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27 June 2019
On 1 October 2018 the Supreme Court issued a landmark judgment in which it upheld the appeals of 44 liquefied petroleum gas (LPG) cylinder manufacturers and dismissed the finding of bid rigging in the supply of 14.2kg domestic LPG cylinders to the Indian Oil Corporation Ltd (IOCL). In so doing, the court quashed the decision of the Competition Appellate Tribunal (COMPAT) which had upheld the finding of the Competition Commission of India (CCI) and the latter's imposition of penalties on each party, calculated at 10% of their average relevant turnover.
In relying on judgments and guidelines on cartels and bid rigging from several foreign jurisdictions, the Supreme Court emphasised the need to evaluate the market structure and conditions before determining whether a cartel exists. This judgment signifies a new direction in case law and is likely to change the manner in which India's antitrust regulator evaluates evidence of cartels in future.
In its decision, the Supreme Court held that considering the prevailing market conditions under which the appellants had offered bids in the tender floated by the IOCL, there was insufficient evidence to establish an agreement between them with regard to bid rigging or collusive bidding. As such, the court set aside the COMPAT order of 20 December 2013 which had upheld the findings of the CCI's 24 February 2012 order (Suo Moto Case 03/2011).
The appellants manufactured gas cylinders with a capacity of 14.2kg, which were procured exclusively by India's three oil marketing companies (ie, the IOCL, Bharat Petroleum Corporation Ltd and Hindustan Petroleum Corporation of India).
The CCI's findings that the appellants had engaged in collusive bidding, which COMPAT upheld, were based primarily on the following observations:
One of the appellants, Rajasthan Cylinders and Containers, attacked the very foundation of the CCI's finding of a bid-rigging cartel. It argued that since the Competition Act 2002 prohibits anti-competitive conduct, the market must be competitive for it to apply. However, as the IOCL tightly controlled and regulated the relevant market, monopsony prevailed. Further, the effective prices had had no sanctity, as the L2 (Grade II) and L3 (Grade III) bidders had been awarded contracts in addition to the L1 (Grade I) bidder. In addition, the final negotiated prices had been decided based on privately conducted negotiations with the bidders for which the "benchmark was not the price quoted by them but the internal estimates arrived by IOCL", and the IOCL had had full control over the final prices.
The Supreme Court, while negating Rajasthan Cylinders and Containers' argument, held that the "purpose of the Act is not only to illuminate practices having adverse effect on the competition but also to promote and sustain competition in the market". Therefore, effective enforcement is important not only to penalise anti-competitive conduct, but also to deter future anti-competitive practices. The court observed that in the present case, there had been 60 suppliers of the product and three buyers, and each supplier would have wanted to be an L1 or L2 supplier in order to secure larger orders. Thus, competition would exist among the suppliers in this sense. In any case, it was the CCI's duty to curb any conditions which could affect competition.
The appellants also argued that there had been no collusive agreement or bid rigging in this case, and that the decisions of the CCI and COMPAT had been based on there having been a meeting of an association. This in itself cannot lead to a conclusion of collusion and, as such, the decisions contravened the appellants' fundamental right to form an association under Article 19(1)(c)(g) of the Constitution. As regards the meeting, it was submitted that the director general's report had found that:
In addition, the appellants argued that the bids had been driven entirely by market conditions (monopsony). Further, the bids had had no appreciable adverse effect on competition.
The Supreme Court looked beyond the factors considered by the CCI and COMPAT (labelling them as "only one side of the coin") and observed that there had been only three buyers of the 14.2kg gas cylinders. The biggest of these was the IOCL, which held a 48% market share. The fact that the market comprised only three buyers may have deterred new players from entering the field. In addition, the IOCL had ensured that parties which had made technically viable bids were given some orders for cylinders. Further, the court observed that the manner in which tenders were floated by the IOCL and the rates at which they were awarded indicated that it called the shots with regard to price control. Evidence showed that the IOCL's expert had arrived at a figure of Rs1,106.61 per cylinder and all of the accepted tenders had been lower than this price. Further, negotiations had taken place with the L1 bidder, which had led to a further reduction in the price quoted by that bidder. Subsequently, the L2 and L3 bidders had been awarded contracts at the same rate at which one was awarded to the L1 bidder; the only difference had been the quantity of cylinders. This showed that control had remained with the IOCL.
Another important factor considered by the Supreme Court was government control. The court observed that under the LPG (Regulation and Distribution) Order 2000, only the three oil companies could supply LPG to domestic consumers in 14.2kg cylinders. The price at which the cylinders could be supplied to consumers was also controlled by the government.
As regards the meeting of bidders which had taken place two days prior to the bidding, the Supreme Court observed that even though only 19 parties had attended, those which had not attended had quoted almost exactly the same rates, which implied that there was a different explanation for the similar bids. For the court, the market conditions had led to oligopsony, which prevailed because of the limited number of buyers and their influence over the fixation of prices.
On this basis, the court held that the appellants had successfully discharged the onus imposed on them by the CCI and COMPAT by referring to various indicators which reflected that their parallel behaviour had not been the result of any concerted practice.
In concluding its decision, the Supreme Court emphasised that based on the IOCL's watertight tender policy, which had given it full control over the process, it would be necessary to summon the IOCL to clarify many aspects of the case which remain shrouded in mystery.
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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