artel enforcement is probably the strongest focus of competition laws in all jurisdictions and the heaviest penalties are reserved for them.
By Vinod Dhall & Vrinda Nagpal
Cartels are the antithesis of a functional free market economy where competition between rivals drives consumer welfare, economic growth and innovation. They represent a market failure compelling competition authorities to step in to investigate and punish the conspiring parties.
Cartel enforcement is probably the strongest focus of competition laws in all jurisdictions and the heaviest penalties are reserved for them. In the US, it was cartels functioning as trusts set up by competitors that led to the enactment of the country’s antitrust law.
India has not been safe from the baneful effects of cartels. Knowledgeable observers suspect that cartels have been rampant in Indian markets, and more so in homogeneous goods including commodities such as mineral ores, timber, trucking, cement, sugar, ethanol, glass, construction and real estate industries.
Understandably, the Competition Act 2002—like competition laws elsewhere—provides for stringent penalties on proven cartels, which can extend for each year of the cartel to the higher of 10% of the turnover or three times the profit. The high penalty is designed to punish errant companies as well as executives responsible for the offence.
Trade associations existing in most industrial sectors have a legitimate purpose such as projecting the problems of the industry in relation to matters such as tax or royalties or mining. Traditionally, associations were even assigned roles by the government in matters such as data collection. But trade associations in India (and elsewhere too) have often been functioning as cartels or a willing platform for running cartels.
Cartels in India have been particularly pronounced in the bidding markets. It is almost axiomatic to say that where bids are being submitted for supply against tenders floated by the government or a government agency, there is likely to be a cartel functioning in the background—even though supplies to private parties have not been safe against cartels, too!
The Competition Commission of India (CCI) has rightly been active in investigating and punishing cartels. According to data available publicly, cartels have accounted for about 63% of the cases investigated by the CCI and for 60-70% of the penalties. In the case of the well-known cement cartel, the penalties imposed on 11 cement companies amounted to Rs 6,300 crore. However, recoveries of the imposed penalties has been painfully low due to the protracted judicial processes; only about 1% of the penalty amount could be recovered by the CCI, considerably diluting the deterrent effect of the CCI’s decisions. It is incumbent on the appellate tribunal (NCLAT) and the courts to have a better appreciation of the deeply damaging effects of cartels and decide these cases with a sense of urgency.
In a case with far-reaching consequences, the Supreme Court ruled that the penalty in the case of a multiproduct company should be limited to 10% of the turnover attributable to that particular product. The stated rationale being that this would be in accordance with the principles of equity and proportionality. But these very principles could argue that the penalty should be in proportion to the size (reflected in the turnover and profits) of the company so that it equally hurts each cartelising party. When the Act stipulates a penalty proportionate (10%) to the turnover of a company, it implicitly embodies the principle of proportionality.
In another ruling, the Supreme Court observed that market conditions may be such as to have driven the suppliers to form a cartel. While the practices of a procuring company may be such as to weaken competition between suppliers, this cannot be a justification for suppliers to upfront collude in the submission of bids instead of competing in bids.
It is hoped that, in some future case, the Supreme Court will reverse those decisions or observations that weaken enforcement against cartels in India and the ability of the CCI to levy deterrent penalties.
The authors are Senior advisor and associate, respectively, Touchstone Partners