Alerts & Updates 29th Aug 2018

ELP Competition Law & Policy Update – NCLAT Upholds CCI’S Order Imposing Penalties on Cement Companies and Trade Associations for Cartelization

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  • Background

    In its very first final judgment issued on July 25, 2018, the National Company Law Appellate Tribunal (NCLAT) upheld the Competition Commission of India’s (CCI) order imposing penalties on 11 cement companies and trade associations i.e. Cement Manufacturers Association (CMA) for cartelization in the cement industry.

    After a chequered history of being remanded by the erstwhile Competition Appellate Tribunal (COMPAT) on procedural grounds, the 11 cement companies and CMA, found a significant penalty being re-imposed on them by the CCI vide its order dated August 31, 2016 (Order). The CCI found the cement companies and the CMA to be in contravention of the provisions of Section 3(3) of the Act, which inter alia prohibits cartels. The CCI held that the cement companies used the platform provided by CMA and shared details relating to prices, capacity utilisation, production and dispatch, thereby restricting production and supply of cement in the market in contravention of Section 3(3)(a) and Section 3(3)(b) of the Act.

    The CCI accordingly re-imposed a cumulative penalty of over INR 6700 crores on 11 cement companies and CMA.

    The NCLAT decided to not interfere with the “mere minimum” quantum of penalty imposed by the CCI.

  • Key Takeaways from NCLAT’s Judgment
    • Definition of ‘Concerted Practice’ – The NCLAT defined ‘concerted practice’ as a ‘form of coordination’ which may be short of a concluded agreement but amounts to coordination which is knowingly substituted for the risks of competition.
    • Exchange of Information amounting to Concerted Practice – The NCLAT held that information exchange can constitute a concerted practice if it reduces strategic uncertainty in the market thereby facilitating collusion. According to the NCLAT, information exchange can amount to a concerted practice, where it reduces the otherwise present strategic uncertainties in the market, thereby facilitating collusion. The NCLAT condemned the “strategy” of cement companies of openly circulating the sale price of cement despite being competitors. The NCLAT acknowledged that while the Government of India had called for the pricing information from companies, the cement companies could have sent their respective pricing information to the Government directly in a sealed cover, rather than using the CMA as a platform to share the information amongst themselves.

    Moreover, like the CCI, the NCLAT also condemned the CMA for purposefully acting as a conduit for the cement companies to cartelize. The NCLAT noted that the information relating to production, capacity utilization, prices etc. which CMA was authorized to collect was never meant to be shared with the individual cement companies. Therefore, the NCLAT categorized the information exchanged between CMA and the cement companies as amounting to a meeting of minds (or a concerted practice) for fixation of sale price of cement and for regulation of supply and production of cement in the market.

    • Price Parallelism and Limited Supply – To arrive at a finding of price parallelism, the NCLAT identified price increases which were inconsistent with normal price increase trends over the previous years. The NCLAT, therefore, concurred with the CCI’s finding of price fixing in contravention of Section 3(3)(a) of the Act. The NCLAT also noted that the cement companies had decreased their supply in November 2010 followed by a price increase by some companies in January 2011. This shortage of supply of cement by the cement companies was classified as a limitation on the production and supply of cement in the market, in contravention of Section 3(3)(b) of the Act.
    • Balance of probabilities – The NCLAT observed that the test to determine a cartel under competition law in India and globally, is one of ‘balance of probabilities’. This test was distinguished from the test of ‘beyond reasonable doubt’. However, the NCLAT held that even if the strictest standards were applied in the present case, the CMA and the cement companies would still be found to be in violation of Section 3(3)(a) and 3(3)(b) of the Act.
    • Relevant Market – Echoing the views of the Apex Court in Competition Commission of India v. Coordination Committee of Artists and Technicians of West Bengal Filmsthe NCLAT also held that it is necessary to delineate a relevant market even in cases of contravention of Section 3(3) of the Act.

    The order of the NCLAT may be accessed here.

  • Some illustrative Dos and Don’ts to be kept in mind while dealing with competitors/trade associations are listed below.
    Dos Don’ts
    – Companies must formulate a robust competition compliance programme to educate their employees on how to conduct themselves in trade association meetings and with competitors. – Companies must NOT use trade association meetings as a platform to share pricing or other business sensitive information.
    – Trade associations must always record and maintain detailed minutes of their meetings and proactively inform members (companies) to not use the trade association as platform to discuss information relating to price and other business sensitive details. Trade association and those attending meetings of trade associations on behalf of its members must always stick to the issues identified for such meetings in a pre-circulated agenda and also take notes during meetings. – Employees must NOT engage in informal communication or discussions with employees of competing companies regarding strategic information such as price, supply and production quantities..
    – If pricing or other business sensitive information has to be shared with the government or government and/or statutory agencies, such information must always be shared in sealed envelopes by the companies. If the platform of an association is used, it must be ensured that the information is not exchanged amongst the member companies. – Employees must NOT share future plans concerning production or sales of competing products.
    – Companies must document reasons for increase and decrease in price, change in supply or decrease in installed capacity or capacity utilisation. – Employees must NOT exchange information with employees of competitors which would lead to control of production or supply in the market or result in imposition of any other restrictions on customers.
    – In case of any doubts whether a particular course of action would amount to anti-competitive conduct, a company/enterprise must consult legal counsel for advice. – Employees must NOT indulge in any activities which would result in market or customer allocation or division.