THE LOST BATTLE OF AN OLIGOPOLISTIC ASSOCIATION

The two year long unprecedented and complicated battle involving interpretation of numerous economic data and other variables had come to an end in the month of June 2012 with India’s competition watch-dog – Competition Commission of India (CCI) imposing a heavy penalty of Rs 6307 Crores. The said penalty was imposed on various cement manufacturers and its association. The proceedings  goes to prove that Indian regulators have become more sophisticated and knowledgeable enough to understand the Macro-economic dynamics and to use these economic data as a circumstantial evidence to hold the market participants guilty of violating economic laws. Though the opposite parties of the case – the Cement Manufacturers’ Association (CMA) and its members have decided to appeal against the order of CCI, the facts of case are certainly interesting enough to make it debatable by the professionals in field of Economics and Law.

Allegations by the Informant

The informant in this case is Builders’ Association of India (BAI). It alleged that the Opposite Parties – CMA and its members had indulged in Cartel. As per section 2(c) of Competition Act 2002 "cartel" includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services. To prove that the Opposite Parties (OP’s) have indulged in a Cartel, BAI had used various economic data as its weapon which had finally proved to be lethal.

It was bought to notice of the commission that although real estate sector grew by 7.77% and 8.10% in Fyr 08-09 and 09-10 respectively, the cement sector had grown by 7.9% and 11.68% for the respective financial years. The operating profit margins were 26% and 33.4% respectively in the said financial years. The installed capacities were 219 M.T and 246 M.T in the respective financial years.  However, the capacity utilisation had been 88% and 83% in the respective years. During the financial year 2009-10, the price per K.G of cement increased 4 times – it rose by Rs 10/kg in Quarter ended June 09, Rs 27/kg in Qr ended sep 09, Rs 5/kg in Qr ended Dec 09 and Rs 15/kg in Qr ended Jan 10.

The informants added that in Financial year 2009-10 the companies had increased the cement production using fly ash – which is being supplied by State owned thermal plants at free of cost to the cement manufacturers. According to the Informants this should have resulted in fall in price. The total production of cement in 08-09 was 192.87 M.T while in 09-10 it was 204.18 M.T.  This should have resulted in fall in prices on account of economies of scale. Despite the above facts, the prices have disproportionately increased. Moreover, the said pattern of growth in cement prices had been same in all the regions of India – North, south, east, west and central. This proves that the price rise is not on account of genuine economics. It was brought to notice of the fact that major players in cement industry – ACC and Guarat Ambuja had 60% and 80% rise in Gross Profit.

It was alleged that major cement manufacturers had formed an association – CMA. CMA holds meeting frequently during which it mandates its members to restrict supply and to fix prices. Consequently the production and despatch of cements have been kept in tight control. Based on all these allegations, the commission had formed a prima facie opinion that an investigation by Director General is warranted.

The Crossing of Swords begin

The Director General (DG) stated that while the price had increased by 100% between 04-05 and 10-11, the input costs have grown only by 30%’s This, according to DG should have lead to fall in prices. However, OPs contended that cost of production does not fix the price since the cement industry is oligopolistic in nature and that the competitors’ prices are closely watched to respond to any change in price.

OP’s denied their indulgence in Cartel and submitted that in a cartelised sector, there will not be capacity additions. However, in the present case the installed capacity had increased between fyr 08-09 and 09-10. According to OP’s, the capacity had been underutilised on account of fall in demand of cement. The capacity that the DG has considered is the name plate capacity and that entire name plate capacity cannot be utilised on account of shortage of Power, labour shortages and availability of railway sidings etc. As the cement companies have invested heavily in their cement plants for additional capacity, there is no incentive for them to under utilise the capacity. DG refuted the claims of OP’s that they were not able to explain the reasons fall in capacity utilisation even though the real estate sector had risen significantly – which signifies the rise in demand for their output. He also added that no documentation was found during their investigation to prove that the prices have been fixed to respond to competitors’ pricing. It was alleged that the pricing procedure of the OP’s shows that the companies have centralised decision making system.

DG had stated that although there are no direct evidences to prove that the OP’s have indulged in Cartelisation, the following circumstantial evidences indicate existence of cartelisation.

· There has been positive correlation between prices fixed by the OP’s and co-efficient of correlation had been greater than 0.5

· Market leaders fix the prices – which are being followed by the small players in market.

· The correlation of despatch is also similar between all the members of CMA

· The demand for cement is highly inelastic – and that price cut by one firm would result in simultaneous price cuts by other firms – this is the motive for OP’s to indulge in Cartelisation to avoid such price war.

· There exists a system between the members of CMA’s to collect the details of pricing and despatch of all the firms in cement industry.

· Members of CMA hold meeting frequently and mostly after the end of meeting there had been aggressive rise in the price fixed by the OP’s.

The OP’s have strongly rejected the claim of DG stating that Cartelisation results in severe penalty and that DG cannot make use of “circumstantial” evidences. They argued that in absence of any direct evidence by DG against OP’s, they cannot be penalised for Cartelisation. OPs contended that the collection of data pertaining to pricing the cement firms is being done pursuant to request made by the Department of Industrial Policy and Promotion (DIPP). It has been stated that the cement industry was earlier subject to regulation by Development Commissioner of Cement Industry who was collecting data pertaining to Cement prices.  After the closure of the office of Erstwhile Development Commissioner, DIPP had requested CMA to continue collecting the pricing data and submit the same to Government.  Consequently the said pricing data were collected by CMA. OPs also rejected the claim of DG that the prices have risen after all the meeting of CMA since after the meeting of certain CMA, the prices have in fact gone down. In addition the individual members of CMAs have raised their own contention.

Ultratech cements submitted that in a cartelised industry there will be entry restrictions for new entrants. However, many new players have entered in Fyr 09-10 who are not part of CMA. The provisions of cartel had been made applicable vide notification dated 20.5.09. However, DG has utilised data prior to 20.5.09 in establishing the existence of cartel.

Lafarge alleged that DG had relied on oral and documentary evidence of buyers, CMA and Dealers – the details of which were not made available to it. Consequently it contended that no opportunity had been given to it to prove its case.  Binani cements contended that in determining the capacity utilisation, DG has failed to consider the capacity of clinker – which is an intermediate product. It is impossible to utilise the full capacity of cement grinding if the clinker capacity is lower than the cement grinding capacity.

The Verdict

Commission had rejected the claim of OP’s that they have not been given opportunity to examine the evidences since the copy of investigation report had been given to all the Ops. It had added that u/s 2(b) of Competition Act 2002, agreement includes any arrangement or understanding or action in concert :-

· Whether or not such arrangement or understanding or action is formal or writing

· Whether or not such arrangement or understanding is intended to be enforceable by legal proceedings.

Consequently, it was held that there is no need for explicit arrangement. Generally in cases of conspiracy or anti competitive agreements no formal agreements will be available and hence such agreements can be established only by way of circumstantial evidences. Parallel behaviour in pricing and sales indicates co-ordination among the OP’s.

Commission dismissed the OP’s view of not considering clinker capacity and for considering name plate capacity. It noted that Director General had extracted the capacity figures from the CMA publications which states that it is “Capacity available for production”.

Commission further added that although provisions applicable for Cartel was notified only on 20.5.09, DG has utilised data prior to 20.5.09 only for understanding the dynamic of the industry. This does not mean that the act has been applied retrospectively as held in Kingfisher Airlines Vs CCI. It noted that although the cartel related regulations were notified only on 20.5.09, the CMA continued to collect the data. ACC and ACL stated that it had resigned from CMA on instructions from its holding company – Holcim. It was stated that Holcim had taken the decision so that it will not invite attention of competition commission of other jurisdictions. However it had been established by DG that ACC and ACL  continued to attend the meeting after their resignation.

Commission stated that the request by DIPP to collect the data of cement prices have motivated the members of CMA to indulge in cartelisation. It added that although DIPP had requested to collect only the pricing data, CMA has in addition collected the despatch and capacity utilisation details. In its opinion, this proves that they have used the CMA as platform for their cartel activities.

In a meeting dated 30.11.09, CMA has stated that it is willing to amend its internal rules and regulations to prevent any conflict with competition commission. However the said regulations were in force till the notice was received on 20.8.10 under this act. Immediately EGM was called on 23.9.10 wherein the following amendments were effected to give to the decision in meeting dated 30.11.09

EXISTING PROVISIONS

AMENDMENT

To increase cooperation and unanimity amongst cement producers

Deleted

To collect and disseminate statistical and technical information in respect of cement trade and industry and other industries to members of association

Addition of words “and general public” after the word “Association”

To represent to Government authorities on any matter connected to trade, commerce and manufacture

To represent to Government authorities on industry specific issues from time to time

Addition of new clause in rules and regulations

Members in association shall be recognised as implying that the member will be free to conduct their business as he please

Weighing on all the facts, the commission held that these circumstantial evidences prove that the opposite parties have indulged in cartelisation and have artificially fixed higher prices by restricting the supplies in the market. It had ordered the opposite parties to pay a penalty equivalent to 50% of the net profits earned during the period during which the cartel was alleged to be in existence.

The Road ahead

The OP’s have stated that they would prefer appeal to Competition Appellate Tribunal (COMPAT). This landmark judgment establishes that the CCI has proved itself to be an equally feared regulator similar to that of Income Tax Department, Enforcement Directorate etc. The usage of economic variables as a “Circumstantial evidence” certainly makes it important for companies in low competition sector to document the reasons of various key managerial decisions. This is necessary to prove that they have not indulged in anti-competitive activities. Since the economic variables are capable of multiple interpretations amongst economists themselves, it makes companies of big sizes vulnerable to proceedings under the Competition Act.

C.A. KARTHIKEYAN BRAHAMANAPALLE

AUDIT MANAGER

GSV ASSOCIATES, CHARTERED ACCOUNTANTS

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