Amazon and Flipkart found violating Competition law in India-DG investigation report out
CCI penalizes sugar mills in UP, Gujarat and AP for cartelizing in supply of ethanol to OMCs under the Ethanol Blending Programme-ignores market realities!
The Competition Commission of India (CCI/Commission) vide order dated 18.09.2018 under Section-27 of the Competition Act, 2002 (the Act) has imposed heavy monetary penalties at 7% of their average relevant turnover on sugar mills in Uttar Pradesh (UP), Gujarat and Andhra Pradesh (AP) and at 10% of the average receipts of the last three years on their trade associations (Indian Sugar Mills Association (ISMA) and Ethanol Manufactures Association of India (EMAI) for indulging in cartelization in supply of ethanol in response to the first joint tender issued by three Oil Marketing Companies (OMCs) i.e. IOCL, HPCL & BPCL for procurement of ethanol for the ambitious Ethanol Blending Programme (EBP) of the Government of India , Ministry of Petroleum and Natural Gas (Mo PNG) for contravention of Section-3(1) read with Section 3 (3) of the Act. A brief background of the case is as under.
The Indian Government introduced an ambitious Ethanol Blended Program (EBP), primarily to reduce its heavy crude oil import bill and keeping in mind the beneficial effects it would have for the agriculture sector and country’s environmental footprint. Ethanol is produced in India from sugar molasses. From molasses, Rectified Spirit (RS) is produced having a strength of 95%. RS is then further distilled to produce ethanol having strength of 99.80% alcohol which can be blended with petrol.
In pursuance of the initiative, EBP Pilot Program was launched in 2002-03 for 5% ethanol blending with petrol. EBP was launched initially in the States of Maharashtra and UP. EBP Programme was further extended to 9 States and 4 UTs w.e.f. 01.01.2003. The programme could only be partially implemented during 2003-04 and 2004-05 due to low availability of ethanol owing to lower sugarcane production. In September 2006, due to resurgence in sugarcane production, it was extended across 20 States and 8 Union Territories subject to commercial viability. Subsequently, implementation of EBP Programme was deferred due to short supply of sugarcane in 2007-08. In September 2008, the Union Cabinet approved the National Bio-fuel Policy and five percent ethanol blending was made mandatory across all States in India. Pursuant thereto, OMCs contracted for 1.4 billion litres of ethanol for EBP Programme at Rs. 21.50/ litre from November 2006 to November 2009. However, only 540 million litres of ethanol could be procured till April 2009.
In the year 2010-11 and 2011-12, OMCs floated tenders on ‘Expression of Interest’ (EOI) basis for supply of ethanol. The Cabinet Committee on Economic Affairs (CCEA) used to determine the base price for procurement of ethanol i.e. Rs. 27 per litre as an ad hoc interim price. Meanwhile a Committee headed by Sh. Soumitra Chowdhary was formed to examine the various issues pertaining to the pricing of ethanol for EBP Program. The said Committee, considering the pale response from the sugar mills for supply of ethanol against the fixed base price determined by CCEA at the rate of Rs. 27/- per litre recommended to introduce competitive bidding in the procurement to attract the sugar mills to supply ethanol on market driven prices. CCEA considered the Committee’s report and issued a Press Release on 22.11.2012 which mentioned inter alia that “the procurement price of ethanol will be decided henceforth between OMCs and suppliers of ethanol “. Accordingly, the first joint tender for procurement of ethanol on competitive market prices was issued by Oil Marketing companies (OMCs), through BPCL, the coordinated Agency nominated for the purpose, in January 2013.
Noticeably, ethanol being an essential input for the Distilleries manufacturing liquor, there was a strong reaction from the user industry from the very beginning and one such company, namely, the Indian Glycols Ltd., anticipating an increase in the ethanol prices due to the determination of fixed price @ Rs. 27/- per litre by CCEA, had approached the CCI with an information filed against the OMCs[1], the ISMA and the MoPNG alleging that the joint tendering by the OMCs at the behest of the CCEA directives was an act of anti -competitive co-ordination between horizontally placed buyers. The CCI, however, found the allegation devoid of merit and dismissed it vide its order dated 26 July 2012.
But when the CCEA, on the recommendation of the Soumitra Chowdhary Committee , decided to procure ethanol through competitive bidding and the three OMCs again floated a joint tender in January 2013 and invited quotations from ethanol manufacturers /sugar mills for supply of ethanol through a joint tender dated 02.01.2013 (which was issued by BPCL on behalf of all the three OMCs – as the coordinator of the tender process) .the user industry approached CCI again with 6 separate informations filed by M/s India Glycol Ltd[2]., Ester India Chemicals Ltd[3], Jubilant Life Sciences Ltd[4], A B Sugars Ltd[5]. , Wave Distilleries and Breweries Ltd[6]. and Lords Distillery Ltd[7]. (collectively known as Informants). Accordingly, sealed tenders were invited under two bid system i.e. technical bid and price bid from ethanol suppliers and the said supply was to be made available to various depots/ terminals of OMCs across the country for a period of one-year w.e.f. 01.03.2013. The Informants complained that the said joint tender by OMCs was an agreement amongst horizontal players to procure ethanol from various suppliers in contravention of the provisions of Section 3 of the Act which was likely to cause appreciable adverse effect on competition (AAEC) within India with respect to supply and distribution of ethanol. Further, it was alleged that the sugar manufacturers who participated in the joint tender quoted similar and identical rates by way of understanding amongst themselves and collective action, which is said to be violative of Section-3 of the Act.
The Commission opined that there exists a prima facie case on the said allegations of collective decision making to fix the prices of ethanol for supply to OMCs by sugar mills and accordingly, directed Director General (DG) to investigate the matter and submit the investigation report. On finding that there exists similar issues/ allegations the Commission vide order 01.07.2013 and 23.07.2013 clubbed Case Nos. 36 of 2013, 47 of 2013, 48 of 2013 and 49 of 2013 with Case Nos. 21 of 2013 and 29 of 2013.
DG’s Investigation Report:
DG filed a common Investigation Report on 20.07.2015. In the Investigation Report, DG finds the trade associations i.e. Indian Sugar Mills Association (ISMA) and Ethanol Manufacturers Association of India (EMAI) in violation of Section- 3 (3) (a), 3 (3) (b) read with Section- 3 (1) of the Act and bidders of sugar mills in respect of the depots located in the state of Uttar Pradesh, Gujarat and Andhra Pradesh found to be in violation of Section- (3) (3) (d) of the Act with regard to joint tender floated by OMCs.
During the pendency of the DG’s Investigation Report before the Commission, some opposite parties (OPs) moved applications seeking cross-examination of some witnesses, which was allowed by the Commission. Thereafter, a report of cross-examination was also submitted by DG on 21.09.2016. Though the allegations by Informants were made with respect to the suppliers of ethanol in UP/Haryana/Punjab, but the DG confined its analysis primarily to UP producers only. However, the DG also examined and collected data to ascertain if there was a pan-India pattern in bidding. On examining pan-India data, DG found sugar mills operating in the State of UP, Andhra Pradesh and Gujarat had indulged in the anti-competitive conduct.
Analysis of DG’s Report by Commission:
After considering DG Report, cross examination reports and other material available on records the Commission decided vide its order dated 28 March 2017 to proceed with the inquiry against the 20 sugar mills, including 14 originally arrayed as bidders though not made Opposite Parties (OPs) in Case No. 21 of 2013 but against whom DG had recorded findings. The Commission also decided to proceed against 2 associations, 1 federation and 3 OMCs. Thus, the inquiry by the Commission was held against total of 26 opposite parties in the case. Further the Commission vide its order dated 19.07.2017 recorded that sugar mills namely, The Upper Ganges Sugar & Industries Limited and The Oudh Sugar Mills Limited having merged with Avadh Sugar & Energy Limited, making the total number of sugar mills inquired as 19. Thus, the final inquiry was held against 25 OPs.
Commission’s Analysis:
The Commission have examined two issues in the present case:
- Whether the joint tender floated by OMCs is in violation of provisions of Section 3(1) read with Section 3(3) of the Act?
- Whether the tender floated on 02.01.2013 by OMCs was rigged by sugar mills/ ISMA/ EMAI/ NFSCF in contravention of the provisions of Section 3 of the Act?
Whiling dealing with the first issue, the Commission pointed out that DG didn’t find any contravention of the provisions of Section-3 of the Act by the PSU OMCs for floating joint tender as the arrangement was found to enhance the efficiency with regard to procurement of ethanol by saving wastage of time, money and resources of all the stakeholders including the bidders. Further, CCI noticed that Indian Government holds majority share in each of the OMCs and to ensure that taxpayers’ money is not wasted OMCs has issued joint tender, on account of which the three OMCs i.e. IOCL, BPCL and HPCL had to work in close coordination.
There exists limited availability of the ethanol, in a situation where separate tenders are issued one OMC would have issued the tender first there could be chances of procuring all or most of the quantity of ethanol and thereby limiting procurement of ethanol in favor of remaining OMCs. Such a situation would lead to market imperfections like
- Demand of higher prices by the remaining OMCs on account of basic economic theory of demand and supply,
- Hampering of equitable distribution and functional coordination in case separate tendering is conducted.
The Commission viewed that since the terms of the tenders are same for all the OMCs floating a joint tender is the most efficient option in terms of
- Cost-effectiveness and time and effort associated with multiple tenders.
- Minimization of attendant costs to the national exchequer.
- Availability of opportunity of equitable blending of ethanol.
- Fulfillment of the mandate provided by the Indian Government without the exclusion of any OMC.
The Commission thus found no merits in the allegation of the Informants on joint tendering resorted to OMCs and held that floating of joint tender by OMCs for procurement of ethanol per se cannot be construed as anti-competitive conduct. The Commission further notes that even the presumption of AAEC is not applicable on the agreements entered into by way of joint ventures as the factual matrix by OMCs demonstrated efficiency resulting from the joint tendering process and by virtue of grounds engrafted in proviso to Section- 3(3) of the Act such an agreement which results into efficiency is exempted from the category of AAEC. Therefore, the joint tender floated by OMCs is not in contravention with provisions of Section-3.
With regards to the second issue, there are sub-issues which need to be discussed in some detail.
Jurisdictional Challenge: The preliminary issue about jurisdiction of DG was raised by some of the OPs i.e. DG exceeded its limit by examining the conduct of the bidders who were not arrayed as OPs in the Information. The Commission observed that though the bidders of other States, except UP, were not named specifically OPs in Case No. 21 of 2013, but the order passed by Commission under Section- 26 (1) of the Act didn’t confine to the State of UP. Further, by virtue of Regulation 20 (4)[8] of the Competition Commission of India (General) Regulations, 2009, the Commission didn’t find any fault in DG’s investigation. Also the Commission has given sufficient opportunity to hear the parties and no violation of principles of natural justice is caused
Price parallelism: The tender process required quotations of basic price of ethanol and Net Delivered Cost (NDC) and the data collected by DG with respect to the tender dated 02 January 2013 was undertaken. The CCI considered the distribution of basic price and NDC quoted by the bidders and observed that the basic price quoted was in the small price band of Rs. 35/- to Rs. 36/- per litre (as against the price of Rs. 34/- per litre quoted by Kisan Sahkari Chini Mills Ltd. (KSCM) the State-run cooperative sugar mill) and NDC was clustered very closely between Rs. 41.70 per litre and Rs. 42.50/- per litre.
After analyzing the DG’s data the Commission noted that the plea of bidders that out of 110 depots across India, instance of identical bidding was noticed only in few, was misconceived since most of the bidders had concentrated only in 4-5 depots located near to their distilleries, therefore, their conduct has to be judged on the basis of the depots where they submitted their bids and not on pan-India basis. The Commission observed that it is evident that the total quantity offered by bidders matched the total required quantity and, therefore, this was clear indication of an understanding, coordination and concerted approaches by the bidders. According to CCI, the bidders couldn’t offer any plausible explanation with regard to this issue.
Further, the Commission examined if there existed a common agreement amongst bidders on a particular price band. On analysis of the pricing pattern, the Commission found that depots operating in the State of UP had quoted identical prices, but this might not constitute an agreement rather quoting of identical freight charges by the bidders acted as an additional factor to establish the collusive conduct of the bidders. The replies submitted by the bidders on identical freight charges despite substantial variance in the distance between the distilleries had no plausible explanation. The Commission noted that DG was justified in focusing the investigation depots wise where the bidding pattern appeared to be collusive. In furtherance of the discussions, the Commission found out that bidders who participated in respect of the depots in UP have acted in concerted and collusive manner in submitted their bids. This conclusion was evidenced from the price quoted, quantities offered and the explanations given by the parties.
Behavior of the Bidders: Some of the OPs objected to the findings in the DG Report on the ground that DG did not examine the producers of Maharashtra. In furtherance of the objections raised by the OPs, the Commission remanded the matter to the DG for further investigation vide its order dated 30.10. 2017. The Supplementary Investigation Report contained analysis of 20 bidders who submitted their bids for 11 depots. After carefully analyzing the bidding pattern, the Commission found that the basic price quoted in all bids was in excess of Rs. 40/- per litre but the NDC was in the range of Rs. 45.54/- per litre to Rs. 55.66/- per litre. The Commission thus concluded that unlike the bidding pattern in Andra Pradesh and UP, bids for NDCs were not similar in respect of the 10 depots analyzed by the DG and bids for basic price of Rs. 40/- per litre matched only for 2 bidders. Therefore, no contravention was established for the bidders in the State of Maharashtra.
Thus, the Commission after examining the conduct of bidders in the State of UP, Andhra Pradesh, Gujarat and Maharashtra found bidders of Andhra Pradesh, UP and Gujarat indulging in the anti-competitive conduct.
Role of Trade Associations- The Commission examined the role of the 3 trade associations in facilitating the bid rigging.
On examination of the role of ISMA, it was noted that immediately after the Press Release dated 22.11.2012 in respect of the decision of CCEA regarding change in pricing mechanism, ISMA had convened meetings of ethanol manufacturers on 06.12.2012. After this, meetings were convened on 19.12.2012 and 27.12.2012. However, no details of these meeting were provided by ISMA in response to the probe letters issued by the DG during investigation. During investigation, some of the members of ISMA who attended those meetings provided the information about the meetings held by ISMA in December 2012 in respect of Ethanol supply to OMCs. The representatives of the 12 companies who had attended these meetings have categorically stated the details of these meetings in their statement recorded under oath by the DG. The statements of the Director General of ISMA and another Director of ISMA dealing with sugar and by products were recorded but their statements were found to be evasive in which both denied holding any formal meetings of sugar mills of the pretext of absence of record. On the contrary, it was noticed that the meetings of the ethanol manufacturer members were called by the concerned Director (Shri G.K. Thakur) by way of email with the approval of the DG, ISMA (Shri Abinash Verma), but the said Director could not explain the purpose of calling the meeting of the ethanol manufacturers except for stating that a meeting was called because ethanol blending was made mandatory. The Director could not explain why this could not have been discussed during the AGM of ISMA which was scheduled after 7 days i.e. on 13.12.2012. Further, both could not explain why Bajaj Hindusthan Limited, the largest sugar manufacturer was called for the meeting held on 06.12.2012 though it was not the member of ISMA. The above facts coupled with the conduct of ISMA in hiding the details of meeting led CCI to the conclusion that the ISMA was taking an active role in providing a platform to all the competing bidders of UP for discussion and coordination amongst themselves in order to obfuscate the whole bid process of OMCs.
As regards EMAI, it was noticed that its President made a statement reported in a business daily i.e. Business Standard, Mumbai Edition of 07.12.2012 in which he had categorically stated that the ethanol manufacturers wanted OMCs to pay Rs. 40 per litre.
The members of EMAI were found to have followed this lead given by the President, EMAI in his press statement that the price of ethanol should be more than Rs.40/- litre. It also emerged that EMAI conducted two meetings (on 09.01.2013 and 21.01.2013) after the announcement of tender where all the members were called to Mumbai.
As regards the National Federation of Cooperative Sugar Factories Limited (NFCSF) is concerned, neither the DG/CCI find any evidence on which a finding of contravention can be recorded against it, nor the Informants could point out any such material against NFCSF wherefrom any infringing anti-competitive conduct could be attributed to it.
Accordingly, out of 3 trade associations, CCI found two associations i.e. ISMA and EMAI in contravention with Section- 3 (3) (a), 3 (3) (b) read with Section- 3 (1) of the Act.
Finally, the Commission penalized the sugar mill manufacturers at the rate of 7% of their average relevant turnover of the preceding three financial years arising out of sale of ethanol and decided to impose penalty on trade associations (ISMA and EMAI) at the rate of 10% of their average receipts of the preceding three financial years.
Curiously, the CCI did not impose any penalty on the officials of the sugar mills and the office bearers of the trade associations.
Comment:
This case amply demonstrates the hardening of stance of the CCI in punishing any apparent coordination between competitors, mainly on legal grounds and ignoring the market realities. The case also illustrates how the trade associations facilitate coordination between competitors.
The ambitious EBP of the Government of India was a nonstarter from the beginning due to the non-remunerative price for the procurement of ethanol fixed by the CCEA i.e. at Rs. 27 per litre whereas the sugar mills / ethanol manufacturers were able to sell the same to other private buyers i.e. distilleries and pharma companies at much higher rates. The informations filed were clearly motivated with vested interest of the distilleries which were themselves procuring ethanol at higher rates from the same sugar mills in UP, for instance, which was mentioned to the CCI during the initial hearings. Thus, the basic price of Rs.35 to Rs. 36 per litre quoted by the sugar mills in UP apparently reflected the competitive market price, which fact was ignored by the CCI. The concept of demand-supply gap plays a major role in market-driven pricing mechanism which seems to have been ignored. The fact that the price of a product is determined based on the demand available of a product in the market cannot be ignored. It is disappointing to observe that the Commission has failed to appreciate the economics factors which has led the sugar mills to quote higher price.
Secondly, it is also surprising how the sugar mills in Maharashtra, which, in furtherance to the diktat given by the President of EMAI had all quoted basic price above Rs. 40/- per litre have been exonerated even when the EMAI itself was penalized.
Thirdly, it is equally surprising why did the Commission not penalize the office bearers of ISMA and EMAI when there was plenty of incriminating evidence available against them. Similarly, non-initiation of penalty proceedings by DG and CCI against the Directors and officials of the sugar mills found to have cartelized is surprising in the light of recent precedents of the case of pharmaceutical companies.
Finally, it is necessary to question whether the sugar mills were really operating in a cartel, because nearly every OP made party to the instant case made a submission that the price quoted was realized on the basis of demand available in the market.
………………………………….
[1] Case No. 14/2012
[2] Case No. 21 /2013
[3] Case No. 29/2013
[4] Case no. 36/2013
[5] Case No. 47/2013
[6] Case No. 48/2013
[7] Case No. 49/2013.
[8] The report of the Director General shall contain his findings on each of the allegations made in the information or reference, as the case may be, together with all evidences or documents or statements or analyses collected during the investigation.
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