How to bust those cartels

Written by Pradeep S Mehta | Updated: Nov 20 2010, 04:35am hrs
A recent action against the Indian company Apollo Tyres local subsidiary in South Africa for collusive activity set in motion the whole thought process of understanding what businesses do in order to maximise profits by whatever means. The same businesses would also indulge in thwarting import competition by collectively applying for anti-dumping action. While collusive action or cartelising can be actioned against under the competition law, use of non-tariff barriers such as anti-dumping cannot be easily countered because the rules in India do not allow the application of a public interest test.

At this juncture we ask a simple question: why are certain sectors more susceptible to restrictive trade practices than others The answer lies in the way these sectors operate. A cartel is more likely to exist in an industry that has, inter alia, homogeneous characteristics, meaning comparatively less competition on quality of goods or service or few competitors or a slump in the economy. Both the cement and the tyre industry notoriously hold the distinction of satisfying most of these conditions, and have been in the spotlight of competition enforcement agencies the world over.

Tyre cartels are more diabolical than others as they affect the very roots of the economy. Tyres constitute a substantial part of trucking cost and hence a rise in tyre prices inevitably leads to increase in prices of all other essential commodities. Cement can similarly acts as a multiplier too. Competition authorities everywhere are aware of this phenomenon and have been strict in dealing with cartels in both sectors. I only deal with the tyre sector here.

In India, the market situation becomes grimmer in the tyre sector because it is an oligopolistic industry and is successful in organising itself under the aegis of the Automotive Tyre Manufacturers Association. It also persuades the government to impose anti-dumping duty on imported tyres and creates safe havens for itself. It has also been active in lobbying other branches of the government when its interests are threatened. For example, it has appealed to the Forward Markets Commission against futures trading in rubber, as if that will help to reduce the prices! When the truckers strike hit the nation in late 2008, the roads and surface transport ministry issued ads telling the public how wrong the strike was. One valid grouse of the All India Motor Transport Congress was the high tyre prices caused by cartelisation. In the ads, the ministry advised the truckers to approach the MRTP Commission with evidence against collusive behaviour.

In India, the main legislation to deal with cartels was the MRTP Act, 1969, now replaced by the Competition Act, 2002. India had its first formal faceoff with tyre cartels when eight tyre companies came up with The General Code of Conduct for Members in 1967. MRTP instituted an inquiry to look into this Code, which appeared to be a gentlemens agreement on prices and market sharing. But with its scant resources and limited powers, the MRTP Commission could only pass cease and desist orders. This did not prevent the tyre industry from using its collective powers to get more than its due share.

The new Competition Act has more teeth and the Competition Commission of India (CCI) has also been working for more than a year. With several handicaps, it has yet to come up with any striking order but one can expect something in the near future. CCI can benefit from other nations experiences in busting cartels.

For example, it can learn from the Competition Commission of South Africa on the case where Apollo Tyres and others have been hauled up. The South African Tyre Manufacturers Conference Ltd (SATMC) and four tyre manufactures and suppliersApollo Tyres, Goodyear, Continental Tyre and Bridgestonehad been referred to the Competition Tribunal for adjudication. The Commission requested the Tribunal to impose an administrative penalty amounting to 10% of the total turnover every concerned company except Bridgestone, which had cooperated in the proceedings and was granted amnesty in terms of the Commissions Corporate Leniency Policy.

Strict actions have been taken against tyre cartels in the EU and the US as well. Amnesty provisions have also proved helpful in busting cartels. A leniency policy was established by the US justice department in the 1990s, which allows for immunity to companies that voluntarily report their involvement in antitrust practices. Leniency provisions are based on the idea of approvers in criminal cases. An approver is an accomplice in the crime, who subsequently admits his guilt, helps the investigation and gets a lesser punishment or full amnesty in exchange. Leniency provisions also share jurisprudential foundations with plea-bargaining, which allows the offender to declare his guilt in lieu of lesser penalty. The Indian Competition Act also provides for leniency provisions and CCI, following the practices of other nations, should use these generously.

There are other measures that may prove useful in tracking down tyre cartelisation. CCI is empowered to suo motu take cognisance of competition distortion practices. It should scrutinise the price rise of tyres to trace the presence of cartels. GoI should amend the anti-dumping law to include public interest as a test. Like the Transparency Internationals Integrity Pact, which has been accepted by India, CCI could also innovate and ask certain industries that are more susceptible to cartelisation, such as cement and tyres, to furnish undertakings that they will not indulge in cartelisation.

The author is the secretary general of CUTS International