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CCI Imposes Penalty on LPG Gas Cylinder manufacturers for Cartelization in response to tenders floated by HPCL in 2011
By way of order dated 09.08.2019, the Competition Commission of India (“CCI/Commission”) has imposed penalty on 51 LPG manufacturers for engaging in cartelization by collectively withdrawing their bids in a tender floated by Hindustan Petroleum Corporation Limited (“HPCL”) for procurement of 14.2 Kg LPG cylinders.
Background and allegations
The case was initiated suo moto on the basis of an anonymous letter dated 25.04.2013 by which the CCI was informed that there was an alleged cartel operating in the tenders floated by HPCL in 2011 and 2013 .
Tender No. 1
E-tender No. 11000083-HD-12001 (“Tender No.1”) was floated by HPCL on 28.10.2011 for supply of 45, 00,000 14.2 Kg LPG cylinders, under a two bid system (technical and price bids), to its depots in 18 states. One of the conditions of the tender was that a particular bidder could only bid for 9 States out of the 18. A total of 72 bidders submitted their bids out of which 72 were technically qualified. 53 of them met the qualification criteria for ‘existing vendor’ and the remaining 19 qualified as ‘new vendors’. The allegation in this tender was that the orders placed on the vendors were at prices higher than the procurement price of other oil companies with the same vendors during the same period. It was also alleged that cylinders continued to be procured at higher rates, and thus, HPCL may have incurred losses running into crores.
Tender No. 2
E- Tender No. 12000147-HD-12002 (“Tender No. 2”) was floated by HPCL on 24.01.2013 for supply of 40, 00,000 14.2 Kg cylinders, under a two bid system, to its bottling system located in 18 States. A total of 66 bidders participated in this tender, out of which, 65 were technically qualified. 4 qualified in the ‘existing vendors’ category and 10 qualified as ‘new vendors’. It was alleged that while the evaluation of the bidding process was undertaken, 51 bidders withdrew their bids by submitting letters of withdrawal citing reasons such as power cuts, labor problems etc. Some bidders did not provide any reason for their withdrawal.
After withdrawal, HPCL decided to proceed with the evaluation of the remaining bidders and found that 5 were from ‘existing vendor’ category and 10 were from ‘new vendor’ category. It was stated by HPCL that as there was a delay in finalizing the price bids of Tender No. , purchase orders were placed on 4 existing vendors at L-1 rates under Tender No.1. The price bids of Tender No. 2 were opened on 31.05.2013 and since then purchase orders were placed on new L1 rates.
DG Investigation
Market conditions
The Director General (“DG”), in his investigation report, concluded that the market for supply of 14.2 Kg cylinders is conducive for cartelization. Such finding was based on the following points:
(i)DG noted that there are only 3 market players in the procurement of empty LPG cylinders for retail and distribution of 14.2 Kg LPG filled cylinder namely- HPCL, IOCL[1] and BPCL[2].; (ii)Yearly demand for LPG cylinders by HPCL is between 50,00,000- 60,00,000 as against 60-80 participating vendors, who are either connected by being in one group, common management or related management; (ii) demand can be easily estimated and markets can be allocated and shared between them’ (iv) there is no substitute for 14.2 kg cylinders; (v) Bidding takes place on repetitive basis; (vi) there is little or no technological change in the product design; (vii) presence of an industry association.
Tender No.1
The DG noted that out of the 53 bidders who submitted their bids, several entities had common or related managements. The DG also took note of instances of identical bids being submitted by related as well as unrelated bidders for different States. Although the manufacturing units of different bidders were located at different places in different States, their final quoted rates were identical or within a narrow range Moreover, other factors such as freight cost, tax credit, excise duty exemption, power supply tariff etc. were also different in different States. The DG noted that the bidders quoted identical rates not only at L1 but also L2, L3, L4 and L5 rates without any justification or basis. Most of the bidders, in their deposition, admitted to being in touch and meeting with each other on various occasions such as pre-bid meeting, negotiation meeting etc. The DG found 48 Opposite Parties to be in contravention of Section 3(3)(d) read with Section 3(1) of the Competition Act, 2002 (“the Act”) with respect to Tender No.1
Tender No. 2
The DG noted that out of the 4 ‘existing vendors’, Krishna Cylinders and Gopal Cylinders had quoted identical prices in 8 out of the total 10 States in which they had submitted bids. Both the firms admitted, in their deposition, to have always discussed rates for the tenders of LPG cylinders and quoted accordingly.
The DG observed that out of the 51 bidders who withdrew their bids, 46 simultaneously withdrew on the same day i.e. 04.03.2013. Most of them stated no reason for withdrawal or stated a common reason ‘Due to unavoidable circumstances’. The DG noted that several of them had discussions before withdrawing from the tender which was evidenced by exchange of withdrawal letter format through e-mails between them. In cases where the format of the withdrawal letter was not same, the reasons stated were similar which could not be possible without a concerted action.
Moreover, several bidders had identical IP addresses through which the bids were uploaded. Further, there were 6 common agents which worked for the LPG manufacturers who frequently met each other and were aware of the decisions of other companies. The DG also found that several bidders were in regular contact with each other through e-mails and shared important and confidential information relating to tenders, negotiations, strategies etc.
The DG also found that there was an active national level association- Indian LPG Cylinders Manufacturers Association and also regional associations such as North India LPG Cylinder Manufacturers Association and Rajasthan LPG Cylinder Manufacturers Association which gave a platform to the LPG manufacturers to discuss and exchange various issues. The DG stated that the bidders initially had denied the existence of such associations, however, their existence was established by exchange of information between the manufacturers.
DG found 53 bidders to be in contravention of Section 3(3) (d) read with Section 3(1) of the Act.
CCI Analysis
Tender No. 1
The Commission observed that identical prices were quoted by bidders despite the fact that they had different costs. Moreover, the DG had found that the bidders were in contact with each other which was also admitted by the bidders themselves in their respective depositions. However, the Commission was of the view that parallel pricing can only lead to a strong suspicion of cartel and cannot lead to positive conclusion regarding bid rigging. CCI noted that the investigation had nowhere revealed that the quotation of identical prices was with an aim to share the market among themselves. Moreover, CCI held that the information exchanges between competitors could constitute a concerted practice if it involves sharing of strategic data between them such as details about price, demand, capacity utilization, and internal documents evidencing knowledge or understanding of competitors pricing strategy, awareness of future price increase by a rival etc. Although, the representatives of the Opposite parties knew each other and admitted to have been interacting with each other on a regular bases, however, the investigation did not bring out any evidence of exchange of any strategic information in relation of discussion of quotation bids in Tender No.1.
CCI also sought for the views of HPCL and found that the rate quoted by the bidders is only one of the factor that is taken into consideration in addition to existing procurement cost and industry rates and HPCL is neither constrained nor dependent on the rates quoted by the bidders. Moreover, the Commission also noted that HPCL is aware of the fact there can be identical rates offered by bidders and for that reason it has introduced the concept of integrity pacts in its tenders, however, it was not invoked by HPCL despite there being existence of price parallelism in the bids.
Accordingly, considering the submissions of HPCL and in the light of judgement passed by the Hon’ble Supreme Court in the Rajasthan Cylinders Case[3] , the CCI decided not to examine the conduct of bidders in Tender No.1
Tender No.2
Identical Bids
The Commission noted that the bidders had quoted identical rates in Tender No. 2 after discussing with each other and admitted to have always talked to each other before submitting their bids. However, in view of the decision taken in Tender No.1 above and absence of any corroborative evidence of collusive bidding of coordinated action apart from quoting identical bids, the Commission decided not to proceed with the Opposite Parties who quoted identical prices.
Collective Withdrawal
The Commission noted that out of the 51 LPG manufacturers who withdrew their bids, 21 did not provide any reasons in their withdrawal letters, 9 stated unavoidable circumstances, 4 stated calculation error and the remaining 7 gave explanation of manpower shortage, labor problem, power cuts etc. as their reason of withdrawal. The Commission noted that the Opposite parties were unable to justify their reason during the investigation. The Commission also noted that apart from related Opposite parties, several unrelated Opposite parties uploaded their bids from common IP addresses which could not be possible without the existence of a prior understanding.
Moreover, the Commission observed that there were common agents of the LPG manufacturers who admitted of talking and meeting each other regularly and also worked for the other in their absence.
The Commission also examined the e-mail exchanged between the Opposite Parties and concluded that they were regularly communicating with each other and coordinating their conduct by sharing sensitive and confidential information in relation to tenders. The Commission also acknowledged the existence of National as well as regional associations which could have played a role as a platform to facilitate collusion.
The Commission apart from noting the above factors, observed that a number of LPG manufacturers had used common language and format in their withdrawal letters to HPCL and had filed these letters on the same day i.e. 04.04.2013 which, in the opinion of the Commission, could not be a sheer coincidence. The reasons furnished by many of the LPG manufacturers were also identical or many a times common despite the fact that such bidders were situated through the length and breadth of the country and submitted their bids for different States.
Accordingly, the CCI decided to impose penalty at the rate of 1% of the average relevant turnover for the financial year 2013-14, 2014-15 and 2015-16 on the 51 LPG manufacturers who withdrew their bids. Also, a penalty calculated at the rate of 1% of the average income of the financial year 2013-14, 2014-15 and 2015-16 was imposed on the office bearers.
COMMENT: This order exhibits maturity of jurisprudence on analysis of cartels in public procurement and better understanding of the unique , buyer driven market conditions in India by the CCI. Though this order also exhibits acceptance of the ratio decidendi of the Supreme Court judgment in the first and main LPG Cylinder cartel case by CCI ( in which I represented 44 out of 51 bidders before CCI ) by not holding parallel pricing by distantly situated suppliers as amounting to cartel due to unique market conditions dominated by the monopsonist buyer (HPCL) yet the time taken by CCI to arrive at a finding of collective withdrawal from the bidding process ( which may also tantamount to cartelization) amounting to cartel is noteworthy and shows a severe resource constraint at CCI .
[1] Indian Oil Corporation Limited
[2] Bharat Petroleum Corporation Limited
[3] Rajasthan Cylinders and Containers Ltd v Union of India (Civil Appeal No. 3546 of 2014)
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