India: Cartels

The Indian Competition Act 2002 (the Competition Act) is the law that governs and regulates anticompetitive conduct in India. The Competition Commission of India (CCI) is the statutory watchdog in charge of enforcing and administering competition laws in India. The CCI is equipped to investigate anticompetitive practices, aided by its investigative arm, the Office of the Director General (DG). While the Competition Act was enacted in 2002, it only came into effect on 20 May 2009. Since then, the CCI has put in place robust processes to regulate anticompetitive conduct in India. The CCI regulates:

• anticompetitive agreements, including cartels;¹
• abuses of dominant position;² and
• combinations (mergers, acquisitions and amalgamations).³

The CCI is empowered to initiate an inquiry into anticompetitive agreements or unilateral conduct of its own volition, on receipt of any information or on the basis of a reference from the central or a state government or a statutory authority.⁴ Any person, consumer or association of persons or consumers can provide information that may trigger a detailed inquiry. If the CCI establishes the existence of a prima facie case, it directs the DG to carry out an investigation, which culminates in a detailed report. Thereafter, the CCI typically invites the alleged cartelists’ views on the DG’s report and offers them the opportunity to explain their position orally. Finally, if the CCI finds that a cartel exists or an agreement is anticompetitive, it may impose penalties and pass any other orders it deems appropriate.

In this chapter, we review recent developments and trends in cartel jurisprudence and enforcement in India. First, we set out an overview of substantive law relating to cartels. Second, we review the evolving nature of evidence required to prove an agreement (a necessary precursor to the existence of a cartel). Finally, we consider the concept of the ‘single economic entity’ sometimes used by alleged cartel participants part of the same group of companies to avoid liability under the Competition Act.

Cartels: an overview of the substantive law

Section 3 of the Competition Act provides for and prohibits certain anticompetitive agreements. It deals with two types of anticompetitive agreements: agreements between or among competitors (horizontal agreements, including cartels); and agreements between enterprises or persons at different stages or levels of the production chain (vertical agreements). While section 3 of the Competition Act itself does not expressly categorise these agreements as horizontal or vertical agreements, the language of sections 3(3) and 3(4) of the Competition Act makes it abundantly clear that the former is aimed at horizontal agreements and the latter targets vertical agreements. Cartels are a subset of horizontal anticompetitive agreements and to establish the existence of a cartel, the CCI must find that competitors had entered into an agreement to fix prices, limit supply, share markets or rig bids. Given that agreements can take various forms, the Competition Act has broadly defined the term ‘agreement’⁵ to mean:

any arrangement or understanding or action in concert, (i) whether or not, such arrangement, understanding or action is formal or in writing; or (ii) whether or not such arrangement, understanding or action is 
intended to be enforceable by legal proceedings.

Further, an anticompetitive agreement is one that causes an appreciable adverse effect on competition (AAEC) in India. To determine whether an AAEC could arise, the CCI balances the possibility of various factors. The first three relate to the negative effects on competition, and include:

• the creation of barriers to new entrants in the market;
• the ousting of existing competitors from the market; and
• foreclosure of competition by hindering entry.

The remaining three relate to beneficial effects, such as:

• benefits accruing to consumers;
• improvements in the production or distribution of goods or provision of services; and
• the promotion of technical, scientific and economic development.⁶

Importantly, section 3(3) of the Competition Act provides that agreements or coordinated practices carried out by enterprises or persons (including cartels) engaged in trade of identical or similar products are presumed to have an AAEC in India. The four types of agreement that are presumed to cause an AAEC are in relation to:

• pricing – price-fixing agreements, where competitors directly or indirectly fix purchase or sale prices between themselves;
• quantities – agreements between competitors that seek to limit or control production, supply, markets technical development, investments or provision of services;
• market sharing – agreements between competitors irrespective of the form that they may take and would include market sharing by way of allocation of products, geographies or source of production; and
• collusive bids – bid-rigging agreements, where competitors eliminate or reduce competition for bids or adversely affect or manipulate the process of bidding.

While considering such agreements, the CCI examines the evidence at hand and determines whether a horizontal agreement or a cartel exists. Once a cartel/horizontal agreement is found to exist, it is presumed to cause AAEC. This presumptive rule though does not apply to efficiency enhancing joint ventures.⁷

The provisions of section 3(3) of the Competition Act effectively make it incumbent upon the alleged cartel participants to establish that their conduct did not result in an AAEC. An analysis of the CCI’s decisions suggest that this burden has proven to be an onerous one, and alleged cartelists have rarely succeeded in rebutting such a presumption. Therefore, typically once a cartel agreement is found to exist, the focus quickly shifts to the quantum of penalty that the CCI may impose on cartel members.

However, in its six years of cartel enforcement activity, the CCI’s reluctance to use its powers to search and seize documents and evidence in ‘dawn raids’ has meant that it has rarely been able to establish the existence of a cartel agreement through direct evidence. While several mature competition agencies rely on dawn raids and leniency programmes as their primary source of direct evidence, the CCI’s own leniency programme is only just beginning to pick up steam. Like in other jurisdictions, the CCI’s leniency programme is aimed at inducing cartel participants to break rank and provide information against their fellow cartelists as under the Competition Commission of India (Lesser Penalty) Regulations 2009 (Lesser Penalty Regulations). The Lesser Penalty Regulations seek to achieve this by encouraging cartel participants to step up and admit guilt of participation in such anticompetitive conduct and thereby benefit from the reduction of the penalty that could be imposed on them. It is public knowledge that while a number of leniency applications have been filed with the CCI,⁸ we are yet to witness a decision of the CCI arising out of such proceedings. As a result, significant uncertainty still exists in relation to the quality of evidence that needs to be adduced by leniency applicants to qualify for a reduction in penalty. One must be mindful that the Lesser Penalty Regulations themselves indicate that the CCI has been vested with great discretion while considering the evidence submitted by applicants and determining whether to grant them the benefit of reduction of penalty.⁹

Given there have been no significant decisions that have established the existence of cartel agreements through direct evidence collected through leniency applications or dawn raids, the CCI has relied on a variety of indirect or circumstantial evidence alone to determine the existence of a cartel agreement.

Evolving nature of evidence used by the CCI to establish an ‘agreement’ under the Competition Act

The implementation of the law governing cartels in India has seen an immense change since its inception. As noted above, the scope of the term ‘agreement’, as defined in the Competition Act, is wide and extends to a mere ‘arrangement’, ‘understanding’ or ‘action in concert’, none of which need be in writing or enforceable by law. This broad definition of the term ‘agreement’ is no accident and was intentionally done to cover any form of understanding that cartel participants could have among themselves. The policy justification for such a broad definition also ties into the fact that cartels rarely exist in explicit contractual form, and it is difficult to find direct evidence in investigations of this kind. As a result, the CCI has tended to rely on various forms of circumstantial evidence, which is by nature more attainable (though not exact) to prosecute cartels.

The CCI’s early cartel decisions consider the evidentiary standard required for establishing the existence of an agreement as being similar to the ‘beyond reasonable doubt’ approach used in criminal and other penal proceedings. This is borne out in an early decision of the CCI – the Deutsche Bank case.¹⁰ In this decision, the CCI held that the existence of an agreement must be established ‘unequivocally’ and could not be conjectured or circumstantially adduced.

However, over time, the CCI clarified its position in the Tyre Cartel case.¹¹ While referring to it’s finding in the Deutsche Bank case, the CCI observed:

That however is not to suggest that an agreement can be established only through direct evidence. As discussed above, circumstantial evidence is of no less value than direct evidence as the law makes no distinction between the two.

A similar view was taken in the subsequent Soda Ash Cartel case,¹² where the CCI observed:

There is rarely direct evidence of action in concert and the Commission has to determine whether those involved in any dealings have some form of understanding and are acting in co-ordination with each other. In the light of the definition of the term ‘agreement’, as noted supra, the Commission has to find sufficiency of evidence on the basis of benchmark of ‘preponderance of probabilities.

This was the same rationale applied in the Steel Cartel case.¹³ It appears from these decisions that the CCI is not reluctant to use circumstantial evidence alone to establish the existence of an agreement, since their view appears to be that direct documentary evidence is rarely found while investigating cartels. Apart from confirming that circumstantial evidence may be used to find an agreement, the CCI has also clarified that, as cartel sanctions in India are civil in nature, the standard of proof applicable to the evidence adduced by the CCI would be based on the ‘balance of probability’ test. The CCI elaborated on this in the LPG Cylinder¹⁴ case, wherein it observed:

Cartelisation not being a criminal offence the test of proof will be only ‘balance’ of probability’ and ‘liaison of intention’ which can be established with the support of indirect or circumstantial evidence. … since the CCI can impose only administrative fines, the standard of proof required is not that of beyond reasonable doubt.

From a review of these decisions, it seems abundantly clear that the CCI is willing to base its assessment of the existence of an agreement on circumstantial evidence alone, both economic¹⁵ and conduct based,¹⁶ and in doing so, it holds itself to the lower ‘balance of probabilities’ standard. This has resulted in an onerous burden being placed on defendant companies who find that the CCI has ‘established’ the existence of an agreement between competitors, purely on economic inferences and circumstantial evidence and the defendants are left with the task of rebutting the presumption that such an agreement does not result in an AAEC. While theoretically this might seem like parties are afforded a defence based on the rule of reason, in practice there has not been an instance where alleged cartel participants have successfully been able to rebut this presumption and absolve themselves of a finding of contravention. The lowering of the evidentiary standard coupled with the acceptance of circumstantial evidence alone to establish the existence of an agreement has made cartel defence increasingly difficult. Not only does the CCI routinely base its findings on selective and fragmented circumstantial evidence, recent decisions reveal that the nature and quality of evidence used by the CCI to prove the existence of an agreement have increasingly been watered down over the past few years.

The trend of less exacting evidence being used to find an agreement is apparent from the evidence used in recent CCI decisions.

In the Cement Cartel case,¹⁷ the CCI found an agreement among various cement manufacturers on the ground that they were members of the Cement Manufacturers Association (CMA) and their participation at the CMA facilitated collusion among them. Specifically, the CMA provided cement manufacturers an opportunity to exchange sensitive price and production information with each other. The CCI was not persuaded by evidence showing that the government directed the collection of price and production data, as well as market share volatility, which generally counters a narrative of cartelisation.

In the Container Manufacturers case,¹⁸ the CCI concluded on the balance of probabilities that an agreement existed, by relying on two pieces of circumstantial evidence: similar bids were submitted despite a variance in cost structures among container suppliers; and the fact that at least 10 of the container suppliers had common board members. Despite the lack of any direct evidence of an express agreement, the CCI found that the circumstances facilitated the possibility of information exchange. As a result, the CCI concluded that there was an agreement between the container suppliers. The CCI’s practice marks a departure from the settled principle that evidence adduced, even if circumstantial, needs to be considered in light of the ‘totality of circumstances’ applicable to the particular case, and not piecemeal.¹⁹

In the Airline Fuel Surcharge case,²⁰ the CCI found an agreement merely on the basis of the parties’ inability to disprove that they were party to a cartel. Specifically, the CCI concluded that an agreement existed on the basis that the cartel participants were unable to provide any plausible explanation for parallel incremental increases in fuel surcharge rates to negate the existence of a cartel. In particular, the parties were unable to provide any evidence to support their contention that they determined their respective fuel surcharge independently. This led the CCI to conclude that a clandestine ‘understanding’ among various airline operators existed. The nature of evidence used by the CCI to find the existence of an agreement, seems to suggest that the burden to prove an agreement, which is for the CCI to meet, shifted onto the parties (ie, airliners) to prove that there was no agreement between them.

This decisional practice leaves little doubt that the CCI may reach a finding that an agreement exists if the evidence suggests it to be more plausible than not. Moreover, the kind and quality of evidence used by the CCI to prove the existence of an agreement has clearly been watered down over the past few years. A possible reason for such a trend could also be the practical difficulties that are faced by the CCI while investigating cartels, given the lack of direct evidence in such investigations.

The CCI’s approach though is being contested before the Competition Appellate Tribunal (COMPAT), which has far more exacting standards on the nature of the evidence used to find the existence of a cartel agreement. Most recently, in October 2015, in the Andhra Pradesh Films case,²¹ COMPAT took exception to the evidence relied on by the CCI to come to a finding of a violation of section 3(3) of the Competition Act. COMPAT expressly observed that the lack of evidence collated by the DG and the CCI led the CCI to arrive at a ‘perverse’ finding of contravention. This contravention was arrived at without requiring the complainant in the particular case to show that there was, in fact, any anticompetitive conduct by the alleged cartelists. This demonstrates that COMPAT is inclined to apply a more robust approach to analysing evidence before it, even while the CCI on the other end has made it increasingly difficult for companies to defend cartel charges.

The CCI has further narrowed the window for companies to defend themselves from cartel allegations on the grounds that they are part of the same ‘single economic undertaking’. In a recent judgment involving the insurance industry for instance, the CCI disregarded the commonly accepted ‘single economic undertaking’ defence that was advanced by companies that were part of the same ‘group’ but were alleged to have acted together as being part of a cartel.

The concept of ‘single economic entity’: an evolving ‘defence’ in India

Cartel jurisprudence in India has also witnessed the CCI consider the concept of the ‘single economic entity’ in its recent decisions. This concept is becoming particularly relevant given the presence of numerous conglomerates in India, a number of entities may well be part of the same ‘group’ as defined under explanation (b) to section 5 of the Competition Act.²² Though widely acknowledged in mature competition law jurisdictions, including the United States²³ and the European Union,²⁴ the concept of a single economic entity is still evolving in India and has only been used in the recent past by alleged cartel participants to argue they could not have contravened section 3 of the Competition Act.

The principles applied by the CCI, while determining whether alleged cartelists are part of the same ‘single economic entity’ are relatively similar to the principles applied by the European Commission (EC) and the European Court of Justice (ECJ).

Taking cue from the European approach, the CCI considered the principle of a single economic entity, for the first time, while examining the existence of an anticompetitive vertical agreement in the Lamborghini case.²⁵ In this case, the CCI for the first time held that agreements between entities that are part of the same ‘group’ cannot be scrutinised under section 3 of the Competition Act since they are in the nature of ‘internal agreements’. Thereafter, when examining the allegation of cartelisation against entities that were part of the same group in the Kansan News case,²⁶ the CCI observed:

Since there cannot be a case of any anticompetitive agreement of the nature mentioned in Section 3(3) of the [Competition] Act among the entities of the same group, it cannot be said that the parties have formed a cartel.

The CCI’s decisions in the Lamborghini and Kansan News cases have led to an increased use of single economic entity concept to deny an alleged contravention of the Competition Act in proceedings where the alleged conduct has occurred between two or more entities that may form part of the same group of companies.

Thus the CCI’s approach to the concept of a single economic entity is key. Following on from Lamborghini and Kansan News, the CCI penalised four public sector insurance companies for bid rigging and bid manipulation in the Insurance Companies case.²⁷ This was for discussing and determining the prices that each would quote in a particular tender. The CCI found a violation of section 3 of the Competition Act, despite the insurance companies’ arguments that they were all wholly owned subsidiaries of the central government, controlled through the Ministry of Finance (MoF). The CCI held that the insurance companies did not constitute a ‘single economic entity’ given the evidence showed that each had: independently decided its business strategy while participating for the relevant tender; and, without any instruction from the MoF, discussed each others’ proposed bid price. Notably, the CCI also examined the distinction surrounding de facto control and de jure control, while determining whether the insurance companies indeed acted as a ‘single economic entity’.²⁸ This appears to be generally consistent with the test of ‘real autonomy’ used in the EU.²⁹

The Insurance Companies and Kansan News decisions lend weight to the fact that the CCI has applied the concept and interpreted the law in a manner similar to the approach adopted in Europe.³⁰ The CCI’s recent decisions suggest that companies operating as separate market-facing entities that make strategic business decisions independently, despite being part of the same group, may well not be entitled to the ‘single economic entity’ defence. This effectively second-guesses the way that conglomerates and business groups may choose to operate through a series of market-facing entities and further reduces the possible defences available to a company should the CCI decide to investigate it for being part of an alleged cartel.

Conclusion

A review of the CCI’s recent decisions indicates that there has been a conscious trend towards making it easier to weed out anticompetitive behaviour in industry in India. Since cartel agreements are not easy to prove, perhaps it was only a matter of time before the CCI took to prosecuting cartel cases on the basis of circumstantial evidence alone. Companies at the receiving end of the CCI’s scrutiny have conversely had to face an increasingly aggressive regulator that applies a presumptive rule to establish that an agreement exists, and then disallows explanations of legitimate business conduct that are based on the well-accepted principle of a ‘single economic undertaking’. The scrutiny that these decisions have come under from COMPAT is, however, a strong indication that the jurisprudence on this subject will continue to develop in the coming years.

Notes

1. Section 3 of the Competition Act.
2. Section 4 of the Competition Act.
3. Section 5 and 6 of the Competition Act.
4. Section 19 of the Competition Act.
5. Section 2 (b) of the Competition Act.
6. Section 19 (3) of the Competition Act.
7. Proviso to Section 3(3) of the Competition Act states, ‘Provided that nothing contained in this sub-section shall apply to any agreement entered into by way of joint ventures if such agreement increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services.’
8. Available at: http://articles.economictimes.indiatimes.com/2014-02-27/news/47739680_1_alleged-cartel-competition-commission-regulator.
9. The CCI considers a number of factors on whether to grant leniency and may grant a penalty reduction of ‘up to’ 100 per cent for the first person, 50 per cent for the second and 30 per cent for the third. Regulation 3(1) and Regulation 4 of the Lesser Penalty Regulations.
10. Neeraj Malhotra v Deutsche Post Bank Home Finance Limited & Ors, Case No. 5 of 2009.
11. In re All India Tyre Dealers Federation v Tyre Manufacturers, MRTP Case: RTPE No. 20 of 2008.
12. Shailesh Kumar v Tata Chemicals Limited & Ors, Case No. 66 of 2011
13. In Re: Alleged Cartelization of steel producers, Case No. RTPE 09 of 2008.
14. In Re: Suo motu case against LPG cylinder manufacturers, Case No. 3 of 2011.
15. The CCI often examines economic evidence, such as the level of market concentration, parallel movement of prices, trends in capacity utilisation and variations in cost-structures across firms – while carrying out cartel inquiries.
16. CCI relies on evidence of meetings between competitors, similar or identical bidding prices, membership of trade associations, any history of cartelisation, and suspicious sharing of information.
17. Builders Association of India v Cement Manufacturers Association & Ors, Case No. 29 of 2010 (CCI). In December 2015, the COMPAT returned the Cement Cartel case to the CCI on procedural grounds without going into the merits of the conduct of the cement manufacturers.
18. In Re: M/s Sheth & Co and Ors, Suo Moto Case No. 04 of 2013.
19. Arvindkumar Anupala Poddar v State of Maharashtra; 2012 (11) SCC 172.
20. In Re: Express Industry Council of India, Case No. 30 of 2013.
21. Andhra Pradesh File Chamber of Commerce v M/s Cinergy Independent Film Service Pvt Ltd & Ors, Appeal No. 15 of 2013.
22. 22  ‘Group’ is defined under the Competition Act as being ‘two or more enterprises which, directly or indirectly, are in a position to:  (i)   exercise fifty per cent or more of the voting rights in the other enterprise; or
    (ii)  appoint more than fifty per cent of the members of the board of directors in the other enterprise; or 
    (iii) control the management or affairs of the other enterprise.’
23. See Copperweld Corp v Independent Tube Corporation, 467 US 752 (1984); and American Needle, Inc v National Football League, 560 US 183 (2010).
24. See Shell v Commission (1992) ECR II-757; Avebe v Commission, Case C-314/01; Elf Aquitaine v Commission case T – 174/05; and Akzo Nobel NV and Others v Commission (Akzo Nobel Case), Case C-97/08.
25. Exclusive Motors Pvt Ltd v Automobili Lambhorgini, Case No. 52 of 2012.
26. Kansan News Pvt. Ltd v Fastway Transmission Pvt Ltd, Case No. 36 of 2011.
27. In Re: Cartelization by public sector insurance companies in rigging the bids submitted in response to tenders floated by the Government of Kerala for selecting insurance service provider for Rashtriya Swasthiya Bima Yojna v National Insurance Co Ltd & Ors, Suo Moto Case No. 02 of 2014.
28. Page 10 of the Order under Section 27 passed by the CCI on 10 July 2015.
29. Competition Law (7th Edition), 2012, Oxford University Press, Richard Whish & David Bailey; Page No. 94.
30. The ECJ in the Akzo Nobel Case, held that the central test of determining whether two or more entities form a part of a unitary market facing entity (ie, a ‘Single Economic Entity’), is whether such entities are independent in their decision-making or whether one is able to exercise decisive influence over the other with the result that the latter does not enjoy ‘real autonomy’ in determining its commercial policy on the market.