CCI introduces Leniency “Plus” regime in India- Will it suffice?
Supreme Court of India delivers 2nd landmark judgment on cartels in India –dismisses legalistic findings of CCI and COMPAT of bid rigging in tender floated by IOCL for LPG Cylinders- based on market conditions
The Supreme Court of India (“Court”) vide its landmark judgment dated 1.10.2018 has allowed the appeals by the 44 LPG Cylinder manufacturers and dismissed the finding of bid rigging in supply of 14.2 kg domestic LPG cylinders to the Indian Oil Corporation Ltd. (IOCL) , quashing the Order of the erstwhile Competition Appellate Tribunal (COMPAT) which had earlier upheld the finding of the Competition Commission of India (CCI) , which had also imposed penalties on each party @ 10% of their average relevant turnover.
The Hon’ble Supreme Court relying upon judgments and guidelines on cartels/bid rigging from several foreign jurisdictions has emphasized the need to evaluate the market structure and market conditions before arriving at a finding of cartel. This judgment is a trend setter and is likely to bring a change in the manner of evaluation of evidence on cartels by the antitrust regulator in future.
The Apex Court has held that , considering the prevailing market conditions in which bids were offered by the appellants , there was no sufficient evidence to establish an “agreement” amongst the suppliers of LPG cylinders (“appellants”) for bid rigging/collusive bidding in the tender floated by IOCL thereby setting aside the orders passed by COMPAT dated 20.12.2013 which had upheld the findings of CCI vide order dated 24.2 2012 in Suo Moto Case No. 03/2011 .
The Appellants are engaged in the business of manufacturing gas cylinders of a particular specification having capacity of 14.2 Kg which are procured exclusively by the three oil marketing companies (OMCs) in India, namely- IOCL, Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum Corporation of India (HPCL) and there is no other buyer than these three OMCs for the LPG cylinder manufacturers.
The findings of CCI, also upheld by COMPAT that the appellants engaged in collusive bidding was primarily based on the following observations-
- There were identical or near identical bids by all 50 empanelled LPG vendors for the tender despite the differences in cost of production, location, input costs etc. and all the bidders had secured the order.
- There was an active trade association of the appellants (Indian LPG Cylinders Manufacturers Association) and meetings of the bidders took place in Mumbai just 1-2 days before the date of submission of the tenders, i.e. 3rd March 2010, attended by 19 members, where the bids were rigged.
- The conduct of the LPG cylinder manufacturers in coming together on a common platform (Indian LPG Cylinders Manufacturers Association) and fixing the bid prices ensures that no new player could enter the relevant market and quote the prices independently and it would make entry of a new player difficult.
Appellants’ contentions
The Ld. Counsel appearing for Rajasthan Cylinders and Containers (Ms. Madhavi Divan) attacked the very foundation on which CCI/COMPAT concluded that there was a cartel for bid rigging. The Counsel based her case on three main propositions, namely, (i) the inherent nature of the market for sale of LPG cylinders which precludes possibility of competition, (ii) no collusive agreement or bid rigging existed and (iii) even if a collusive agreement is presumed, there was no appreciable adverse effect on competition (AAEC). Each of these contentions and the decision of the Apex Court on them is briefly discussed under.
Firstly, contention was raised that for section 3(3) of the Competition Act, 2002 (“Act”) which prohibits anti-competitive agreement between direct competitors, there has to be a competition in the market in the first place. Since there was tight control and regulation by IOCL and monopsony prevailed in the market, it did not leave any scope for competition in the market. The monopsony power of IOCL with 48% market share coupled with other factors such as strict tender conditions etc. ensured the bidding prices had no sanctity , since not only L2 and L3 got orders in addition to L1, but, the final negotiated price was decided on the basis of privately conducted negotiations with the bidders for which the ‘benchmark” was not the price quoted by them but the “internal estimates” arrived by IOCL’, and the price control was entirely in the hands of IOCL being in a market in which monopsony prevailed. In such a market with no scope for competition between horizontal players, the question of any anti-competitive conduct did not arise.
It was also stressed that in such market scenario it was necessary for CCI for CCI to implead IOCL as a party and obtain its views which could serve as useful evidence on the issue whether the bidders were free to determine the price by an agreement among themselves or not[1].
It was further averred that in a monopsonist market, where the price is set by the buyers, demand is predictable and there is a repeated bidding process, the products are homogeneous and specialized, price parallelism is inevitable , which as per the decision of the Supreme Court in the well-known case of Union of India Vs. Hindustan Development Corporation[2] , alone cannot lead to conclusion of cartelization . Accordingly, CCI or COMPAT could not have used these unique market factors itself to presume collusion since most of these factors are inherent in the nature of industry as described by CCI itself.
Secondly, contention was raised that there was no collusive agreement or bid rigging in this case and the CCI and COMPAT decision was based solely on the factum of meetings of the trade association held on 1st and 2nd March 2010, attended by only 12 persons representing 19 parties and that the same cannot lead to a conclusion of collusion. It was reiterated that when the said meetings were attended only by 19 parties, collusion amongst the 45 parties cannot not be established ipso facto , when two persons who attended the meetings had denied any discussion on prices and the lunch and dinner were hosted by two members and not by the trade association. Such approach also attacks the fundamental right to from an association under Article 19(1) (c) and (g) of the Constitution of India. Similarly, inference of collusion can not be drawn on the basis of six common agents being nominated for depositing 44 bids.
Thirdly, no appreciable adverse effect on competition was proved since 12 new players had participated in the said tender and, therefore, the conclusion of both CCI and COMPAT that the alleged collusion amongst the 45 bidders had created barriers for new entry was incorrect.
In addition, the Ld. Counsel for Om Containers (Mr. Jaiveer Shergil ) relying on the Supreme Court’s decisions in Punjab Land Development & Reclamation Corporation Ltd. Vs. Presiding Officer, Labour Court[3] and S. Sundram Pillai Vs. V.R. Pattabiraman[4] and CCI Vs. Coordination Committee of Artists & Technicians of West Bengal Film & Television[5] raised another legal argument that as per the Explanation to section 3(3) of the Act , which defines the term “bid rigging” , since the word “means” is used , the “effects” on competition , as mentioned in the said Explanation ( i.e. elimination or reducing of competition for bids, or, adversely affecting the process of bidding ,or, manipulation the process of bidding) have to be specifically proved with the help of evidence and cannot be inferred and the burden of rebuttal of AAEC presumed in Section 3(3) cannot be put on the appellants as per the doctrine of reverse burden .
The Ld. Counsel emphasized that such inference or assumption based on preponderance of probabilities does not meet the legal requirement of the Explanation to Section 3(3) of the Act, as aforesaid. Particularly, the fact that even the L1 bidder was subjected to further downward negotiation by IOCL and then a final rate was determined, practically, precluded any possibility of any “adverse effect on competition” or “manipulation of bidding process “by the appellants in terms of the Explanation to Section 3(3) of the Act, it was averred. Most other Counsels adopted the above contentions.
Rebuttals by CCI
In rebuttal, the Ld. Senior Counsel for CCI (Mr. Salman Khurshid) , also relying upon the Supreme Court judgment in CCI Vs. Coordination Committee of Artists & Technicians of West Bengal Film & Television[6], submitted that there was a strong economic evidence of collusion in the form of Identical or near-identical bidding by all 50 empanelled LPG vendors resulting in bid rigging, all the bidders were awarded some portion of the tender and no bidder was left empty handed, i.e., Market Sharing Arrangement, resulting in Geographical/Territorial allocation of market in such a way that entities located in the northern parts of the country were awarded the tender in the northern States, entities located in the southern parts were awarded the tender in respect of southern States, No plausible economic rationale or explanation was forthcoming for the identical bids, despite obvious difference in cost of production, location, input cost etc., the overall effect of increase in price of procurement of LPG Cylinders over previous years. The Ld. Counsel referred to “hastily made correction” in their bid documents by some bidders (e.g. appellant in C.A. No. 4868 of 2014-M/s Jesmajo…) ,which were evidence of an understanding to arrive at “pre-decided outcome” .
The Ld. Counsel, refuted the first legal contention of Ms. Divan that Section 3 was not applicable since there was no competition in the first place and stressed that if the matters are examined on such basis most of the culprits will get away. The purpose of the Act was not only to eliminate cartelisation but also to promote competition.
Answering the argument of ‘price parallelism’ which according to the appellants resulted in identical and near identical bids, Mr. Khurshid argued that legal submission in this respect was settled by this Court in Excel Crop Care[7] case wherein such an argument was rejected (… argument of parallelism is not applicable in bid cases and it fits in the realm of market economy..) . Further, as per the Ld. Counsel , the analysis of bids revealed that there was a market sharing and territorial allocation of bids, which was evidenced from the fact that each and every bidder got some part of allocation under the tender in one or more states and that no one went empty handed.
Supreme Court decision
The Hon’ble Court divided the first contention of Ms. Divan into legal and factual aspects. While negating the legal argument that no competition could exist in the market to trigger application of section 3(3) of the Act, observed that the “purpose of the Act is not only to illuminate practices having adverse effect on the competition but also to promote and sustain competition in the market. Therefore, effective enforcement is important not only to sanction anti-competitive conduct but also to deter future competitive practices. The Court observed that in the present case there were sixty suppliers of the product for which there are 3 buyers and each supplier would want to be L1 or L2 supplier so that it will be able to secure orders for larger quantities than the other, and therefore, in this sense there would be competition among them. In any case, it is the duty of CCI to ensure that the conditions which have the tendency to kill competition should be curbed.
On the second contention and the factual aspect of the first contention, that there was no collusive agreement or bid rigging, the Apex Court, while referring to its earlier judgments in Excel Crop Care[8] case , CCI Vs. Coordination Committee of Artists & Technicians of West Bengal Film & Television[9] and various International Guidelines[10] agreed with the basic contention of CCI that there may not be a direct evidence in cartel cases and that the standard of proof required for cartels remains that of ‘preponderance of probability” and that even in the absence of proof of concluded formal agreement, when there are indicators that there was practical cooperation between the parties which knowingly substitute the risk of competition, that would amount to anti-competitive practices.
However, the Apex Court then went into the real question as to whether there was a possibility of such an agreement having regard to the market conditions even when we proceed on the basis that meeting did take place?
The Apex Court , considering the first contention raised by the appellants, whether there was a situation of monopsony or oligopsony, and noticing the factors which led the CCI to conclude that the appellants colluded observed that if these factors , particularly, that (i) there is an active trade association of the appellants and (ii) a meeting of the bidders was held in Mumbai just before the submission of the tenders., and that (iii) there were identical bids despite varying cost, (iv) products are identical and (v) there are small number of suppliers with few new entrants, are taken into consideration by themselves, they may lead to the inference that there was bid rigging.
But, the Apex Court , then observed that this is “only one side of the coin” and that aforesaid factors are to be analysed keeping in mind the ground realities that were prevailing, as pointed out by the appellants. The Court, referring to the second contention of the appellants, noted the “attendant circumstances” which prevailed, such as
- there are only three buyers. Among them, IOCL is the biggest buyer with 48% market share
- limited number of buyers and for some reason if they do not purchase, the manufacturer may deter new entrants from entering the market,
- Evidence was received which showed that IOCL’s internal estimate arrived at a figure of Rs. 1106.61(One thousand one hundred and six rupees and 61 paisa) per cylinder and all the orders were placed on each bidder at a price lesser than the aforesaid estimated price of IOCL. After this, negotiations were undertaken with the L1 bidder which lead to further reduction of prices quoted by L1 bidder and thereafter L2 and L3 bidders were awarded contract at the rate at which it was awarded to L1, the only difference being the quantity. Ultimately, all the bidders supply the goods at the same rate which is fixed by the IOCL after negotiating with L-1 bidder,
- there were 12 new entrants, which cannot be treated as less. Therefore, the conclusion of CCI that the appellants ensured that there should not be entry of new entrant may not be correct,
- Since there are not many manufacturers and supplies are needed by the three buyers on regular basis, IOCL ensures that all those manufacturers whose bids are technically viable, are given some order for the supply of specific cylinder, so that the supply of this essential product is always maintained for the benefit of the general public, since it was necessary to keep all parties afloat and this explains why all 50 parties obtained order along with 12 new entrants,
- the governmental control which is regulated by law. 14.2 kg LPG cylinders as mandated in the LPG (Regulation and Distribution) Order, 2000 , issued under the provisions of Essential Commodities Act, 1955, ensures that even the price at which the LPG cylinder is to be supplied to the consumer is controlled by the Government.
As regards the meeting of the bidders two days prior to the bidding, the Court observed that despite the fact only 19 parties attended the meeting, the others who did not attend the meeting quoted the almost same rates which leads to an inference that the reason for quoting similar price was not the meeting but something else. Hon’ble Supreme Court reasoned the market conditions leading to the situation of oligopsony that prevailed because of limited buyers and influence of buyers in the fixation of prices. It observed that “the situation of oligopsony can be both ways. There may be a situation where the sellers are few and they may control the market and by their concerted action indulge into cartelization. It may also be, as in the present case, a situation where buyers are few and that results in the situation of oligopsony with the control of buyers”.
On this basis, the Hon’ble court held that “we come to the conclusion that the inferences drawn by the CCI on the basis of evidence collected by it are duly rebutted by the appellants and the appellants have been able to discharge the onus that shifted upon them on the basis of factors pointed out by the CCI. However, at that stage, the CCI failed to carry the matter further by having required and necessary inquiry that was needed in the instant case.
The Supreme Court while concluding with its order also emphasized that in such a watertight tender policy by IOCL which gave it full control, it was necessary to summon IOCL which would have cleared many aspects which are shrouded in mystery and the dust has not been cleared.
Comment: This judgment is a trend setter and will be quoted repeatedly in cartel cases in future because Firstly, the Hon’ble Supreme Court went beyond the conventional & legalistic outlook adopted by CCI in which it more or less avoids the economic aspects of market realities. The Hon’ble Court saliently took notice of the market being characterized by oligopsony and thus being a buyers’ market, which in turn resulted in the apprehension of LPG cylinder manufacturers behaving in a cartel, whereas the reality lied in the fact that the prices were actually quoted or negotiated by the buyer, in this case. Secondly, it comes as a shock that IOCL being the sole buyer and having a watertight tender policy in a market characterized by oligopsony, if not monopsony, was not summoned by CCI or COMPAT.
[1] In fact, this request was specifically made by me as the Counsel representing the 44 parties as their “common counsel” but was rejected by both CCI and by COMPAT in appeal.
[2] (1993) 1 SCC 467
[3] (1990) 3 SCC 682
[4] (1985) 1 SCC 591
[5] CIVIL APPEAL NO. 6691 OF 2014 Judgment dated 07 March 2017
[6] CIVIL APPEAL NO. 6691 OF 2014 Judgment dated 07 March 2017
[7] (2017) 8 SCC 47
[8] (2017) 8 SCC 47
[9] CIVIL APPEAL NO. 6691 OF 2014 Judgment dated 07 March 2017
[10] OECD Policy Roundtables Prosecuting Cartels without Direct Evidence, 2006
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