Commission imposes heaviest penalty yet against cement cartel - International Law Office

Introduction
Facts
Director general's report
Commission inquiry
Comment

Introduction

Through its order of June 20 2012,(1) the Competition Commission has, among other things, imposed a penalty on 11 cement manufacturers of 0.5% of their profit for 2009-10 and 2010-11. The penalty, which totalled Rs63.07 billion, was imposed for the alleged limitation and control of supplies in the market and the determination of prices through an anti-competitive agreement.(2)

Facts

The informant (the Builders' Association of India) alleged that 11 major cement manufacturers from across India, operating under the aegis of the Cement Manufacturers' Association (CMA), had:

• simultaneously increased their prices across all five zones (ie, North, East, West, South and Central India), despite the fact that the cement manufacturing units were geographically dispersed throughout India and had different production and transportation costs, thus demonstrating allocation of the markets;
• collectively decided to reduce their utilisation and production capacity from 88% in March 2009 to 82.46% in March 2010 (despite an increase in their installed capacities from 219 million tons to 246 million tons during the same period) in order to artificially increase demand, thus demonstrating limitation and control of supply;
• collectively increased the unit sales price of cement between 2008 and 2010, despite various concessions and stimulus packages announced by the government in 2008, thus demonstrating collective determination of sale price; and
• demonstrated an increase in their operating profit margin (OPM) between 2007-08 and 2009-10, despite a slowdown in the growth of the construction and real estate sector during the same period (similarly, the OPM of the six dominant players within the cement industry was 27.33%, in comparison with 17.68% for the industry as a whole).

Furthermore, the cement industry had failed to pass on the price benefit from fly ash to its customers and consumers (fly ash constitutes 15% to 20% of the raw material used to produce cement and is provided free of charge by thermal power plants, which are mostly government-owned or semi-government undertakings).

After considering the information, the commission opined that a prima facie case existed under Section 26(1) of the Competition Act 2002 and directed the director general to investigate the matter.

Director general's report

After conducting an in-depth investigation into the various allegations, the director general held that:

• in the guise of meetings of the High Power Committee, the cement manufacturers had exploited the inelasticity of demand for cement by entering into mutual arrangements and understandings in order to manipulate the price and supply of cement in violation of the act;
• the cement manufacturers had engaged in control of the supply of cement in the market by way of tacit agreements and by indulging in collusive price fixing; and
• the CMA provided a platform for member cement manufacturers to act in a coordinated manner to decide pricing and production strategies.

According to the director general, the acts and conduct of the cement manufacturers were anti-competitive and in contravention of Sections 3(1), 3(3)(a) and 3(3)(b) of the act.

Commission inquiry

Findings
The commission first considered whether the cement manufacturers had violated Section 4 of the act, in relation to abuse of dominant position. The commission observed that since the market structure suggested that no single firm or group was dominant, no contravention of Section 4 had therefore been made by any single cement firm or a group.

The commission then considered whether the cement manufacturers had violated Section 3(3) of the act. The commission observed that the cement manufacturers had met up at the CMA, which then collected both retail and wholesale prices and circulated details of capacity utilisation and production among its members. The commission considered this a coordinated act on the part of the cement companies to restrict production and supply in the market, in contravention of Section 3(3)(b) of the act.

Furthermore, the commission held that price parallelism among cement manufacturers was rampant, supported and corroborated by factors such as the limitation and control of supply by underutilising capacity and the maintenance of similar and parallel behaviour in the production and dispatch of cement with a view to maintaining high prices in the market. This was further established by circumstantial evidence that the cement companies had acted in concert under an 'agreement'. The commission overruled the objection raised by all respondents that there was no written agreement or direct evidence from which the existence of a cartel could be inferred. The commission observed that a written agreement is not necessary to establish common understanding or concerted behaviour under the definition of an 'agreement' under Section 2(b) of the act.

The commission relied on settled jurisprudence from other jurisdictions, as well as on the guidelines of international agencies such as the Organisation for Economic Cooperation and Development (OECD), in support of its decision that cartels can be prosecuted without direct evidence of agreement and on the basis of circumstantial evidence alone. The commission also relied on earlier precedents in the form of past decisions of the Monopolies and Restrictive Trade Practices Commission (RTPE 99/1990 and RTPE 21/2001), in which the CMA and a number of cement manufacturers were found to have engaged in restrictive trade practices. In addition, a number of cement manufacturers had been penalised in other jurisdictions.

Final order
In its June 20 2012 order, under Section 27 of the act, the commission directed the cement manufacturers to cease and desist from indulging in any activity relating to agreement, understanding or arrangement on the price, production and supply of cement in the market. The CMA was also directed to disengage and disassociate itself from collecting wholesale and retail price information through member cement companies and from circulating production and dispatch details of such companies to its members. Besides these directions, monetary penalties were imposed on all 11 major cement manufacturers, as well as on the CMA.

Penalty imposed
The penalties imposed were equal to 0.5% of the manufacturers' annual profits for 2009-10 and 2010-11 and totalled Rs63.07 billion. Significant individual fines were imposed on the following companies:

• ACC Ltd was fined Rs11.48 billion;
• Ambuja Cement Ltd was fined Rs11.64 billion;
• Binani Cement Ltd was fined Rs1.67 billion;
• Century Textiles Ltd was fined Rs2.74 billion;
• India Cement Ltd was fined Rs1.86 billion;
• JK Cement Ltd was fined Rs1.26 billion;
• Lafarge India Ltd was fined Rs4.8 billion;
• Madras Cement Ltd was fined Rs2.59 billion;
• Ultra Tech Cement Ltd was fined Rs11.76 billion; and
• Jai Prakash Associates Ltd was fined Rs13.24 billion.

The commission also imposed a penalty of Rs7.3 million on the CMA (equal to 10% of its average turnover for the three preceding years).

Comment

The commission's decision is significant for a number of reasons. First, it is based primarily on circumstantial evidence which, according to the commission, provided the "plus factor" to corroborate the price parallelism - that is, it indicated the limitation and control of the market by the major cement manufacturers through under-utilisation of their installed capacities in order to create artificial demand, as well as allocation of the market on a geographical basis. Second, the commission recognised the institutionalised interactions that facilitate the exchange of sensitive commercial information - such as price, installed capacity, capacity utilisation, production and dispatch - through the Cement Manufacturers' Association. Third, the commission noticed that the coordinated behaviour of the major cement manufacturers increased the profits only of the large cement companies. Furthermore, the benefits of several exemptions granted by the government to the cement industry through, for example, excise duty reductions were not passed on to customers and consumers.

The commission's order follows an emerging trend in India of cracking down on hard-core cartels. Through this decision, the commission has initiated the development of valuable jurisprudence on this important aspect of antitrust law. Moreover, with such heavy penalties, the chances of dissenting members of cartels being encouraged to come forward to avail the benefits of the leniency scheme have increased. Under the scheme, the commission is obliged to grant a waiver of up to 100% of a penalty on cartel members that provide material help in breaking the cartels, on a first come, first served basis.

For further information on this topic please contact MM Sharma at Vaish Associates by telephone (+91 11 4929 2525), fax (+91 11 2332 0484) or email (mmsharma@vaishlaw.com).

Endnotes

(1) Builders Association of India v Cement Manufacturers, Case 29/2010. The commission press release of June 21 2012 in relation to the order can be seen at www.cci.gov.in/May2011/Home/PressReleaseCementJune2012.pdf.

(2) The full text of the decision is available at www.cci.gov.in.