Updated: Dec 22, 2020
Two recent cartel findings in quick succession, yet no penalties in either. Strange as it may seem, it is true. We speak of the Competition Commission of India (CCI), which had sent shivers down the spine of corporate India with a slew of hefty fines in the landmark cement cartel decisions totalling over INR 6700 crore (approx. USD 908.84 million). The CCI in the past has also severely penalised public general insurance firms (approx. INR 671 crore; USD 90.9 million), aluminium phosphide manufacturers (approx. 317 crore; USD 42.9 million), airlines (approx. INR 54 crore; USD 7.3 million), etc.
The enforcement priorities of the CCI were clear – cartels were undisputedly the most egregious conduct that upends fair competition – and by imposing severe fines, it signalled clearly to the India Inc. to clean house or draw fire. It has so far intervened in several sectors such as coal, railways, pharmaceutical, insurance, film, civil aviation, sports broadcasting, gas and petroleum and made appropriate market corrections.
Last four years have also witnessed a rise in the number of leniency applications. The high standard of evidence and proof, the very secrecy of the cartels, compounded with protracted litigation, prompted the CCI to encourage the usage of leniency tool. Leniency, simply put, means the applicant discloses a cartel and reveals its inner workings to the regulator in return for complete or partial immunity. The applicant may provide smoking gun evidence that the regulator may not already have or otherwise be aware of at all or aid the regulator with probative evidence to make their task easier in proving the cartel. Leniency thus can be sought either before or while an investigation is underway.
In January 2017, the CCI issued its first leniency decision in a case involving bid-rigging for supply of fans to the Indian Railways. The CCI imposed a total penalty (including on individuals) of approx. INR 2.4 crore (USD 0.32 million). Despite being the first decision, the CCI was measured in its approach and reduced penalty of the leniency applicant by 75%. It did not grant a 100% waiver because the applicant came forward when the investigation had already commenced.
Fast forward to 2020, and Auto-bearings and CBB, decided in June and July respectively, mark a visible and significant departure from an otherwise consistent trend of penalising cartel members stringently.
Auto-bearings was triggered by a leniency application by Schaeffler India Limited, which was later joined in the queue by National Engineering Industries Limited. Seized with clinching evidence on meeting details, email communications and call data records, the CCI concluded that the four large auto-bearing firms colluded to mutually decide bearings’ price sold to original equipment manufacturers (OEMs). The colluded price increase was aimed at uniformly passing on the increase in raw material (steel) cost to the OEMs; otherwise the OEMs were allegedly unwilling to abide by any individual price increase request.
Similarly, in CBB, the CCI found ten suppliers of brake blocks to the Indian Railways guilty of collusive bidding. Unlike Auto-bearings, this case was triggered by several complaints filed by the Railways departments. Such was the blatant nature of the collusion in CBB that the CCI noted that the opposite parties “had discussed every detail of the tenders and the process to rig the bid at every step”.
In both CBB and Auto-bearings, the story until the findings of contravention remains consistent with past decisional practice. And then, surprisingly, for reasons that are not entirely clear, the CCI restricts its direction to a mere ‘cease and desist’ order. No monetary fines – much less hefty fines – were imposed either on latecomers (leniency applicants who turned themselves in when investigation was at advanced stages) or on parties who continued to contest the cartel.
When one closely examines the cartel duo, they appear like a routine conspiracy among members to act in cahoots and mutually determine their commercial conduct, which they should have otherwise done independently. As noted above, a few cartel members also came out clean and filed leniencies, which formed the backbone of the CCI’s finding. Despite the clear-cut cases of well proven cartels, it is puzzling that the CCI levied no fine.
Bear in mind, the decisions may have some merits in the current extraordinary circumstances owing to the COVID-19 pandemic, but do they set the right precedents and guide the businesses in the right direction as to competition compliance? We discuss some key implications arising from this disruptive cartel duo decision.
Is the effectiveness of the established leniency program in peril?
Leniency program has been introduced globally to fight cartels effectively by treating early confessors leniently who help regulators uncover and implicate its co-conspirators. A successful tool in deterring future cartel formation, it provides a powerful ‘carrot and stick’ incentive to parties to either blow the whistle or face the music. Besides, the severeness of a possible penalty, and consequent relief a whistle-blower may receive, is an important factor that drives the effectiveness of this popular cartel-busting tool.
If the penalties on the non-applicants are nominal or not applied consistently, the prospective applicants could perceive that the benefit of continuing a conspiracy outweighs revealing its existence to the antitrust regulator. The applicants could compare long-term gains by continuing collaboration with cartel members against trading off its reputation for being a reliable partner. The result will likely be fewer leniency cases and enhanced cartel stability.
Given this, it is not understood why the CCI would digress from the ‘carrot and stick’ approach, making the carrot rather too sweet for everyone with no stick in the backdrop. If complete amnesty is available for all parties absent any intelligible differentia and regardless of whether they are leniency applicants or contesting parties, such approach would be a deathblow to the very essence of a leniency program.
In fact, such an approach may also signal to hark back to the ‘cease and desist’ era of the Monopolies and Restrictive Trade Practices Act – the 1969 statute of an advisory model with no teeth.
Did the CCI obfuscate the meaning of cooperation?
Note that cooperation in leniency means admitting guilt and providing first-hand insider evidence, which is quid pro quo for a smaller fine or complete clemency. The reduction in fine is further subject to the ‘degree’ of cooperation, i.e., timing of disclosure in terms of when investigation starts, and significance of evidence brought forward.
The CCI underlined the full cooperation and confession by the offenders in a supposedly “wide ranging and complex investigation” in CBB, which “optimizes the resources of the DG” and “expedites the adjudicatory process besides lessening the regulatory burden.” It added that “the OPs have fully cooperated during investigation and inquiry … by not denying the material confronted by the DG”.
The CCI, while speaking of cooperation, clubbed both leniency and non-leniency applicants together, obfuscating the specific meaning and relevance assigned to cooperation in leniency regulations. While doing so, neither did it detail the nature of cooperation nor differentiate between the cooperation extended by leniency and non-leniency parties. One thus wonders what we should make of the detailed regulations on graded reduction in fine and first priority status if all the parties are let-off without even filing a leniency application? Where would be the incentive to break ranks or the fear of second-guessing that competitors may first file a leniency application?
Applying the same generosity to all, who came in later or did not turn in at all, does not augur well for the incentive for defection. In the times of modern technology and rising commerce when the ability to conceal cartels has increased manifold, the effort should be to unearth and eliminate cartels to protect competition in the market. On the contrary, diluting the incentive for applicants by meting out parity to non-leniency applicants would take the wind out of the leniency program’s sails.
Whether the special dispensations are justified?
One thing which is clear from Auto-bearings and CBB is that the CCI held that a cartel existed in both cases. Speaking of zero penalties, the CCI said Auto-bearings is a peculiar case, but unfortunately, practitioners were left to grapple with what made this cartel peculiar absent any indication of the purported peculiarities. In an endeavour to explain this gap perhaps, the CCI provided reasons, albeit vague, in the latter case, CBB. It justified the clemency in view of the pandemic and liquidity or credit needs of the small enterprises.
At this juncture, it is worthwhile to compare the mitigating factors with the aggravating factors – the period of the cartel in Auto-bearings was 2009-11 while in CBB it was 2009-17 – both pre-COVID and evidently of long durations. Now let’s combine this with the volume of market affected and number of tenders involved – both admittedly large. While the CCI has made a fleeting attempt to justify nil penalties on account of pandemic concerns, surely there are no real ‘peculiar’ or special circumstances which restrained it from imposing a fine. That too when the base amount has already been restricted to relevant turnover stemming solely from the infringing business of an entity.
The CCI’s approach is exacerbated by the fact that it did not analyse the financial health of the individual firms before doling out free bonanzas. Even in the first substantive antitrust case, FICCI vs. United Producers, the CCI was not of a benevolent disposition and imposed a token fine.
Financial hardships and the pandemic could at most be mitigating factors for reducing penalties. The upshot of the cartel duo is, in every cartel case, at least during the currency of the pandemic, parties can and will press for nil penalty. One thus wonders whether this is the right signal to businesses – be it in the times of the pandemic or beyond.
Could India Inc. misconstrue the decisions?
While the CCI granted amnesty to all, including those who contested the cartel finding, it cautioned the parties to steer away from recidivism or their future conduct will be assessed critically. As much as the warning arguably counterbalances the lack of fine, the logical conclusion is a ready certificate of exoneration for first-time offenders. Plainly interpreted, Auto-bearings and CBB are empty of deterrence signal. It will be interesting to watch how the CCI takes forward its soft precedent in the future. That said, the businesses should not overlook potential follow-on private damages claims even if they are able to avoid administrative fines once the CCI has made its finding.
Is this an initiation of crisis cartels in India?
Crisis cartels could mean short term collaboration among competitors, for example, to solve overcapacity or correct pricing below cost, to survive an extreme crisis like the COVID-19 pandemic. Absent collaboration, firms without deep pockets or state aid may find themselves exiting the market. That could potentially diminish competition in the market and leave fewer choices for consumers.
No doubt, changing economic environments warrant the governments to adapt their enforcement priorities accordingly. However, two questions arise here: one, whether Auto-bearings and CBB were crisis cartels? Two, even if they were not, whether the toleration of hard-core cartels is justifiable during the pandemic? As to the first issue, the cartels are clearly of the pre-COVID era and were not necessitated by any crisis – Auto-bearings related to rising raw material cost while CBB concerned a monopolistic buyer at most, which are not crises.
As regards tolerating cartels during the pandemic, structural overcapacity or financial hardships are better dealt by other means, for example, tax-free aid or legal collaboration like joint ventures or limited safe harbours or imposing import tariffs. The CCI could also have reckoned it as a mitigating factor to determine the penalty without marking a significant departure from its early tough stance on cartels.
Be that as it may, tolerating cartels, during a crisis or not, distorts markets and harm consumers and could have long-term consequences after the crisis. And the Competition Act, 2002 or the CCI’s advisory on the COVID-19 do not extend any leeway to crisis cartels either. Alternatively, in the interest of the economy, the regulator or the government should consider issuing detailed guidelines for collaboration during crises that otherwise could be illegal. Such guidelines should clarify the type of exceptional circumstances, qualifying criteria, conditions like keeping the authority informed, clear advantages over alternative means, performance metrics, etc.
Leniency program is a vital weapon to detect and punish hard-core cartel activity flourishing in secrecy. Based on the ‘prisoner’s dilemma’, its efficacy depends on a clear and reliable framework of amnesty to entice conspirators to rush to be the first in the door of regulators. Where the co-conspirators face fines in millions, the confessor is rewarded with immunity from fines. An incentive to receive the best deal and cooperation of confessors are thus indispensable for successful cartel prosecution.
Contrast it with Auto-bearings and CBB, and that clarity to receive best deal or tangible benefit over fellow conspirators is obscured. The decision to impose nil penalties by the CCI sends a murky signal to businesses and undermines the credibility of the leniency program. With the increasing awareness of antitrust policies, the need of the hour was detailed penalty guidelines to make the antitrust laws more robust. A zero penalty, on the other hand, discourages the fear of detection, the fear fellow conspirators may defect, and dampens the emerging leniency culture in India.
What will be the exact impact of Auto-bearings and CBB on future cases cannot yet be accurately determined, but one thing is clear – the cartel duo has put a spoke in leniency’s wheel and one can only hope that that wheel is set in motion sooner rather than later.
For further information, please contact:
Anisha Chand, Partner, Khaitan & Co.
Swati Bala, Khaitan & Co.
 Anisha Chand is a partner, and Swati Bala is a senior associate at Khaitan & Co. The views and opinions expressed in this article are solely of the authors.  Note that some of these fines were eventually reduced by the former Competition Appellate Tribunal (COMPAT), for example, the penalties on general insurance firms were reduced to approx. 2 crore (USD 0.27 million) while penalties on aluminium phosphide manufacturers were reduced to approx. 10 crore (1.35 million). Also, in the case of airlines, the CCI reduced the originally imposed penalty of approx. 257 crore to approx. 54 crore after a direction from the COMPAT to reconsider the quantum of penalty.  In Re: Cartelisation in Industrial and Automotive Bearings (Suo Motu Case No. 05 of 2017; decided on 5 June 2020) <https://www.cci.gov.in/sites/default/files/05-of-2017.pdf> Last accessed 5 October 2020.  In Re: Chief Materials Manager, South Eastern Railway (Reference Case Nos. 03/05 of 2016, 01/04/08 of 2018; decided on 10 July 2020) <https://www.cci.gov.in/sites/default/files/03-of-2016.pdf> Last accessed 5 October 2020.  The Competition Commission of India (Lesser Penalty) Regulations, 2009 (No. 4 of 2009)  FICCI – Multiplex Association of India vs. United Producers/ Distributors Forum & Ors. (Case No. 1 of 2009; decided on 25 May 2011)