According to the CCI Annual Report for FY19, of the total penalties amounting to about Rs 13,881 crore, the amount realised was only Rs 127 crore
As early as 483 AD, the Constitution of Zeno provided for property confiscation and banishment for joint action of monopolies or price-fixing in products like clothes, fish and other goods.
Cartels have been the principal target of competition/antitrust authorities worldwide. Cartels have thrived through centuries, and so have efforts by authorities to curb them. Adam Smith wrote in the Wealth of Nations (1776): “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” As early as 483 AD, the Constitution of Zeno provided for property confiscation and banishment for joint action of monopolies or price-fixing in products like clothes, fish and other goods.
Kautilya’s Arthashastra too observed, “Traders, joining together and raising or lowering the (prices of) goods, make a profit of one hundred panas on one pana or of hundred kumbhas on one kumbha. (VIII.4.36)”, and prescribed penalties; for instance, for artisans and traders who profiteered through cartelising, the fine was to be one thousand panas.
Beginning in the 1870s, America witnessed rapid economic growth and the beginnings of an industrial economy. But this development was also accompanied by ingenious strategies to run cartels through the formation of trusts that brought unified control over competing businesses and, thus, control over prices and supplies. Examples of such infamous trusts were cartels in oil, sugar, whiskey, cotton oil, telecom and others. Following public outrage against these trusts, president Benjamin Harrison promised during his election campaign an ‘antitrust’ law, which got enacted in the form of the Sherman Act, 1890, the precursor of modern competition law.
Cartels, especially those that fix prices, divide markets, rig bids, etc (called hardcore cartels), are denounced due to the enormous harm they cause to the economy. Several credible studies have examined the damage wrought by cartels. One study has shown that on average cartels raise consumer prices by 49% and the more serious ones by as much as 80%. Between 1990 and 2005, overcharges by international cartels reached as much as $500 billion.
A World Bank-OECD study has observed that in developing countries the economic damage of cartels already detected could reach as much as 6.38% of GDP, while excess profit resulting from unjustified overcharges could reach up to 1% of GDP. Based on international trade flow data and a list of 42 detected international cartels operating in developing markets and prosecuted in the US and EU in the 1990s, it was estimated that imports affected by cartel agreements constitute 3.4–8.4% of total imports to developing countries—an amount equivalent to 0.6–1.7% of the GDP in these countries. If the above estimate of excess profits was to be applied to India, the harm caused by cartels could be around Rs 2 lakh each year! Damagingly, a substantial proportion of the cartels were found to be in sectors that affect the poor such as food, beverages, transportation and logistics, and in other essential goods.
On account of the heavy injury caused by cartels and the secret nature of their operations, usually, competition law’s stiffest penalties are targeted toward cartels. For example, during 2019 the fines imposed on cartels were $1.7 billion in the EU, $354 million in the US, $385 million in Brazil, and $401 million in Japan. The penalties can reach 10% of the worldwide turnover. In several countries such as the US, the UK, and Japan, cartels face criminal offences and are liable to prison sentences.
In India too, the Competition Act treats cartels more stringently than other offences: these are per se violations; the penalty can be the higher of 10% of turnover or three times the profit for each year of the cartel; and whistleblowers are welcomed through significantly lenient treatment by a reduction in penalties, a provision that the CCI has taken continuous measures to popularise among stakeholders. In its enforcement against cartels, the CCI has imposed some significant penalties, for example in the well-known cement cartel, the total penalty on eleven cement companies was Rs 6,317 crore. However, the recovery of penalties levied by the CCI has been impeded for one reason or the other. Numerous penalty orders have been appealed and have been pending for extended periods in higher judicial forums—the NCLAT and the Supreme Court. According to the CCI Annual Report for FY19, of the total penalties amounting to about Rs 13,881 crore (for all categories of cases, including cartels) the amount realised was only Rs 127 crore; thus, the penal and deterrent effect of the penalties imposed by CCI has been seriously muted by these protracted proceedings.
Interestingly, in a related provision of the Act, if an enterprise fails to pay the penalty (or fails to comply with a final CCI order), in the last resort, the CCI can lodge a complaint before the Chief Metropolitan Magistrate, Delhi where a fine up to Rs 25 crore and/or imprisonment up to 3 years can be awarded. According to the above Annual Report, as many as 30 complaints were pending before the CMM, but it does not appear that such punishment was imposed by the CMM in any case. Thus, this legal recourse has proved of little practical value to the CCI.
In recent months, no significant cartel has been punished by the CCI, may be partly due to the pandemic. In 2020, in five cases, final orders have been passed by the CCI, but in none of these cases, including one of bid-rigging (identified by a CCI survey as an endemic problem in India), was a penalty imposed. During 2019 and 2020, in two cases, the CCI ordered an investigation to be undertaken; conversely, in seventeen cases the CCI declined to order an investigation. It is possible that in the rejected cases, the information provided was insufficient to justify an investigation and thereby cause unnecessary harassment to the opposite parties. But this also depends on the threshold of material or evidence required by the CCI for directing an investigation. If the threshold is set too high, it will be beyond the wherewithal of most complainants to furnish sufficient proof, especially since all cartels operate in great secrecy. In that case, the CCI would be losing a valuable source of information in its fight against cartels, which the CCI should be welcoming.
In the mission to unravel cartels, a few suggestions may be worth considering:
Cartels often use times of crises to flourish, as happened in Europe during the wars. India, along with the rest of the world, is fighting a war against the pandemic. While the CCI has rightly issued a public notice indicating it would understand any healthy cooperation undertaken by companies to support the fight against the virus, it may also be useful to undertake a proactive study/survey of the markets to detect any cartelisation that may be going on, especially in critical areas like health services including hospitals, pharmaceuticals, essential consumption goods like food, agricultural inputs, education and widely used metals.
Announce a policy on penalties, as done in several jurisdictions, clarifying the CCI’s methodology for deciding the quantum of penalty in proven cases. A firmer approach should be followed for levying penalties on proven cartels, except for leniency applicants (whistleblowers). Unless adequate penalties are imposed there would be no deterrence and also little incentive for whistleblowers to avail the leniency programme.
Lower the threshold for the quantum of evidence expected from an informant for directing an investigation; if credible material is provided by the informant, the rest can be unearthed by the DG with its investigative powers; otherwise, this may discourage informants from reaching out to the CCI.
It is imperative that the cap on penalties set in the Act at 10% of the total turnover (lowered by the interpretation given by the Supreme Court) be restored in the amendments currently under consideration of the government.
The author is Founding member and former acting chairman, Competition Commission of India and currently senior advisor of competition law, Platinum Partners