By way of a November 28 2017 order,(1) the Competition Commission of India (CCI) exonerated nine Research Designs and Standards Organisation-approved suppliers, including four sister companies, from allegations of bid rigging in the supply of roof-mounted air conditioning units to the Rail Coach Factory, Kapurthala. Despite finding instances of identical bidding by the defendants, the CCI held that in the absence of cogent evidence, the collective increase or decrease in rates did not establish a case for violation of Sections 3(3)(a), 3(3)(d) and 3(1) of the Competition Act 2002.
The CCI reiterated its rationale in two earlier decisions (namely, Shri B P Khare, Principal Chief Engineer, South Eastern Railway v Orissa Concrete and Allied Industries Ltd & Ors, Case 05/2011 and the Competition Appellate Tribunal's decision in Escorts Limited v Competition Commission of India & Anr, Appeal 13 of 2014 (December 18 2015)), which held that mere identical pricing is insufficient to prove the formation of a cartel.
Further, the CCI widened the scope of 'bid rigging' to include collusion between subsets of bidders that are closely held or sister companies with common management or promoters, holding that even if subsets collude among themselves, such conduct violates Section 3(3)(d) of the Competition Act if it reduces competition, among other things.
The CCI also relied on its recent decision on single economic entities in re Delhi Jal Board v Grasim Industries Ltd & Ors (Cases 03 and 04/2013) to distinguish procurement markets, holding that where two or more entities of the same group submit separate bids in the same tender, they have consciously decided to represent themselves to the procurer as independent decision makers and independent options for procurement (for further details, please see "CCI denies chemical companies' single-entity defence against collusive bidding"). Accordingly, the 'single economic entity' defence was rejected.
The chief material manager of the Rail Coach Factory, Kapurthala brought claims under Section 19(b) of the Competition Act, arguing that in relation to tenders floated from July 2013 for the procurement of roof-mounted air conditioning units, there was an abnormal increase in the prices quoted by the defendants, namely:
- Daulat Ram Engg & Services P Ltd, Madhya Pradesh;
- Daulat Ram Industries;
- Amit Engineers;
- Fedders Lloyd Corporation;
- Intec Corporation;
- Lloyd Electric and Engg Ltd;
- Sidwal Refrigeration Industries Ltd;
- Stesalit Ltd; and
- Ess Ess Kay Engg Co P Ltd.
The defendants manufactured roof-mounted air conditioning units for Hoffman Busch coaches and conventional air-conditioned coaches.
On investigation, the director general examined 89 tenders floated between 2011 and 2014 for the supply of units in regard to four categories of coaches. It exonerated four of the defendants (Daulat Ram Engg, Daulat Ram Industries, Stesalit and Ess Ess Kay Engg), but concluded that the remaining five had violated Sections 3(3)(a) and 3(3)(d) of the Competition Act.
It noted that Fedders Lloyd and Lloyd Electric, as well as Intec and Sidwal Refrigeration, were sister companies (ie, part of the same group) under common management or sharing certain basic facilities, and that their bids were identical in some tenders.
In addition to examining the conduct of the defendants collectively, the CCI examined the conduct of the defendants in the following subsets:
- Lloyd Electric and Sidwal Refrigeration;
- Fedders Lloyd and Lloyd Electric;
- Intec and Sidwal Refrigeration; and
- Amit Engineers, Intec and Sidwal Refrigeration.
It held that the concept of 'bid rigging' under Section 3(3) of the Competition Act includes agreements which reduce competition for bids or adversely affect or manipulate the bidding process. Therefore, even if subsets of bidders collude among themselves, such conduct would violate Section 3(3)(d) of the act if it reduces competition, among other things. Accordingly, the CCI emphasised that the 'intent' is the outcome of any such collusion.
The director general found that Lloyd Electric and Sidwal Refrigeration had engaged in collusion on the basis that they had quoted identical prices in a July 30 2009 tender. However, the CCI rejected this on the grounds of insufficient evidence, noting that no plus factors had been identified to support the finding of collusive behaviour, and that the director general's theory of how the parties should have behaved could not be considered a plus factor.
Similarly, the CCI found insufficient evidence to uphold the director general's opinion that there was a so-called 'meeting of minds' between Fedders Lloyd and Lloyd Electric regarding a May 12 2011 tender based on the fact that they are sister companies headed by the same chair and managing director.
With respect to the Intec and Sidwal Refrigeration subset, the director general found two instances of identical pricing. However, the CCI observed that sporadic instances of identical or similar pricing in regard to homogenous products, coupled with the bidders' knowledge of prices quoted in previous tenders, does not constitute evidence of a 'meeting of minds'. As a result, neither the intent behind nor the consequence of the collusive behaviour could be ascertained.
The CCI further observed that competitors' parallel behaviour can be a result of intelligent market adaptation in an oligopoly and that this is illegal only when such conduct is on the basis of information exchanged between the competitors with the aim of influencing the market. Accordingly, instances of identical pricing are indicative of collusion only when this is the only plausible explanation for the parties' conduct.
The CCI cautioned against finding a violation based merely on suspicion over identical or similar pricing, coupled with evidence of a possible exchange of information. It held that although the director general found instances of identical or similar pricing by the various subsets, the investigation failed to prove that this was an outcome of collusion. Although the pricing in some of the 89 tenders – coupled with the collective increase or decrease in rates and other factors (eg, common management) – raised suspicion, in the absence of sufficient cogent evidence the defendants could not be found to have violated Sections 3(3)(a), 3(3)(d) and 3(1) of the act.
The decision has further widened the scope of 'bid rigging' within company groups to include instances where subsets of bidders collude among themselves. The CCI held that such instances reduce competition for bids and therefore constitute bid rigging under Section 3(3) of the Competition Act. However, in order to establish collusion between these subsets, the parties' intent and the outcome of their behavior must also be established. Since collusion may not result in one of the bidders winning the tender, an investigation must also examine how the companies have benefited, in order to prove a meeting of minds.
For further information on this topic please contact MM Sharma at Vaish Associates by telephone (+91 11 4249 2525) or email ([email protected]). The Vaish Associates website can be accessed at www.vaishlaw.com.
Endnotes
(1) CCI decision, November 28 2017. For the full text, please see the CCI website.
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