manufacturers have acted in concert and hence, a cartel was formed. The order made in 2016 imposed a penalty of 0.5 times the net profit of the members of the cartel for the financial years 2009-10 and 2010-11.

Brushless DC Fans Case

This is the first ever case where the CCI passed an order with respect to a leniency application. This case was related to bid rigging in tenders floated by Indian railways for brushless DC fans. Shri Sandeep Goyal who was the first opposition party came forward and admitted to the existence of a cartel. He explained the roles of each member of the cartel, the design, the modus operandi, the duration of the cartel, all the incentives for formulating said cartel, and lastly, the mode and manner of how the decision was made on the name of the proposed winners for forth-coming tenders for brushless DC fans. The CCI noted that he came forward at the very late stage of the investigation. However, since his statements were heavily relied on to confirm existence of a cartel, he was granted a 75% decrease in penalty. This case showcased the success of leniency programmes and set a precedent for multiple cartels to be exposed by members of the cartels making leniency applications.

Conclusion:

Cartels are a threat to competition. It is not necessary that cartelization happens only in illegal businesses. It can easily happen in legal businesses such as cement manufacturing, and brushless DC fans manufacturing in such a manner that penalties in terms of lakhs and crores of rupees have had to be imposed to offset the losses sustained due to the cartels’ agreements on making the environment anti-competitive for their own benefit. A healthy competitive environment is positive sign in the economy. There is a duty on the CCI to try and restrict as many threats to competition as possible. This threat of cartels will persist forever as different parties in different cartels will keep trying to find loopholes to mask their anti-competitive agreements. This is where the Competition Act, 2002 along with The Competition Commission of India (Lesser Penalty) Regulations, 2009 can really help in curbing the rise of cartels in various relevant markets across India. Till then, faith is to be kept in the CCI and all parties associated with the task of curbing the rise of cartels.

References

• Aditya Bhattacharjea and Oindrila De, “Cartels and the Competition Commission” 47(35) Economic and Political Weekly 14-17 (2012).
• Aditya Bhattacharjea, Oindrila De, et.al., “Anti-Competitive Agreements Under the Competition Act, 2002” 54(02) Review of Industrial Organization 221-250 (2019).
• Ashok Chawla, “Global Business and Competition Law in India” 9(02) Indian Foreign Affairs Journal 173-181 (2014).
• Builders Association of India vs Cement Manufacturers’ Association, Case No. 29 of 2010.
• Competition Commission of India, Introduction to Competition Law (CCI, 2016)
• Delhi Jal Board vs Grasim Industries, Ref Case No. 03 & 04 of 2013.
• Gaurav Bansal, “India: Cartels”, AZB & Partners, May 06, 2021,
• Gaurav Bansal, Shivam Jha, et.al., “Cartels Laws and Regulations 2023 | India”, Global Legal Insights,
• Rajat Sethi and Simran Dhir, “Anti-Competitive Agreements Under the Competition Act, 2002” 24(02) National Law School of India Review 32-49 (2013).
• Re: Cartelization in respect of tenders floated by Indian Railways for supply of Brushless DC Fans and other electrical items, Suo Moto Case No. 03 of 2014.
• The Competition Act, 2002 (Act 12 of 2003).
• The Competition Commission of India (Lesser Penalty) Regulations, 2009 (Act 04 of 2009).