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15 November 2018
On 18 September 2018 the Competition Commission of India (CCI) penalised several sugar mills in the states of Uttar Pradesh, Gujarat and Andhra Pradesh and their trade associations (the Indian Sugar Mills Association (ISMA) and the Ethanol Manufactures Association of India (EMAI)) for indulging in cartelisation in contravention of Section 3(1) read with Section 3(3) of the Competition Act 2002. The cartel concerned the supply of ethanol in response to the first joint tender issued by three oil marketing companies (OMCs) (ie, IOCL, HPCL and BPCL) under the ambitious ethanol blending programme (EBP) launched by the government and the Ministry of Petroleum and Natural Gas.
In accordance with Section 27 of the act, the CCI imposed heavy fines on the sugar mills (7% of their average relevant turnover) and their trade associations (10% of their average earnings for the past three years).
The government launched the EBP to reduce its heavy crude oil import expenditure and improve India's agriculture sector and environmental footprint. In India, rectified spirit, which has an alcohol content of 95%, is produced from molasses. Rectified spirit is further distilled to produce ethanol, which has an alcohol content of 99.8% and can be blended with petrol.
The pilot EBP, which concerned 5% ethanol blended with petrol, was launched between 2002 and 2003. It was launched initially in the states of Maharashtra and Uttar Pradesh, before being extended to a further nine states and four union territories. The programme was only partially implemented between 2003 and 2005 because of a low availability of ethanol owing to low sugar cane production. In September 2006, due to a resurgence in sugar cane production, the programme was extended across 20 states and eight union territories, subject to commercial viability. However, in 2007 and 2008 implementation was once again deferred due to a sugar cane shortage.
In September 2008 the Union Cabinet approved the National Biofuel Policy and 5% ethanol blending was made mandatory across all Indian states. From November 2006 to November 2009, pursuant to the Union Cabinet's order, OMCs contracted for 1.4 billion litres of ethanol under the EBP at Rs21.50 per litre. However, by April 2009, they had managed to procure only 540 million litres of ethanol.
For the 2010-11 and 2011-12 years, OMCs floated tenders on an expression of interest basis for the supply of ethanol. The Cabinet Committee on Economic Affairs (CCEA) used these to determine the base price for the procurement of ethanol (ie, Rs27 per litre as an ad hoc interim price). Meanwhile, a committee headed by Soumitra Chowdhary was formed to examine the various issues pertaining to the pricing of ethanol under the EBP. After considering the lukewarm response from the sugar mills for supplying ethanol at the fixed base price determined by the CCEA (Rs27 per litre), the committee recommended that competitive bidding be introduced to attract sugar mills to supply ethanol at market-driven prices. The CCEA considered the committee's report and, on 22 November 2012, issued a press release which mentioned, among other things, that the "the procurement price of ethanol will be decided henceforth between OMCs and suppliers of ethanol". Accordingly, in January 2013 the first joint tender for the procurement of ethanol at competitive market prices was issued by IOCL, HPCL and BPCL through BPCL (the coordinated agency nominated for this purpose).
As ethanol is essential for distilleries which manufacture liquor, there was a strong initial reaction from the liquor industry. Indian Glycols Ltd – anticipating an increase in ethanol prices due to the CCEA's fixed price of Rs27 per litre – approached the CCI, alleging that the joint tendering by the OMCs at the behest of the CCEA directives was an act of anti-competitive coordination between horizontally placed buyers.(1) However, the CCI found the allegation to be devoid of merit and dismissed it on 26 July 2012.
The CCEA, on the Chowdhary committee's recommendation, subsequently decided to procure ethanol through competitive bidding. In January 2013 the three OMCs once again floated a joint tender and invited quotations from ethanol manufacturers and sugar mills for the supply of ethanol. The joint tender, dated 2 January 2013, was issued by BPCL (acting as coordinator of the tender process) on behalf of all three OMCs. The user industry once again approached the CCI, this time with six separate claims filed by:
Accordingly, sealed tenders were invited under a two-bid system (ie, a technical bid and a price bid from ethanol suppliers). The relevant supply was to be made available to various OMC depots/terminals across the country for one year. The above informants complained that the joint tender of the OMCs was an agreement between horizontal players to procure ethanol from various suppliers in contravention of Section 3 of the Competition Act, which was likely to have an appreciable adverse effect on competition within India with respect to the supply and distribution of ethanol. Further, it was alleged that the sugar manufacturers that had participated in the joint tender had quoted similar and identical rates by way of an understanding among themselves and collective action in violation of Section 3 of the act.
The CCI opined that there was a prima facie case based on the allegations of collective decision making to fix prices for the sugar mills' supply of ethanol to the OMCs. As such, it ordered the director general to investigate the matter and submit a report. On finding that similar allegations had been made, the CCI – by way of 1 July 2013 and 23 July 2017 orders – joined Cases 36/2013, 47/2013, 48/2013 and 49/2013 with Cases 21/2013 and 29/2013.
On 20 July 2015 the director general filed an investigation report in which the ISMA and the EMAI were found to have violated Sections 3(3)(a) and (b) read with Section 3(1) of the Competition Act. Further, the report found that that the bidders of sugar mills with depots in Uttar Pradesh, Gujarat and Andhra Pradesh had violated Section (3)(3)(d) of the act by way of the joint tender floated by the OMCs.
During the pendency of the director general's report before the CCI, a number of opposing parties filed applications seeking to cross-examine various witnesses, which the CCI allowed. The director general subsequently submitted a cross-examination report on 21 September 2016. Although the informants' allegations had been made with respect to the suppliers of ethanol in Uttar Pradesh, Haryana and Punjab, the director general confined its analysis to Uttar Pradesh producers. However, the director general also examined and collected data to ascertain if a pan-India bidding pattern existed. On examining pan-India data, the director general found that sugar mills operating in the states of Uttar Pradesh, Andhra Pradesh and Gujarat had indulged in anti-competitive conduct.
After considering the director general's report, cross-examination reports and other material available on record, the CCI decided by way of a 28 March 2017 order to proceed with the inquiry against the 20 sugar mills, including 14 which had originally been arrayed as bidders, but were not listed as opposing parties in Case 21/2013 (but against whom the director general had recorded findings). The CCI also decided to launch proceedings against two associations, one federation and the three OMCs. Thus, the CCI initiated an inquiry into 26 opposing parties. Further, in its order of 19 July 2017, the CCI recorded that certain sugar mills (ie, The Upper Ganges Sugar & Industries Limited and The Oudh Sugar Mills Limited) had merged with Avadh Sugar & Energy Limited, making the total number of sugar mills under investigation 19. Thus, the final inquiry concerned 25 opposing parties.
The CCI examined two issues:
While dealing with the first issue, the CCI pointed out that the director general had found that the OMCs had not contravened Section 3 of the act by floating the joint tender, as the arrangement was found to have enhanced the efficiency of the procurement of ethanol by saving all of the stakeholders – including the bidders – time, money and resources. Further, the CCI noticed that the government held a majority share in each of the OMCs and had issued the joint tender to ensure that taxpayers' money was not wasted. As such, the OMCs had been required to work in close coordination.
As there is a limited supply of ethanol in India, if separate tenders had been issued, there would have been a risk of one OMC procuring all or most of the country's ethanol, thereby limiting procurement. Such a situation would have led to market imperfections, such as:
The CCI held that since the terms of the tenders were the same for all of the OMCs, the joint tender had been the most efficient option in terms of:
The CCI thus found no merits in the informants' allegations of joint tendering by the OMCs and held that their floating of a joint tender for the procurement of ethanol did not constitute anti-competitive conduct. The CCI further noted that the presumption of an adverse effect on competition did not apply to the agreements entered into by way of joint ventures, as the facts submitted by the OMCs demonstrated the efficiencies of the joint tender process. Under Section 3(3) of the Competition Act, any agreement which results in efficiency is exempted from the category of an adverse effect on competition. Therefore, the joint tender floated by OMCs did not contravene Section 3.
With regard to the second issue (above), the CCI considered the following sub-issues.
A number of opposing parties raised the director general's jurisdiction as a preliminary issue (ie, they argued that the director general had exceeded its jurisdiction by examining the conduct of bidders who were not listed as opposing parties in the case). The CCI observed that although the bidders of states other than Uttar Pradesh were not named specifically as opposing parties in Case 21/2013, the order passed by the CCI under Section 26(1) of the Competition Act was not confined to the state of Uttar Pradesh. Further, by virtue of Regulation 20(4) of the CCI (General) Regulations 2009, the CCI found that the director general had not erred in its investigation.(8) In addition, the CCI had given parties sufficient opportunity to be heard and no violation of principles of natural justice had occurred.
The tender process required quotes for the basic price of ethanol and net delivered cost (NDC). Based on the data which the director general had collected with respect to the 2 January 2013 tender, the CCI considered the distribution of the basic price and NDC quoted by the bidders and observed that:
After analysing the director general's data, the CCI noted that the bidders' argument that identical bidding had occurred in only a few of the 110 depots across India was misconceived since most of the bidders had been concentrated in only four to five depots located near their distilleries. Therefore, their conduct had to be judged on the basis of the depots where they had submitted their bids and not on a pan-India basis. The CCI observed that the total quantity offered by bidders matched the total required quantity, which was a clear indication of the bidders' understanding, coordination and concerted approaches. According to the CCI, the bidders had offered no plausible explanation with regard to this issue.
Further, the CCI examined whether there had been a common agreement among the bidders regarding a particular price band. On analysis of the pricing pattern, the CCI found that depots operating in the state of Uttar Pradesh had quoted identical prices, but conceded that this might not constitute an agreement. However, it considered that the bidders' quoting of identical freight charges established their collusive conduct, as there was no plausible explanation why the bidders had submitted identical quotes for freight charges despite the substantial differences in the distance between them and the distilleries. The CCI noted that the director general had been justified in focusing its investigation on the depots where the bidding pattern appeared to be collusive. Further, the CCI discovered that bidders who had participated in respect of the Uttar Pradesh depots had acted in a concerted and collusive manner in submitting their bids. This conclusion was evidenced from:
Some of the opposing parties objected to the findings in the director general's report on the ground that the report had failed to examine producers in Maharashtra. On 30 October 2017, in furtherance of these objections, the CCI remanded the matter to the director general for further investigation. The supplementary investigation report contained an analysis of 20 bidders who had submitted bids for 11 depots. After carefully analysing the bidding pattern, the CCI found that the basic price quoted in all bids exceeded Rs40 per litre, but that the NDC was in the range of Rs45.54 per litre to Rs55.66 per litre. The CCI thus concluded that unlike the bidding pattern in Andhra Pradesh and Uttar Pradesh, bids for NDCs were different in respect of the 10 depots analysed by the director general and bids for a basic price of Rs40 per litre were the same for only two bidders. Therefore, no contravention was established for the bidders in the state of Maharashtra.
Thus, the CCI – after examining the conduct of the bidders in Uttar Pradesh, Andhra Pradesh, Gujarat and Maharashtra – found that the bidders in the first three states had indulged in anti-competitive conduct.
Trade associations' role
The CCI examined the role of the three trade associations in facilitating the bid rigging.
On examination of the ISMA's role, the CCI noted that it had convened meetings of ethanol manufacturers on 6 December 2012 – almost immediately after the press release concerning the CCEA's decision regarding a change in pricing mechanism was issued on 22 November 2012. Meetings were also convened on 19 December 2012 and 27 December 2012. However, the ISMA provided no details of these meetings in response to the probe letters issued by the director general during the investigation. During the investigation, some members of the ISMA who had attended the meetings provided information thereon. The representatives of the 12 companies who had attended these meetings categorically stated the details of these meetings in their statement recorded under oath by the director general. The statements of the ISMA director general (Shri Abinash Verma) and another director (Shri GK Thakur) concerning sugar and its by-products were recorded, but their statements were found to be evasive (they both denied holding any formal meetings of sugar mills in the absence of any record).
On the contrary, it was discovered that Thakur had called the meetings of the ethanol manufacturer members by way of an email with Verma's approval. However, Thakur's only explanation for calling the meeting was that ethanol blending had been made mandatory. He could not explain why this could not have been discussed during ISMA's annual general meeting, which had been scheduled for seven days later (ie, on 13 December 2012). Further, neither the ISMA director general nor the director could explain why Bajaj Hindusthan Limited, the largest sugar manufacturer, had called for the 6 December 2012 meeting even though it was not a member of ISMA. The above facts, coupled with the ISMA's withholding of meeting details, led the CCI to conclude that the ISMA had taken an active role in providing a platform for all competing Uttar Pradesh bidders to discuss and coordinate in order to obfuscate the entire bid process.
As regards the EMAI, it was noted that its president had issued a statement in the 7 December 2012 Business Standard (Mumbai Edition) that the ethanol manufacturers wanted the OMCs to pay Rs40 per litre. The EMAI members were found to have followed the lead of the president when he said that ethanol should be pried higher than this. It also emerged that the EMAI had conducted two meetings (on 9 and 21 January 2013) after the announcement of tender.
As regards the NFCSF, neither the director general nor the CCI found any evidence that it had contravened the Competition Act. Further, the informants produced no evidence that it had engaged in anti-competitive conduct.
Accordingly, the CCI found that two of the three trade associations investigated (ie, the ISMA and the EMAI) had contravened Sections 3(3)(a) and (b) read with Section 3(1) of the Competition Act.
Finally, the CCI imposed a penalty on:
Curiously, the CCI imposed no penalty on the officials of the sugar mills or the office bearers of the trade associations.
This case demonstrates the CCI's shift towards punishing apparent coordination between competitors based on legal grounds and ignoring the market realities. It also illustrates how trade associations facilitate coordination between competitors.
The government's ambitious EBP was a non-starter from the beginning due to the non-remunerative price for the procurement of ethanol fixed by the CCEA (ie, Rs27 per litre), whereas sugar mills and ethanol manufacturers were able to sell ethanol to other private buyers (ie, distilleries and pharma companies) at much higher rates. The allegations filed were clearly motivated by the distilleries' vested interest in procuring ethanol at higher rates from the sugar mills in, for instance, Uttar Pradesh, which the CCI was made aware of during the initial hearings. Thus, the basic price of Rs35 to Rs36 per litre allegedly quoted by the sugar mills in Uttar Pradesh apparently reflected the competitive market price, a fact which the CCI ignored. The concept of supply and demand plays a major role in market-driven pricing mechanisms, which also seems to have been ignored. The fact that the price of a product is determined based on the market demand cannot be ignored. It is disappointing that the CCI failed to appreciate the economic factors which led the sugar mills to quote a higher price.
It is also surprising that even though the EMAI was penalised, the Maharashtra sugar mills were exonerated despite having quoted a basic price of more than Rs40 per litre following the EMAI president's order.
It is equally surprising that the CCI not penalise the office bearers of the ISMA and the EMAI when there was plenty of incriminating evidence against them. Similarly, the director general and the CCI's failure to initiate penalty proceedings against the directors and officials of the sugar mills found to have cartelised is surprising in light of recent precedents involving pharmaceutical companies.
Finally, it is necessary to question whether the sugar mills were really operating in a cartel, as nearly every opposing party had made a submission that the price quoted was realised on the basis of demand in the market.
For further information on this topic please contact MM Sharma at Vaish Associates by telephone (+91 11 4249 2525) or email (email@example.com). The Vaish Associates website can be accessed at www.vaishlaw.com.
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