In re Cartelisation in the supply of Protective Tubes to Indian Railways (Competition Commission of India)
Facts:
1. The present matter was initiated by the Commission suo motu, pursuant to receipt of an application under Section 46 of the Competition Act, 2002 (Act) read with Regulation 5 of the Competition Commission of India (Lesser Penalty) Regulations, 2009 (LPR), on behalf of Jai Polypan Private Ltd. (including its individuals), for alleged cartelisation in the supply of protective tubes to the Indian Railways.
2. From the disclosures made in the lesser penalty application, the Commission noted that there appears to exist coordination and collusion amongst the following vendors of protective tubes (OPs) from 10.06.2015 to 29.06.2020, in the tenders issued by the Indian Railways for procurement of protective tubes through the modus operandi of, inter alia, quoting mutually agreed prices and allocating tenders amongst themselves:
1. Polyset Plastics Private Ltd. (OP-1)
2. M/s Anju Techno Industries (OP-2)
3. M/s Power Mould (OP-3)
4. Jai Polypan Private Ltd. (OP-4)
5. M/s Rama Engineering Works (OP-5
6. M/s Polymer Products of India (OP-6)
7. M/s Hari Narayan Bihani (OP-7)
3. Noting the foregoing, the Commission passed an order dated 17.11.2020 under Section 26(1) of the Act, forming an opinion that, prima facie, the conduct of the OPs appears to be in contravention of the provisions of Section 3(1) read with Section 3(3) of the Act, and consequently, directed the Director General (DG) to cause an investigation into the matter and submit a report. The DG was also directed to investigate the role of the officials/persons who, at the time of such contravention, were in-charge of and responsible for the conduct of the businesses of respective OPs as well as of the persons/officers with whose consent or connivance such contravention was committed, in terms of the provisions contained in Section 48 of the Act.
Investigation by the DG:
4. Pursuant to the directions issued by the Commission, the DG, after conducting a comprehensive investigation in the matter, submitted the investigation report. Based on investigation, the findings of the DG in its report, in brief, are as under:
(a) All 07 OPs are engaged in the manufacture and supply of protective tubes. As such, they are ‘enterprise’ within the meaning of Section 2(h) of the Act. They are engaged in identical/similar trade of goods; hence, their conduct can be analysed in terms of Section 3(3) of the Act.
(b) Evidence of common IP addresses from which bids were quoted and common directorship/partnership between 3 OPs is found. Further, exchange of several email communications between the representatives of the OPs is found, wherein:
(i) discussion on prices to be quoted in the tenders is made,
(ii) tender quantity allocation took place,
(iii) the OPs can be seen distributing tenders amongst themselves wherein the OPs mutually agreed to a given rate, and non-allottees were instructed to quote 8–10% higher prices,
(iv) the OPs can be seen asking other OPs to withdraw their offers from tenders, and
(v) the OPs can be seen manipulating the bidding process by forming a pool or cartel of vendors, even for developmental vendors who were entering the market and were in the initial phases of manufacturing.
Representatives of certain OPs also admitted to the above arrangement.
(c) From the above, the DG observed a modus operandi which was being followed by the OPs and concluded that all the 07 OPs indulged in contravention of the provisions of Section 3(3)(a), 3(3)(b), 3(3)(c), and 3(3)(d) read with Section 3(1) of the Act. In terms of Section 48 of the Act, the DG identified certain individuals of the OPs who had played an active role in contravention of the provisions of the Act by the respective OP and/or who were in-charge of and responsible for the conduct of the business of the respective OP during the period of contravention, and accordingly, fixed liability upon 10 such individuals.
Proceedings before the Commission:
5. The Commission considered the investigation report submitted by the DG in its ordinary meeting held on 04.01.2022 and decided to forward an electronic copy of the ‘non-confidential qua OPs version’ of the same to the OPs and their individuals found liable by the DG in terms of the provisions of Section 48 of the Act (Parties) for filing their respective objections/suggestions, if any, to the investigation report, along with certain financial details. The OPs were directed to furnish their audited Financial Statements, including Balance Sheets and Profit & Loss Accounts for the Financial Years (FYs) 2015–16 to 2020–21, along with details of their revenue and profit generated in these FYs from the sale of protective tubes by way of filing Affidavits supported by certificates from chartered accountants, while the individuals were directed to file their income details, including Income Tax Returns (ITRs), for the FYs 2018–19, 2019–20, and 2020–21.
6. After receipt of objections/suggestions from the Parties, the Commission, on 30.03.2022 and 31.03.2022, heard the oral submissions addressed by the respective learned counsel(s) for the Parties on the DG Report and also heard OP-4 on its application for lesser penalty through video conference mode. The Commission decided to pass an appropriate order in the matter in due course. Thereafter, the Parties submitted their respective written arguments.
Submissions of the Parties:
7. In their suggestions/objections to the investigation report, written arguments, and during the oral hearing, the Parties took diverse pleas, which are summarised in the succeeding paras:
8. Polyset Plastics Private Ltd. (OP-1), M/s Anju Techno Industries (OP-2), M/s Power Mould (OP-3), Mr. Bhupesh Bafna, and Ms. Shanta Sohoni
8.1 The informal market understanding amongst the vendors with regard to the supply of protective tubes to the Railways existed to safeguard and recover the investments in R&D put forth by the vendors and to deliver good quality product at a reasonable price. The answering OPs were not fully aware of the exact and specific competition law in the country and the OPs will certainly be extra careful and cautious of all rules, regulations, and existing compliances in all their future dealings. The informal arrangement between the OPs existed in ignorance of existing laws. Their intentions or actions were not to prevent the entry of any new entity in the tender process, i.e., were not anti-competitive in nature. The field and market were always open for all, and the answering OPs’ dealings have always been fair to all.
8.2 In the digital era, the procurement system and subsequent tendering process of the Indian Railways is very robust and in no way can be influenced by the vendors. It is not the case that, due to any action on the part of the answering OPs, the price of the product increased or jacked up.
8.3 The answering OPs have never been party to any earlier inquiry or investigation. The revenue earned by them from the sale of protective tubes is also very less, considering the overall business. Further, in light of the impact of the COVID-19 pandemic and the consequent lockdowns, the businesses of the answering OPs have suffered a lot. Hence, no penalty ought to be imposed upon the answering OPs.
8.4 Already, heavy penalties on the answering OPs have been imposed in Ref. Case No. 03 of 2018 titled Chief Materials Manager, North Western Railway v. Moulded Fibreglass Products LLP, and hence, no further penalties ought to be imposed.
9. Jai Polypan Pvt. Ltd. (OP-4), Mr. Vishal Baid, Mr. Rajeev Dudhani, and Mr. Rajesh R.
9.1 OP-4 is a lesser penalty applicant before the Commission. It believes that it has the first marker status and that the Commission was not aware of the existence of the present cartel before the lesser penalty application was filed by OP-4. Therefore, OP-4 and its individuals ought to be granted 100% reduction in penalty, if any, imposed upon them. OP-4 made vital disclosures before the Commission, which enabled the Commission to form a prima facie opinion regarding the existence of the present cartel. It also fully co-operated during the course of investigation and inquiry and is not objecting to the findings contained in the DG Report on merits.
9.2 Through its lesser penalty application, OP-4 provided evidence with respect to (i) communication between the OPs for rigging the bids floated by the Indian Railways in relation to protective tubes between June 2015 to June 2020; (ii) the manner in which tenders were allocated amongst the OPs; (iii) the manner in which prices were mutually agreed between the OPs; (iv) the manner of addition of new members to the cartel arrangement and distribution of share percentage between them; and (v) issues with the cartel, monitoring mechanism, and resolution. The DG has relied on the information and evidence provided by OP-4 in its investigation report. In light of this, and considering the fact that OP-4 has fulfilled all conditions for grant of lesser penalty as mentioned under the LPR, penalty should not be levied on OP-4 and its individuals, and if a penalty is to be levied, OP-4 and its individuals ought to be granted 100% reduction in penalty under the LPR.
9.3 The DG has erred in observing that the OPs indulged in geographical allocation of the market. The Indian Railways distributes its operations into different zones across the country geographically, and each railway zone procures its products separately by floating separate tenders. The DG rightly mentions that the OPs had allocated the market percentage to each vendor. However, this market percentage is not allocated on the basis of any geographic segmentation, as the OPs supply their products to the Railways pan-India, i.e., across various railway zones.
9.4 Penalty, if any, ought to be imposed only on relevant turnover/profit of OP-4, i.e., the turnover/profit derived from the sale of Protective Tubes in the relevant time period/duration (i.e., 2015–2020).
9.5 The following mitigating factors ought to be considered in case the Commission deems it necessary to impose a penalty: (i) OP-4 continuously co-operated with the Commission and the DG during the investigation; (ii) OP-4 earned insignificant profits from the cartel arrangement; (iii) OP-4 was forced to join hands with other vendors in order to secure their business because the market is driven and solely controlled by the Indian Railways and vendors have to adhere to the framework and tender conditions stipulated by the Indian Railways; (iv) OP-4 is an MSME unit with limited resources and has suffered significant repercussions of the COVID-19 pandemic, and accordingly, the imposition of penalty will place an additional significant financial burden on OP-4; and (v) OP-4 played a limited role in cartel arrangement as Ms. Shanta Sohoni was responsible for co-ordinating amongst the members of the cartel.
9.6 OP-4 has also disclosed the existence of another cartel arrangement to the Commission. The Competition Law Review Committee, in its report dated 26.07.2019, has acknowledged the challenges faced by the Commission in cartel detection and enforcement and, in view of this, recommended that, where an applicant makes full, true, and vital disclosures with respect to another cartel (Leniency Plus), such applicant may be granted lesser penalty specified in the LPR. In view of this, the Commission, while deciding the quantum of penalty reduction in the present matter, may also take into account the additional disclosure of contravention of Section 3 of the Act made by OP-4 in another matter. Considering the legislative desire for Leniency Plus, in addition to the comprehensive co-operation provided by OP-4 in this matter, the Commission may, considering the fact that OP-4 has also made full, true, and vital disclosures with respect to another anti-competitive agreement, grant OP-4 and its individuals 100% immunity from penalty in the present matter.
10. Rama Engineering Works (OP-5) and Mr. V. Chakrapani
10.1 The DG has failed to examine Mr. V. Chakrapani of OP-5 on oath before giving a finding of contravention against OP-5 and him. This is against the principles of natural justice.
10.2 The DG Report is silent on the period of contravention. Though it appears from the DG Report that the transactions relating to the alleged cartel took place from 2015 to 2019, OP-5 has been made liable despite the fact that it became an approved source for the Indian Railways for protective tubes only on 29.05.2019.
10.3 OP-5 never shared any crucial information with the other OPs like bid amount or bid presentation dates in the relevant period, which may establish the existence of a cartel. All that the investigation has found against OP-5 are five e-mails agreeing to a meeting or revealing information about already awarded quantities, which information was already available in the public domain. No independent source has been examined to prove the allegations of cartelisation. In fact, there is no certificate given under Section 65B of the Indian Evidence Act, 1872 in support of such e-mails relied upon against OP-5. The DG’s findings are based on an incorrect understanding of the facts and law and there is no direct evidence against OP-5 of indulging in cartelisation. OP-5, in this regard, reserves the right to cross-examine the investigating officer of the present matter.
10.4 In a monopsonist market with a single buyer, price is set by the buyer, conditions are such that sellers can predict demand, there is a repetitive bidding process, and products are identical and specialised; as such, mere price parallelism in such cases cannot be a reason to arrive at a conclusion of bid rigging. In such a market, there is a high degree of predictability of prices and bidders may take business decisions to mirror the prices of competitors quoted in other railway zones by adjusting or averaging prices in other tenders.
10.5 The DG has not found that any loss of revenue to the Indian Railways occurred as a result of the present alleged cartel. Hence, there was no appreciable adverse effect on competition (AAEC) within India. In fact, the prices quoted by OP-5 for polyacetal protective tubes to the Indian Railways always remained less than the market price, and the profit margin of OP-5 was also very low (8%).
10.6 After obtaining approval, OP-5 was awarded the first order by the South East Central Railway on 19.08.2019, for which OP-5 had quoted a rate of ₹456, and it was awarded quantity of 5,771; however, in the same railway zone, in 2018, OP-4 had quoted a price of ₹502.95 and it was awarded the tender at this rate. Similarly, OP-5 was awarded the tender of the South Western Railway vide P.O. dated 20.10.2020 @₹432 and quantity of 552; however, in February 2020, OP-6 had quoted a price of ₹470 and was awarded quantity of 2,400. These instances clearly show that OP-5 was not a part of the alleged cartel.
10.7 Further, the cost breakup of polyacetal protective tube is as follows: 1 kg of raw plastic Delrin available in the market for ₹250/kg + manufacturing cost ₹100/-(which includes labour, electricity, etc.) + consumables ₹50/- = Total ₹400/-. In 2019, OP-5 made supplies to South East Central Railway @₹435/- per piece and to South Central Railway for ₹484/- per piece. In 2020, supplies were made to South Western Railway @₹432/- per piece. These rates were quoted after keeping aside a minuscule portion of profit of approx. 8%. This shows that the Indian Railways were not in any losses, and OP-5 quoted very competitive prices.
10.8 OP-5 had not quoted in any of the tenders through a common IP address with any other OP.
10.9 Further, the inherent nature of the market for Protective Tubes itself precludes the possibility of competition, as the product can only be sourced from RDSO-approved sources, and this creates entry barriers for new entrants in the market. The DG has not examined the factors stated under Section 19(3) of the Act to establish any AAEC.
10.10 Penalty, if any, ought to be imposed only on the turnover/profit derived by OP-5 from the sale of protective tubes to the Indian Railways in FY 2019–20 (after it became an approved source).
10.11 OP-5 is a partnership firm registered with the MSME.
10.12 Certain mitigating factors ought to be considered. The DG has itself brought out in the investigation report that the demand for polyacetal Protective Tubes remained low due to the lower pricing of metallic protective tubes, which the Railways continued to procure. Further, coaches also switched to LHB coaches (which do not require protective tubes) in place of ICF coaches. Hence, the DG itself observed that it appears that the cartel was formed to deal with excess supply and low demand. Average turnover earned by OP-5 during the relevant period from the sale of protective tubes was meagre. Further, due to the COVID-19 pandemic and economic slowdown, it has become difficult for OP-5 to survive in the market.
11. Polymer Products of India Ltd. (OP-6), Mr. Vishnu N.M., Mr. Venkata Subramanyam, and Mr. Harsha Gumballi
11.1 OP-6 was only a Part II supplier of protective tubes to the Indian Railways till 25.09.2019. Part II suppliers are not considered for the supply of more than 5% of the tendered quantity, and only if the rate quoted by them is less than a Part I source suppliers’ rate. Being a Part II source supplier, OP-6 was in no position to dictate the prices of protective tubes, which are decided on the basis of the prices of Part I source suppliers. Part II source suppliers are left at complete mercy of Part I source suppliers, and they are forced to follow the directions set by Part I source suppliers to survive in the market and procure business. Hence, OP-6, having no control over the market of protective tubes had not entered into any cartel arrangement and/or manipulated the prices of protective tubes.
11.2 Post 26.09.2019, when OP-6 got approved as a regular source of supply, whenever it was informed to quote according to the rates in the market, it flatly ignored. It quoted competitive rates to the Indian Railways based on various factors, such as the cost of raw material, labour cost, freight cost, etc. It only quoted such rates which, based on its calculations, were commercially viable for it. OP-6, after underquoting in tenders, was asked several times to withdraw the offer, as reflected in the e-mail dated 09.06.2020; however, it never adhered to any such communications. It was never a part of any allocation table nor replied to any meeting proposal post 2019.
11.3 The DG has failed to establish prior agreement of ‘meeting of minds’ between the OPs. Rather, the communications referred to between OP-6 and its individuals with the other OPs express differences of opinions and disagreements. OP-6 has always followed fair trade practices and accordingly, avoided any professional communication with any competitor with respect to any tender whatsoever for which OP-6 may or may not bid.
11.4 OP-6 has not indulged in the modification of any prices arising out of the cartel.
11.5 OP-6 had not quoted in any of the tenders through a common IP address with any other OP.
11.6 OP-6 had provided all relevant information, documents, and evidence during the entire proceedings and has co-operated genuinely, fully, continuously, and expeditiously in the present matter. It has not concealed, destroyed, manipulated, or removed any relevant and necessary documents of the present case.
11.7 The COVID-19 pandemic has had a catastrophic impact on the entire world, especially small-scale industries like OP-6, which is a partnership firm and has been facing the brunt of uncertainty that has been looming around the global economy since the onset of COVID-19. Hence, the Commission may consider waiving the levy of any penalty upon OP-6 and its individuals.
11.8 In another similar case bearing Ref. Case No. 03 of 2018 (supra), the Commission already imposed upon OP-6 and its individuals penalties to the tune of ₹28,80,881/-. As the same relates to substantially similar conduct and for the same duration the Commission ought not impose any further monetary penalty in the instant case.
11.9 The product in question, protective tubes, are no longer in use after the introduction of LHB Coaches. Also considering the redundant nature of the product, the Commission may adopt lenient approach in the matter.
12. Hari Narayan Bihani (OP-7) and Mr. Keshav Bihani
12.1 Not all documents/e-mails relied upon by the DG in its investigation report have been supplied along with the DG Report. In fact, the order dated 17.11.2020 passed by the Commission under Section 26(1) of the Act was not even provided to OP-7, but rather, OP-7 had to seek a copy of the same from the DG.
12.2 OP-7 is a partnership firm. It was approved as a Part II supplier of protective tubes to the Indian Railways on 26.07.2017 and upgraded as Part I supplier on 04.07.2019. There is no finding in the DG Report that after grant of approval as
Part I supplier, OP-7 interacted/communicated/met with the other OPs in terms of the alleged cartel. In fact, after approval as Part I vendor, OP-7 quoted independent/competitive prices and was allotted up to 100% tender quantity (higher than any allocation made by OP-1).
12.3 The DG has failed to establish prior agreement of ‘meeting of minds’ between the OPs. Mere receipt of certain e-mails by OP-7 does not show ‘agreement’ or ‘action in concert’ or ‘understanding’ with respect to it, especially when the actual conduct (price quotations and quantities allotted) of OP-7 is contrary to what has been suggested in the e-mails. Unilateral/independent action not to follow the alleged price dictates/quantity allocation shows that OP-7 was not a part of the alleged cartel.
12.4 There is no evidence in the form of common IP address, call records, meetings, etc., against OP-7. There is also no evidence of any e-mail being sent by OP-7 prior to 25.07.2019.
12.5 Regarding the e-mail dated 25.07.2019 sent by OP-7 to other OPs, it may be noted that the same was sent only after the relevant tender was closed on 11.07.2019. As far as Price List Rate (PLR) mentioned in the said e-mail and other e-mails is concerned, the same is the rate fixed/suggested by Indian Railways itself based on its own calculation and estimation of cost of production. The DG has failed to make a comparison between PLR, actual quoted rates, and tender award rates, or between the quoted and awarded quantities.
12.6 Regarding other e-mails, e-mails dated 11.11.2019 and 12.11.2019 do not mention inclusion of OP-7 in the cartel pool or allocation of any quantity to it; there is no proof of any actual conduct/meeting post e-mails dated 15–16.11.2019; e-mails dated 20.09.2019, 07.10.2019, 03.02.2020, 16.03.2020, and 29.06.2020 were not acted upon by OP-7; e-mails dated 10.02.2020, 17.03.2020, and 08.06.2020 were not marked to OP-7; e-mail dated 08.06.2020 in fact states that OP-7 is not following/quoting the dictated prices; and e-mails dated 09.06.2020, 10.06.2020, and 12.06.2020 only show OP-4 threatening to discontinue the cartel if the dictated prices are not followed. It may be noted that OP-7 did not even participate in any Railway tender between February 2020 and 08.06.2020. Further, it was because of non-cooperation of OP-7 only that the cartel arrangement broke and OP-4, the ringleader, approached the Commission by way of filing lesser penalty application, which was nothing but a counter blast to wipe out competitors.
12.7 Market for polyacetal protective tubes is a monopsonist market with a single buyer, i.e., the Indian Railways. Further, with the requirement of RDSO approval for vendors, there exist entry barriers in this market. As such, the buyer, i.e., Indian Railways, has the power to influence the price quoted by the vendors as it finalises the price. PLR is set by the Railways and it, at its sole discretion, gives counter offer and allocates quantities. Vendors have no option but to accept the counter offer. Thus, suppliers can, at no point in time, have any control over the prices. The present case is, therefore, squarely covered by the judgment of the Hon’ble Supreme Court in Rajasthan Cylinders and Containers Limited v. Union of India and Another (2020) 16 SCC 615, and the present inquiry against OP-7, in terms of the said judgment, ought to be closed.
12.8 Also, though the Hon’ble Supreme Court had observed in Rajasthan Cylinders (supra) that the examination of a buyer in a monopsony market is critical for the purposes of investigation, in the present case, neither RDSO nor Indian Railways were summoned by the DG for recording their statements or clarifying any factual position. With respect to polyacetal protective tubes, raw material and its suppliers are also categorially specified by RDSO. Hence, it is difficult to imagine that RDSO/Railways would not be aware of the prices of raw material, cost of production, and final prices of protective tubes. The DG has failed to examine RDSO/Railways on any such aspect.
12.9 The DG has also failed to examine the other parties (apart from the OPs) who were participating in the tenders for protective tubes issued by the Indian Railways.
12.10 The DG has failed to establish any AAEC in the market. It has not examined the factors stated under Section 19(3) of the Act to establish any AAEC. The alleged conduct of the OPs neither created any entry barriers in the market, nor drove existing competitors out of the market, nor led to foreclosure of competition by hindering entry into the market. In fact, with OP-7 quoting competitive rates as Part I supplier, Indian Railways (the consumer) has benefitted.
12.11 Relevant turnover/profit for OP-7 in the present case ought to be the revenue/profit derived from sale of polyacetal protective tubes for Axle Box Guide in ICF to the Indian Railways from the tenders filled by OP-7 between 04.07.2019 to February 2020.
12.12 As OP-7 was not a part of the cartel arrangement, no liability in terms of Section 48 of the Act can be imposed upon Mr. Keshav Bihani, Partner of OP-7. Anyhow, at this stage, penalty upon him cannot be imposed, as the issue of simultaneous invocation of Section 48 proceedings before giving a finding of contravention against the company is presently pending adjudication before the Hon’ble Supreme Court of India.
Analysis:
13. The Commission has perused the application seeking lesser penalty filed by OP-4 under Section 46 of the Act; the investigation report submitted by the DG and the evidences collected by the DG; the suggestions/objections to the DG Report and the written arguments filed by the Parties; and also heard the oral arguments made by the respective learned counsel(s) representing the Parties in the matter. Before proceeding to examine the evidence collected by the DG, the Commission deems it appropriate to note the product/article involved in the present matter.
14. The present matter involves allegations of cartelisation relating to the product ‘polyacetal protective tube’ for axle box guide in Integral Coach Factory (ICF). The DG, in its report, has noted that the primary suspension in ICF bogie is through a dashpot arrangement, which is mainly a cylinder piston arrangement. This arrangement provides the dampening effect during the running of the coach. The cover of this complete dashpot arrangement is known as protective tube.
15. The Indian Railways, in order to ensure reliability, availability, and safe working of Railway assets, follows the practice of maintaining lists of approved vendors for certain specific items. It is noted from the DG Report that polyacetal protective tube is one such item. Research Designs and Standards Organisation (RDSO) is the nodal agency of the Indian Railways for vendor approval. It maintains two lists—of Part I and Part II vendors. RDSO-approved vendors included in Part I are eligible for regular supply to the Indian Railways and for getting an order for full quantity of tenders floated by the Indian Railways, whereas vendors approved and included in Part II are eligible for developmental order and getting an order for part quantity (up to 25% only). The RDSO-approved vendors/suppliers of polyacetal protective tubes to the Indian Railways, along with their timelines of approval, are as follows:
