Updated: Feb 25, 2022
[Dipak Kumar Varma is a 4th-year student at West Bengal National University of Juridical Sciences, Kolkata]
The Competition Commission of India (CCI) issued a cease-and-desist order against eight firms in Re: Eastern Railway, Kolkata and M/s Chandra Brothers & Others on October 12, 2021, despite establishing that the parties were participating in a bid-rigging cartel. The CCI did not impose any penalty citing the cooperation from offenders during the investigation and the economic impact of the pandemic. Incidentally, this is not the first time the CCI has declined to impose penalties on Micro, Small & Medium Enterprises (MSMEs) during the pandemic. The current approach of the CCI appears to be at odds with its previous measures, which included harsh penalties against cartelization. Therefore, these cases have reopened Pandora's box regarding the severity of current cartel punishments in the wake of COVID-19. Against this background, the paper will emphasise the need for strict punishment against cartelisation, and provide an analysis of the the CCI’s decision while focussing on the need for necessary guidelines that aid in calculating penalties.
II. The need for strict punishment
The Cartels have often been termed as “theft by well-dressed thieves” and “cancer in an open, modern market economy.” They are a boon in the functional free-market economy that encapsulates the idea of consumer welfare, innovation, and growth. In a cartel, most of the actions are carried out covertly, and individuals/entities frequently engage in affirmative acts of concealment. Therefore, problems lie in the identification of such cartels.As a result, sanctions imposed on such cartelisation must be adequately sufficient to outweigh the estimated gains from such action to deter such activity. In India, the same is provided under Section 27 of the Competition Act(The Act) in terms of a civil penalty by fines that may not exceed ten per cent of the average turnover for the last three preceding financial years. However, considering the gravity of the matter, countries like the USA, Canada, UK treat cartels as criminal punishment, and the offender may be punished with fines or imprisonment, or both. Further, countries like Germany, Austria, Poland even have criminal sanctions to deter bid-rigging.
III. The Present Case: The reasons for not imposing any penalty
In the present case, the Indian Railways are the only buyers of the axle bearings in India and with limited sellers in the market, the same is a monopsony market. The providers are the Research Designs and Standards Organization(RSDO) approved vendors(OP). In the loop of investigation by the informants, the OPs were found to have quoted similar prices in the earlier three tenders floated by the Eastern Railways. Further, being operational from 2011-2017, the OPs in coordination used to directly or indirectly determine prices, allocate the tender and manipulate the entire bidding process.
Based on the investigation, the Director General proved the cartel's existence with the help of CDRs, emails exchanged amongst the cartelists, and the statement of the representatives of the respected firms. Therefore, the CCI held the OPs to be in contravention of Section 3(3)(d) read with Section 3(1) of the Act.However, , the antitrust watchdog did not impose any penalty considering factors such as market structure, the role of Indian Railways as a monopsony buyer, nature of the firm, the number of staff employed, and the quantum of their turnover. It also considered the ‘stress’ of the MSMEs who had to bear the impact of the economic situation due to novel Coronavirus. Thus, the CCI believed that if any penalties were to be imposed on such firms, it would turn them economically unviable, further reducing the competition in the market of limited RSDO-approved vendors.
IV. Need for Guidelines: International Perspective
Section 27 of the Act provides the Commission with the power to “impose such penalty, as it may deem fit.” Therefore, even if there exist a pattern of situations in which the CCI has been assessing penalties on a relative basis, without established criteria, the argument is often labelled as subjective keeping in mind the change in membership and hence, the regime of CCI. The CCI has been criticised for having no consistent approach with such discretion and the same not being adequately exercised. The Raghavan Committee’s Report released in the year 2000 highlighted the need for guidelines so that the companies could comply and plan their activities accordingly. Further, the 2019’s Report of Competition Law Review Committee mandated the CCI to develop guidance for imposing penalties.
On the other hand, the European Commission(EC) adopted a detailed Penalty Guideline in 1998 which was further replaced with a new set in 2006. These guidelines consider fines as both punitive and preventive, and the same may be adjusted to create sufficient deterrence. It highlights the aggravating and mitigating factors that aid in imposing fines. Therefore, these guidelines act as a rule of practice and provide the Commission with adequate discretion while being transparent and predictable. Such factors factors include effective cooperation in investigation with the Commission’, and ‘termination of such activity as soon as the Commission intervened’ etc,.
Further, in exceptional circumstances, the Commission, based on the request, may consider the party’s inability to pay with regards to the surrounding social and economic context. Therefore, a reduction is granted based on objective evidence that such fines would “irretrievably jeopardise the economic viability of the undertaking.” Similar guiding principles exists in other states' guidelines such as the USA, Mexico, and Costa Rica. Further, the Competition Law Authorities in order to continue the deterrence effect without jeopardising the economic viability, provide the infringed party with deferred payment options, prolonged payment timeline or instalments.
V. The Effectivity of the Present Measure
A fine should be considered acceptable if it is not arbitrary and is based on sound economic principles. Further, the imposition of a fine is as necessary as the identification of the party in contravention. The CCI declined to impose a penalty on such MSME because it would render them “economically unviable” and that they would have to exit the market.This presumption could have been misplaced if adequate guidelines were provided in advance. It must be understood that the levying of penalty is not just discretionary, but the authorities must exercise such discretion based on relevant factors. The EC guidelines balances this uncertainty and provides enough room for the EC to decide matters based on discretion.
Interestingly, the Dutch Trade and Industry Appels Tribunals reduced the fine imposed on an undertaking by 99%, from €1 million to only €10,000 in the wake of COVID-19 and the undertaking ability to pay. The author believes that the CCI could justify the mitigating factors in the present case to support a lesser penalty decision or asked the OPs to pay the fine in instalments or deferred their payment.
Businesses across the world have been facing losses and hardships because of the current pandemic. While the present scenario is unprecedented, the CCI had earlier considered the incurring losses and substantial debts to decide the quantum of penalty in cartel cases. While it may appear that Indian forums are increasingly adopting an inclusive slant, taking into account both the party's conduct and extenuating circumstances while awarding fines, this is not the case. This is another example of common cartels revealing how firms providing goods for government procurement are often unaware of competition legislation. The Commission had adopted a similar approach in the previous case and even after concluding the existence of cartel, the MSME’s were only provided with a cease-and-desist order citing “peculiar circumstances” of the case. Therefore, the CCI’s gentle approach might have huge ramifications on cases that are due to be decided.
It is confounding to understand why such cartels which operated before the hardships of the current pandemic should be provided with complete exemptions from a monetary penalty. The Apex Court has emphasized how effective enforcement is important to sanction anti-competitive practices and deter future practices. A token penalty would have ensured the strictness of the CCI with respect to the cartels in India and show how holistic the antitrust watchdog was when it came to MSMEs and the plight of the Indian economy in unprecedented situations such as the current pandemic. However, a no-penalty position does not help the case because it sets a wrong precedent in India, where it may allow naive cartels to prosper.
There is no doubt that the CCI enjoys flexible power to impose penalty against those market participants who act in contravention of the Act. However, the same must be done in a transparent and informed way. The Competition regime in India is still considered to be in its nascent stage and it is only when adequate guidelines are provided that the perception of the law would change for the industry and stakeholders. While the need for independent factors relating to penalty calculation has been stressed enough in the Excel Corp case, the CCI must develop penalty guidelines to objectively determine the penalty in the future and cut any uncertainty. The matter is of utmost significance because, in the absence of clear guidelines, India's competition regime development may be restricted.