Friday, June 29, 2012

Analyzing the Impact of CCI’s Order Against Cement Companies

[In the following post, our guest contributor Rahul Singh analyzes the impact of CCI’s order in Builders Association of India v. Cement Manufacturers Association, Case No. 29/2010.
Rahul is Assistant Professor of Law, National Law School, Bangalore (on leave) & Counsel, Trilegal
A summary of CCI’s order is available here]
In a landmark decision, the Competition Commission of India (CCI) has imposed an unprecedented penalty of approximately Rs. 6300 Crores (USD 1.1 Billion) against 10 cement companies for cartelization.
This post analyzes certain common questions being asked by the stakeholders.
1. Will the CCI order determine future pricing ability of the cement companies and their decision related to utilization of production capacity?
The CCI does not have the legislative mandate to dictate future pricing abilities of the cement companies if such decisions are taken in accordance with independent economic analysis, leading to independent business justification.
The CCI’s order merely finds that there was a tacit understanding amongst the 10 cement companies to fix prices and to fix output. The trade association body - the Cement Manufacturers Association - was found to have acted as a platform for such price fixing and output fixing. Therefore, the CCI has passed a ‘cease-and-desist’ order against such collusive conduct.
However, the cement companies retain their ability to determine prices or determine their level of production, based upon their independent economic analysis and business justifications.    
2. How will the CCI enforce the penalty of Rs 6300 Crores? 
Para 8 of the CCI order states that “[t]he amount of penalty determined in case of different entities deposited within a period of 90 days from the date of receipt of this order”. The CCI typically sends a copy of the order to the parties through speed post. The parties will have 90 days to pay the penalty. If the parties fail to pay the penalty within 90 days of the receipt of the order, the CCI will issue a demand notice against the parties. The demand notice issued by the CCI usually gives 30 days to the parties to pay the penalty. Therefore, assuming the speed post will take at least a couple of days to deliver a copy of the order to the parties, the parties will effectively have a little over 120 days to pay the penalty.
In any event, §53B(2) of the Competition Act, 2002 states that “[e]very appeal...shall be filed within a period of sixty days from the date on a copy of the direction or decision or order made by the Commission is received...”. Since parties have 60 days to file the appeal and 120 days to pay the penalty, parties will have ample opportunity to argue their case before the appellate tribunal for a stay on the penalty.      
3. Is it true that until now, even though the CCI has imposed penalty, none of the contravening parties have actually paid the penalty?
No. In each case of contravention, parties have conducted their own cost-benefit analysis. Where the penalty imposed by the CCI was relatively small (e.g. Rs 1 lakh i.e. approximately, USD 2000), on balance parties found it worthwhile to pay the penalty to the CCI instead of fighting costly litigation.
However, where the penalty imposed have been relatively high (e.g. the cases of National Stock Exchange and DLF), parties have vigorously contested the CCI’s claim and sought a stay on the penalty from the appellate tribunal. For instance, in the case of National Stock Exchange, the CCI had imposed a penalty of Rs. 55.5 Crores (USD 9.8 million). Further, in the case of DLF, a penalty of Rs. 630 Crores (USD 111 million) was imposed. In both cases, a stay on the penalty was sought for and granted by the appellate tribunal.    
4. What are the chances of the appeal? What could be possible grounds for appeal?
Given the high stakes involved in the case, it is safe to assume that parties will appeal. Some cement companies have confirmed their decision to appeal. Others are expected to follow suit. Indeed, since the stakes are very high, irrespective of the decision of the appellate tribunal, the case is likely to reach the apex court - the Supreme Court of India.
Each of the cement companies made their own arguments before the CCI. The arguments at the appellate tribunal are likely to be both procedural and substantive in nature. If they stick with similar arguments that have already been made at the CCI, the appellate tribunal is unlikely to be impressed much. Parties ought to reassess the arguments that were made at the CCI, take a fresh look at their case and then approach the appellate tribunal.  
5. What is the appellate tribunal likely to do? Will the appellate tribunal at least grant a stay on the imposition of penalty?
This is extremely difficult to predict. Notwithstanding the precedents of National Stock Exchange and DLF, the appellate tribunal is all set to undergo a massive transformation with Justice VS Sirpurkar, former Judge of the Supreme Court of India, at the helm of affairs.
Justice Arijit Pasayat, the former Chairperson of the appellate tribunal was reluctant to decide cases after the Steel Authority of India Limited episode where a three-judge bench of the Supreme Court (which included Chief Justice Kapadia) had overturned his order. Indeed, the grant of stay on the imposition of penalty in National Stock Exchange and DLF under Justice Pasayat’s leadership was a bundle of contradictions. While the stay was granted in National Stock Exchange on the ground of the CCI’s lack of unanimous order (as two CCI members had dissented), stay was granted in DLF even though there was a unanimous order of the CCI (with a CCI member writing a supplementary order augmenting the majority decision).
To be sure, the settled jurisprudence on the grant of stay states that the three ingredients to be analyzed for the purpose of interim stay are: (a) the existence of a prima facie case; (b) balance of convenience; and (c) likelihood of irreparable injury. Interestingly, the appellate tribunal orders in both National Stock Exchange and DLF took note of these ingredients but also looked at other factors as mentioned above.        
6. Is the CCI order discriminatory? Have smaller cement companies been unfairly let off?
No. The CCI is dealing with two distinct cases against cement companies. While Case No. 29/2010 against the 10 large cement companies have been disposed off, another case RTPE No. 52 of 2006 involving several small cement companies is still pending. Indeed, para 6.14 of the CCI’s order clarifies the following:
         “The Commission, however, observes that decision as regards the involvement of the parties in anti-competitive agreement and the period of contravention in the instant case is limited to this case only and is independent of any other information which may be filed subsequently and also independent of decision in case no. 52 of 2006 pending before the Commission.” 
7. Though the media was rife with speculation about the penalty on Tuesday (June 19), and the order is incidentally dated June 20, why was the order posted online only on late Thursday evening (June 21)?
§57 of the Competition Act, 2002 states that, “No information relating to any enterprise, being an information which has been obtained by or on behalf of the Commission or the Appellate Tribunal for the purposes of the Act, shall, without the previous permission in writing of the enterprise, be disclosed otherwise than in compliance with or for the purposes of this Act or any other law for the time being in force”.
It is evident that the media had a whiff about the imposition of the penalty. While it is unclear whether this was due to any leak from the CCI’s office, the entire episode is likely to have a bearing upon the CCI’s reputation and its ability to handle confidential information.
8. Has the CCI been too harsh on the cement companies?
To be sure, the cumulative quantum of the penalty is unprecedented. However, the Competition Act considers cartelization to be egregious violation of competition law and mandates a deterrent penalty. Proviso to §27(b) of the Competition Act states:
         “Provided that in case any agreement referred to in §3 has been entered into by a cartel, the Commission may impose upon each producer, seller, distributor, trader or service provider included in that cartel, a penalty of up to three times of its profit for each year of the continuance of such agreement or ten per cent of its turnover for each year of the continuance of such agreement, whichever is higher
Clearly, the benchmark of the 3 times of profit under the legislative mandate indicates that the ceiling of the penalty on the basis of profits is 300%. The CCI has imposed 0.5 times or 50% of the profit as penalty, which is way below the ceiling. Curiously, however, for the benchmark of penalty related to turnover, the CCI has mistakenly interpreted the absence of discretion and computed the imposition of penalty on the basis of turnover to be at the rate of 10% and not lesser.
This means that the CCI reads the qualifier ‘up to’ in the proviso to be related to profit but not related to turnover. This is interesting as this proviso was amended in 2007 to make it discretionary. Prior to the amendment, the imposition of penalty was mandatory in nature and it read as: “Provided that in case any agreement referred to in §3 has been entered into by any cartel, the Commission shall impose upon each producer, seller, distributor, trader or service provider included in that cartel a penalty equivalent to three times of the amount of profits made out of such agreement by the cartel or ten per cent of the average of the turnover of the cartel for the last preceding three financial years, whichever is higher”.
The CCI’s interpretation of the proviso is peculiar. It seems to suggest that while the 2007 amendment made the application of penalty under the proviso to be optional, once the CCI has decided to exercise its discretion under the proviso (though it retains the option to impose a penalty lesser than 300% on the basis of profit) and if it chooses to impose the penalty on the basis of turnover it has no discretion but to compute the penalty at the rate of 10% of the turnover.
As a corollary, this also means that if the CCI decides to impose a penalty on the basis of turnover (and not profit) but if it wants to impose a penalty lesser than 10% of turnover it must seek the benefit of the main provision of §27(b) of the Competition Act and not the proviso. The main provision of §27(b), in relevant parts, states: “Where after inquiry the Commission finds that any agreement referred to in §3 or action of an enterprise in dominant position, is in contravention of §3 or §4 as the case may be, it may pass all or any of the following orders, namely… impose such penalty, as it may deem fit which shall be not more than ten percent of the average of the turnover for the last three preceding financial years, upon each of such person or enterprises which are parties to such agreements or abuse”.
There are several cases until now where the CCI has imposed penalty. It is high time that the CCI formulates guidelines for the computation/imposition of such penalty.           
9. What is the likely impact of this order? In addition to the penalty, can the cement companies be held liable to pay compensation?     
It is interesting to note that after DLF – a case against a builder; it is the builders’ association that has been successful against cement companies, manufacturers of their raw material. DLF case had qualitatively altered the landscape of Indian competition law with at least 200 cases being filed against real estate companies due to the DLF-effect. The case against cement companies is expected to have a similar, if not greater, impact on the emerging jurisprudence of Indian competition law.
Incidentally, under the Competition Act, besides the payment of penalty, the cement companies also run the risk of payment of compensation.
§53N(1) of the Competition Act states:
“Without prejudice to any other provisions contained in this Act, the Central Government or a State Government or a local authority or any enterprise or any person may make an application to the Appellate Tribunal to adjudicate on claim for compensation that may arise from the findings of the Commission or the orders of the Appellate Tribunal in an appeal against any findings of the Commission or under §42A or under sub-section (2) of §53Q of the Act, and to pass an order for the recovery of compensation from any enterprise for any loss or damage shown to have been suffered, by the Central Government or a State Government or a local authority or any enterprise or any person as a result of any contravention of the provisions of Chapter II, having been committed by enterprise”.   
10. What is the CCI’s incentive in imposing such a heavy penalty?
§47 of the Competition Act states that “all sums realized by way of penalties under this Act shall be credited to the Consolidated Fund of India”. Therefore, the penalty is paid to the Government of India ensuring that the CCI does not harbour any perverse incentive to impose heavy penalty.   
- Rahul Singh 

1 comment:

loveoflaw said...


In Question 4, you state that unless arguments are reassessed, the appellate tribunal would be unimpressed.

would it be proper to interpret that the order of CCI is logical and will be difficult to overrule ?

given the fact that fresh arguments not made before the CCI and made for the first time at appellate level would not be acceptable.

In question 5, you have cited precedent wherein the stay was granted on the penalties imposed.

keeping in mind the points raised by you in question 4 and 5, would it be proper to interpret that while there might be a interim stay on the penalties imposed, it would be very difficult for the appellate court to overrule the logic of CCI ?