Reverberations of COVID-19: CCI's Mismatched Sectorial Stance on Cartels
[Shobhit Shukla is a student at Maharashtra National Law University, Mumbai.]
In the aftermath of the COVID-19 pandemic, the Indian antitrust watchdog stands in the middle of a self-made bubble of uncertainty. While taking a more lenient stance on cartel-like behavior in the Micro Small and Medium Enterprises (MSME) sector in the wake of the pandemic, the watchdog, contrastingly, did not absolve others of their participation in aiding cartel-like behavior. In October 2021, the Competition Commission of India (CCI / Commission) issued a cease-and-desist order against eight entities found guilty of violating Section 3 of the Competition Act 2002 (Act) while establishing the presence of bid-rigging and cartelization in a tender floated by Eastern Railway. Due to the companies’ status as MSMEs and the economic burden caused by COVID-19, CCI decided not to seek any monetary penalties. However, in contrast, CCI had previously fined United Breweries (UB), Carlsberg, and the All India Brewers Association (AIBA) USD 116 million in a suo motu case on 24 September 2021, after they were found guilty of conspiring in the sale and supply of beer across ten states and union territories, in violation of Section 3 of the Act.
Notably, the Commission has the authority to impose a penalty of up to 10% of the cartel’s average turnover or three times the amount of profit produced by such an arrangement under Section 27(b) of the Act. The panel believed that the “goals of justice” would be reached in both situations by contrasting tactics, such as a forceful warning in one case and a severe fine in the other. Due to CCI’s contrasting stance in cartel leniency orders i.e., the railway MSME cartel order and the beer cartel order as mentioned above, concerns arise about the efficacy of cartel investigations and result in the weakening of competition enforcement in India. Contravening firms were treated differently for the first time under the Indian competition law, even though the repercussions of their conduct were proven to disrupt market competition before the virus. Simultaneously, the European Commission too has been imposing penalties for antitrust violations, notably fining € 260 million in a cartel settlement. Bid rigging is seen as a severe threat by those who advocate for tighter enforcement. The Supreme Court of India had previously stated that efficient enforcement in cartel cases is critical to punish anti-competitive behavior and discourage such behavior. It will now be fascinating to observe if the Commission’s new strategy sets a good precedent for correcting market behavior or a void of clarity in cartel leniency orders which could prove to be baneful to the legislation in the future.
Evaluating the Commission’s orders
In Eastern Railway, Kolkata v. M/S Chandra Brothers and Others, the informants claimed that eight companies colluded in the supply of Axle Bearings to Eastern Railway. The suppliers were also discovered to have discussed how they would be compensated if they did not win the agreed-upon quantity. Based on the preceding, the Commission concluded that there was a reasonable basis for inferring that the members had agreed to quote the same price in response to the tenders floated by the informants, violating Section 3(3) of the Act. As a result, the Commission issued an order under Section 26(1) of the Act, requiring the Director-General (DG) to conduct an inquiry. Following the inquiry, the DG discovered that the cartel members had agreed to share the amounts of Axle Bearings proposed in railway bids issued by different Railway Zones. The investigation revealed that the records of the distribution of Axle Bearings in Railway tenders in order to negotiate the quantity distribution were meticulously kept and communicated through regular phone calls, SMS and emails among cartel members. The object of exchanging these records was to rectify any anomalies to arrive at exact amounts of Axle Bearings obtained by each cartel member in various Railway bids and to allocate future tender allocations to the agreed-upon proportion. Additionally, cartel members reimbursed each other in the event of any shortfalls by submitting cover offers or suppressing bids in upcoming auctions.
Regarding their second claim that the Indian Railways is a monopoly buyer, the Commission concluded that the direct advantages accruing from the Indian Railways’ negotiations accrue to the customers and that any bid-rigging by the vendors was a clear violation of the Act. However, because the enterprises were MSMEs with small employees and turnover, the cooperative and non-adversarial approach used by firms in confessing their involvement, and the economic hardship put upon the MSME sector in the aftermath of COVID-19, CCI decided not to impose any monetary penalty.
This is in sharp contrast to the Commission’s approach In Re: Alleged anti-competitive conduct in the beer market in India, wherein it found sufficient evidence of cartelization among three beer companies. Taking suo motu action, the Commission concluded that the members conspired to use AIBA’s platform to [i] align beer prices and [ii] make price adjustments statements to various Indian government organized businesses tasked with managing the supply of liquor in many states. The objective was to transfer the earnings to the original equipment manufacturers and distribution clients. On 31 October 2017, the Commission issued a prima facie order instructing the DG to examine the case. The DG decided that the three beer manufacturers participated in pricing coordination in violation of Section 3(3)(a) of the Act based on evidence of frequent contacts between the parties acquired by the DG during search and seizure as well as the disclosures made in the lighter penalty petitions. UBL and Carlsberg India received fines of almost INR 752 crores and INR 121 crores, respectively. On the other hand, AIBA was penalized only INR 6.25 lakhs, and the regulator also fined other individuals.
Evaluation of leniency programs
The CCI evaluates a leniency application to see if it allows the Commission to open an investigation or allows applicants to assist with an ongoing investigation and petition for leniency by sharing additional essential facts and evidence. While AIBA and other individuals were still penalized after they competed for assistance to the Commission, the eight firms were let go after assisting the Commission only after the Commission raided their offices. There is precedence to suggest that leniency petitions made after a company’s premises have been raided are not redundant and may qualify for reduced fines; however, these reductions are much less than the parties would have gotten if they had applied earlier. More than one application was given ‘third priority’ advantages of a lower fine. The CCI acknowledged AIBA’s involvement in supplying critical intelligence that enabled dawn raids. UBL, the second leniency application, received a 40% reduction in penalty, while Carlsberg, the third and final leniency petitioner, received a 20% reduction. This was in stark contrast to the eight companies being completely let off in spite of proven cartel rigging in railway tender programs.
Effect of such vagueness towards such cartel cases
The difference between an MSME and a well-established firm might be one cause for such disparities in orders. However, businesses worldwide have suffered losses and economic problems as a result of the ongoing epidemic. Most competition authorities, including CCI, had provided guidance notes and interim authorizations for enterprises supplying vital goods and services in cooperation. Temporary actions taken by enterprises to secure the supply of rare items will not be subject to competition law, stated the European Commission. However, businesses are cautioned not to exploit the current situation by cartelizing or abusing their dominating positions. Cartelization has explicitly been omitted from the list of anti-competitive acts that provided temporary exemptions in the aftermath of the COVID-19 crisis, and active reporting of cartels has been urged.
Under normal conditions, all competition agencies make punishing cartels a top priority. Both the sectors in question are also, in fact, prone to cartelization. The CCI has previously prosecuted railway equipment suppliers for bid-rigging, with the number of cartelized markets in the global beer supply chain being even more significant.
The issue of ambiguity in competition law, in my opinion, is one of the problems that defy reasonable explanation. In the railway cartelization case, the court’s assessments appear to be devoid of objective testing. Such cartel cases necessitate a highly objective manner of analysis, where the orders need not be affected by subjective reasons because such reasoning deems such orders irregular with the current legislation. However, in addition to vagueness and ambiguity, such orders also contain future uncertainty. Here, the court should have provided an intelligible outline in such lucid cases, devoid of the companies’ class or market capitalization. Instead, the court struggles to explain the true extent of the remedy in question for the benefit of law enforcement in its examination of the relatively ambiguous provision.
A more rational strategy to address price-fixing during COVID-19 would be a careful investigation of the financial stability of the defendant who was adversely impacted by COVID-19’s economic ramifications as well as an independent evaluation of the defendant’s financial position. The High Court of New Zealand, in Commerce Commission v. International Racehorse Transport NZ, recently adopted such a reasoned approach to addressing price-fixing during COVID-19. No monetary penalty was imposed on the defendant, where the decision was based on a detailed analysis of the defendant's financial stability, which had been severely impacted by COVID-19. Because of the existing circumstances, the evaluation concluded that the defendant would not be able to pay the penalty, and the judgement was based on that independent assessment. In the current instances, the sectors in question are rife with anti-competitive practices and are prone to recidivism. As a result, one may argue that the CCI’s rulings demonstrate a lack of adequate evaluation because no case-by-case financial examination of the parties’ ability to pay the penalty was conducted.
Finally, while it is critical to offer financial assistance to MSMEs, it is also crucial to assist other failing enterprises in keeping them afloat. By properly evaluating the businesses involved, the parties’ financial condition, and, most crucially, the behavior in issue, the approach should be reasoned and balanced in contrast to the current stance by the Commission, which establishes a wave of ambiguity in cartel leniency programs in the future.