[The following post is contributed by Karan S. Chandhiok, asenior associate with the competition law team at Luthra & Luthra Law Offices and a Member Executive of the Competition Law Bar Assocation. He graduated from Amity Law School in 2006 and did his BCL from Oxford in 2007.
The views are personal, and he may be contacted at karanchandhiok@gmail.com
We hope to carry further comments and analyses on the order in due course]
Builders’ Association of India v. Cement Manufacturers’ Association & Ors.
The CCI, through its orderdated 20 June 2012, imposed a penalty of approximately six thousand crores (approx. USD 1.1 billion) on cement manufacturers in India after holding them guilty of cartelisation in the cement industry. The penalty has been imposed at the rate of 0.5 times the net profit of such manufactures for the past two years. Additionally, the Cement Manufacturer’s Association (the CMA) has been fined 10% of its total receipts for the past two years for its role as the platform from which the cartel activity took place.
The scope of this post is restricted the findings of the CCI, and a more detailed analysis will follow in due course.
Brief facts
The decision of the CCI emanates from information filed by the Builders’ Association of India on 26 July 2010 against the CMA and ACC, Gujarat Ambuja Cements Limited (now Ambuja Cements Limited), Ultratech Cements, Grasim Cements (now merged with Ultratech Cements), JK Cements, India Cements, Madras Cements, Century Textiles & Industries Limited, Binani Cements, Lafarge India and Jaiprakash Associates Limited.
On 15 September 2010, the CCI formed a prima facie opinion on the contravention of the Competition Act, 2002 (the Competition Act) and directed investigations in the matter. On 31 May 2011, the Director General (DG) submitted his report (the Report) detailing contravention of the Competition Act by the respondents.
The CCI called for comments and objections from the respondents, and after considering their submissions came to the conclusion that the respondents had contravened sections 3(3) (a) and (b) of the Competition Act.
Before going to the principal findings of the CCI, it is important to note that the CCI restricted itself to the cement companies named in the information owing to the fact that such companies were the prominent participants in the market and were key players in the whole arrangement.
Similarly, as to the period of contravention, the CCI limited the period from 20 May 2009 to 31 March 2011. However, it made clear that this limitation was only relevant to the present case and would be independent of other cases.
Preliminary Issues
Jurisdiction: The respondents had raised concern over the DG’s investigation and reliance on data prior to 20 May 2009 (the date on which the provisions of Section 3 of the Competition Act were brought into force). The CCI held that mere examination of data prior to 20 May 2009 cannot be construed to mean that the provisions of the Competition Act have been applied retrospectively. Moreover, relying on the Bombay High Court decision in Kingfisher Airlines v CCI, the CCI took the view that if the effects of acts taken place prior to 20 May 2009 were continuing, it had the jurisdiction to examine such conduct.
Failure to provide opportunity to cross examination: The respondents contented that the DG did not give them an opportunity to cross examine witnesses relied upon by him. The CCI rejected this submission and stated that by giving the respondents the chance to submit oral and written evidence before it, the proceedings were in accordance with the principles of natural justice.
Incorrect reliance on motivated information and press reports: The respondents stated that the information filed by the Builders’ Association was motivated. This, again, was rejected by the CCI. It held that under the scheme of the Competition Act, the final outcome was to be determined on the basis of an inquiry after going into the questions whether competition forces were being inhibited due to certain anti-competitive behaviour.
Substantive Issues
The substantive question before the CCI was whether the conduct of the cement companies violated sections 3 (anti-competitive agreements) (discussed below). The CCI also examined whether there was an abuse of dominant position, but found that the market was characterised by several players and no single firm or group was in a position to operate independent of competitive forces or affect its competitors or consumers in its favour (cf. explanation (a) to section 4 of the Competition Act).
In respect of violations of sections 3(1) (a) and (b), the CCI examined the following facts and submissions:
Market Structure of the Cement Industry: As previously stated, the CCI observed that no player can be said to be dominant in India as per the prevailing market structure. The industry is characterised by twelve cement companies having about 75% of the total capacity in India with about 21 companies controlling about 90% market share in terms of capacity. Given the oligopolistic nature of the market, each company takes into account the likely reactions of other companies while making decisions particularly as regards prices. In such a scenario, collusion between companies is possible and can be adduced from circumstantial evidence.
Circumstantial evidence is sufficient to prove violation: The chief objection taken by the cement companies was that the DG failed to support his findings with any direct evidence. The CCI, relying on international practice, noted that given the clandestine nature of cartels, circumstantial evidence is of no less value than direct evidence to prove cartelisation.
Section 3 does not require a delineation of relevant market: The CCI has held that for an inquiry under section 3 of the Competition Act, there is no requirement under the Competition Act to determine a ‘relevant market’. The Commission states that there is a distinction between ‘market’ as used in section 3 and the ‘relevant market’ as defined in section 4 of the Competition Act.
CMA is engaged in collecting competition sensitive data: The respondents contended that CMA collects retail and wholesale prices data from different parts of the country and transmits them to the Ministry of Commerce, as per the latter’s request. The CCI held that the competitors were interacting using the platform of the CMA and this gave them an opportunity to determine and fix prices. The fact that it was being under the instruction of DIPP did not absolve them of liability.
Further, the CCI noted that the CMA publishes statistics on production and dispatch of each company (factory wise) and circulates such information amongst its members. The sharing of price, production and dispatch data makes co-ordination easier amongst the cement companies.
High Power Committee Meetings: The CCI took note of the fact that cement prices increased immediately after the High Power Committee Meetings of the CMA which were attended by the cement companies in January and February 2011. It further noted that ACC and ACL, despite having ceased to be members of the CMA, attended these meetings. The CCI observed that whilst ACC and ACL admitted to having attended these meetings, both CMA and JAL refuted their presence. The inconsistencies in the statements of the different respondents established that they were keen on hiding material information.
Amendments to the CMA constitutional documents: Certain rules and regulations of CMA had serious competition concerns. These were highlighted in a CMA meeting on 30 November 2009. However, the amendments to those rules and regulations were only carried out once the DG sent notice to the respondents in the instant case.
Price Parallelism: The DG had conducted an economic analysis of price data which indicated that there was a very strong positive correlation in the prices of all companies. This, according to the DG, confirmed price parallelism. The respondents argued that the correlation benchmark of 0.5 taken by the DG was arbitrary. Moreover, the prices used by the DG were incomparable since the prices submitted by the companies differed from each other (some had submitted gross prices, while others had submitted depot prices, average retail prices etc.). The CCI did not accept these arguments and stated that given the nature of data exchanged between the parties, price parallelism could not be a reflection of non-collusive oligopolistic market conditions.
Limiting and controlling production: The Report submitted by the DG suggested that whilst capacity utilisation increased during the last four years, the production has not increased commensurately during this period. The various respondents contested these figures and led evidence to show that capacity utilisation was on the increase. It was also argued that the DG had incorrectly relied upon ‘name plate’ capacity whereas actual capacity was dependent on raw materials, plant stabilisation time, power supply etc. Therefore, if the aforesaid is taken into account, the capacity utilisation would be much higher. These submissions did not hold water with the CCI, which observed that on a year on year and plant wise basis, the capacity utilisation across the respondents had decreased.
Limiting and controlling supply: The CCI observed that the forces of demand and supply dictated that the dispatch figures should have been more than or equal to consumption of cement in the corresponding period of the previous year. However, in two months of November and December 2010, the dispatch was lower than the actual consumption for the corresponding months of 2009. It was not the case that the market could not absorb the supplies, but, instead, the lower dispatches coupled with the lower utilisation establishes that the cement companies indulged in controlling and limiting the supply of cement in the market.
Production Parallelism: The production figures across cement companies (in a particular geographical region) showed strong positive correlation. According to the CCI, in November – December 2010 the cement companies reduced production collectively, although during the same period in 2009, the production of the cement companies differed. This was a clear indication of co-ordinated behaviour.
Dispatch Parallelism: It was observed that the dispatches made by the cement companies have been almost identical for the period from January 2009 to December 2010. The cement companies argued that the parallelism in both production and dispatch is on account of the commoditised nature of cement, the cyclical nature of the cement industry and the ability of competitors to intelligently respond to the actions of their competitors. The CCI noted that the drop in production and dispatch in the November 2010 was unusual especially when November 2009 witnessed a mixed trend. Interestingly, the CCI held that the parties to a cartel may not always co-ordinate their action; periodically their conduct may reflect a competitive market. Where co-ordination proves gainful, parties will substitute competition for collusion.
Increase in price: The deliberate act of shortage in production and supplies by the cement companies and almost inelastic nature of demand of cement in the market resulted into higher prices for cement. The CCI was of the view that there was no apparent constraint in demand which could justify the lower capacity utilisation. Further, there was no constraint in demand during November and December 2010, and, in fact, the construction industry saw a positive growth in the third quarter of 2010-11.
Price Leadership: The CCI noted that the given the small number of major cement manufacturers, the price leaders gave price signals through advanced media reporting which made it easier for other manufactures to co-ordinate their strategies.
High Profit Margins: The profit margins of all the cement companies were examined by the Commission, which arrived at the conclusion that some companies posted a high Return on Capital Employed and higher EBITDA in 2010-11 as compared with 2009-10. Additionally, the CCI observed that the respondents earned huge margins over the cost of sales.
Factors set out in Section 19(3) of the Competition Act: It is worth noting that the CCI has stated that where contraventions of sections 3(3) (a) and (b) are proved, the adverse effect on competition is presumed. However, on account of the rebuttals raised by the respondents, it considered the factors mentioned in section 19(3) to determine whether an appreciable adverse effect on competition has been caused.
Although, the Commission did not go into the factors set out in section 19 (3) (a), (b) and (c), it held that the increase of price and reduced supply in the market was to the detriment of the consumers. Further, the efficiency defences in section 19 (e) and (f) were not available as the conduct of the respondents neither caused any improvement in production or distribution of goods nor any promotion of technical, scientific and economic development.
In view of the evidence and the analysis of the factors mentioned in sections 19(d) to (f), the contraventions of sections 3(3) (a) and (b) stood established.
Directions of the CCI
In cartel cases, the CCI has the power to to fine parties up to three times of its profit for each year of the continuance of the cartel or 10% of its turnover for each year of the continuance of the cartel, whichever is higher. The turnover and profit for the cement companies were examined and accordingly the following penalties were levied on the cement companies.
| Company | Penalty (INR in Crores) |
| ACC Ltd. | 1147.59 |
| Ambuja Cements Ltd. | 1163.91 |
| Binani Cements Ltd. | 167.32 |
| Century Textiles Ltd. | 274.02 |
| India Cements Ltd. | 187.48 |
| J K Cements Ltd. | 128.54 |
| Lafarge India Pvt. Ltd. | 480.01 |
| Madras Cements Ltd. | 258.68 |
| Ultratech Cement Ltd. | 1175.49 |
| Jaiprakash Associates Ltd. | 1323.60 |
In addition, the CMA was fined 10% of its total receipts for the past two years.
The respondents have been directed to pay the above penalties within 90 days of the receipt of the CCI order.
The CCI also directed the companies to ‘cease and desist’ from indulging in agreement or understanding on prices, production and supply of cement in the market. Similarly, the CMA has been directed to disengage and disassociate itself from collecting wholesale and retail prices through the member cement companies and also from circulating the details on production and dispatches of cement companies to its members.
- Karan S. Chandiok