At the heart of competition law is consumer welfare and creating a marketplace where businesses compete fairly with each other. Competition in Indian markets and markets outside India, having an appreciable adverse effect on competition in India, is governed by the Competition Act, 2002 (“Act”). Agreements among competitors have always been the most pernicious of all violations of competition law, and traditionally the most stringent penalties are reserved for such anti-competitive agreements.[1]
At its most simple, a cartel is an agreement between businesses not to compete with each other. Section 2(c) of the Act defines cartel as under:
“cartel” includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services;
A cartel is a group of similar, independent companies which join together to fix prices, limit production or share markets or customers between them. Instead of competing with each other, cartel members rely on one another’s agreed course of action, which reduces their incentives to provide new or better products and services at competitive prices.[2] Their purpose is to increase prices by removing or reducing competition to the detriment of consumers and the economy as a whole. For consumers, this means higher prices, poorer quality and less or no choice. Cartels also have a damaging effect on the wider economy as they remove the incentive for businesses to operate efficiently and innovate.
Cartel agreements are a type of horizontal agreement, i.e. they are entered into between persons or enterprises at the same level of the production chain in similar markets and are covered by Section 3(3) of the Act. These agreements are presumed to have an appreciable adverse effect on competition and therefore, anti-competitive.
Given the nature of cartel activities, the probability of such agreements being expressed in writing is very low. Even a ‘nod and wink’ is sufficient. However, common intention is a sine qua non for proving the existence of a cartel.
It is not easy to spot a cartel but some patterns that usually emerge are raising prices by the same amount and at around the same time, offering the same discount or having identical discount structures, refusing to supply to a customer because of their location, etc. Cartels can occur in any industry and at any level of the production chain. However, a cartel is more likely to be found in an industry where there are fewer competitors, products have similar or homogenous characteristics, communication channels between competitors are already established (eg. trade associations), etc.[3] It may also occur in industries where transport costs are significantly higher than the cost of the products and hence, customers prefer to buy from the nearest possible seller and are therefore, constrained. Cartelisation is also one of the principles underlying merger control.
A leading decision on cartels is the Cement case[4]. It was filed against the Cement Manufacturer’s Association and 11 leading cement manufacturers. The main allegation was that the cement manufacturers were limiting production and supply and indulging in collusive price fixing, resulting in exorbitant prices being charged to the consumers and the consumers having no other alternative. The Commission held that price parallelism in conjunction with other plus factors is required to indicate and establish cartelisation. In this case, some of the other plus factors included the common platform of the Cement Manufacturer’s Association and other economic evidence by way of low capacity utilisation, production and dispatch parallelism. While price parallelism may seem to be a key indicator of cartelisation, it is not a conclusive factor as it maybe attributable to the nature of the market and not collusion[5].
The secret nature of cartels makes it very difficult for regulators to gather direct evidence against them. Therefore, regulators have to rely heavily on information given to them by cartel members. Cognizant of this, the Legislature inserted Section 46 in the Act which provides for lesser penalty on cartel members who come forward and make full and true disclosures of violations by the cartel. This provision is supplemented by the CCI (Lesser Penalty) Regulations, 2009 that inter-alia set out the conditions for lesser penalty and the nature of information sought from the cartel member.
Cartel agreements are penalized differently and far more harshly than other horizontal agreements. The proviso to Section 27(b) of the Act lays down the penalty for cartel agreements being up to three times of the profit for each year of the continuance of such agreement or ten percent of the turnover for each year of the continuance of such agreement, whichever is higher. The Excel Crop Care case[6] is an important decision wherein the Supreme Court held that ‘turnover’ for the purposes of Section 27(b) of the Act is the ‘relevant turnover’ of the company relating to the product in question in respect whereof provisions of the Act are found to have been contravened and not the ‘total turnover’ of the company covering all its products. This assumes great importance when the enterprise is a multi-product company. Along with basing its decision in the doctrine of proportionality, the Supreme Court held that the aim of the penal provision is two fold; to punish violators and serve as a deterrent for others. However, such a position cannot be countenanced which would deviate from ‘teaching a lesson’ to the violators and lead to the ‘death of the entity’ itself.
I find this particularly relevant in understanding the aim of the Act. As much as the Act seeks to promote consumer welfare and fairness in conduct of businesses, it also wants businesses to thrive. Unlike certain other statutes and regulators that debar market players from participating in the market for a stipulated time period after contravention, the Act does not debar enterprises from conducting their businesses altogether.
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[1] Order dated 31st August, 2015 in Combination Registration No. C-2015/03/256 (Grasim Industries Limited and Aditya Birla Chemicals (India) Limited)
[2] https://ec.europa.eu/competition-policy/cartels_en
[3] Cartels and the Competition Act 1998 – A guide for purchasers, published by the Office of Fair Trading
[4] Builders Association of India and Cement Manufacturers’ Association & Others [Case No. 29 of 2010, Competition Commission of India]
[5] Rajasthan Cylinders and Containers Ltd. v. Union of India [Civil Appeal No. 3546 of 2014, Supreme Court of India]
[6] Excel Crop Care Limited v. Competition Commission of India and Others, (2017) 8 SCC 47
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