15 October, 2018
Can enterprises be in violation of the Competition Act, 2002 (Competition Act) when prevailing market conditions are themselves not conducive to a competitive market?
This is an interesting question relating to enforcement of the Competition Act, which was dealt with by the Hon’ble Supreme Court of India (Supreme Court) in the case of Rajasthan Cylinders and Containers Ltd v Union of India & Anr[1].
The case arose from a tender floated by Indian Oil Corporation Ltd (IOCL) for the purchase of LPG cylinders. Curiously, it was not IOCL (the buyer) that had approached the Competition Commission of India (CCI) alleging contravention of the Competition Act. In fact, it was an LPG cylinder manufacturer that approached the CCI challenging the tender conditions imposed by IOCL. However, while the case against IOCL was closed, during the investigation of the aforesaid tender, the Director General (DG) noticed a similar pattern in a bid submission by LPG cylinder manufacturers. This chain of events led the CCI to initiate an inquiry, on its own motion, into the alleged cartelisation and bid-rigging by LPG cylinder manufacturers.
Subsequent to the DG’s investigation and recommendations in its investigation report, the CCI came to the conclusion that 45 LPG cylinder manufacturers, out of the 47 which were inquired into, had entered into an anti-competitive agreement in violation of the Competition Act by rigging bids in the IOCL tender. This led to the CCI imposing penalties on those LPG cylinder manufacturers found in contravention. Except for one party, 44 parties filed an appeal before the Competition Appellate Tribunal[2] (COMPAT) challenging the CCI order. While the COMPAT upheld the CCI decision as to the existence of the contravention, it ordered reduction of the penalties on the basis of the principle of “relevant turnover”[3].
While the LPG cylinder manufacturers approached the Supreme Court aggrieved by the finding with respect to contravention of the Competition Act, the CCI filed a cross-appeal against the reduction of penalties.
All the parties relied extensively on the decision and findings of the Supreme Court in Excel Crop Care Ltd v Competition Commission of India & Ors (Excel) mentioned in our previous blog posts here and here.
The LPG cylinder manufacturers relied upon the decision in Excel to contend that the evidence in such cases needs to be considered “not in isolation, but as a whole, account being taken of the specific features of the product in question”. Building on market conditions (monopsony/ oligopsony – markets in which there is only one, or very few, buyers) as examined in Excel, the LPG cylinder manufacturers highlighted various peculiar features of the market for the “product in question” i.e. LPG cylinders. Some of the major features highlighted were:
- Extremely limited number of buyers. IOCL alone holds 48% market share.
- The product is standardised and special to the extent it is highly regulated by the Government and there are no other takers for it.
- There are entry barriers in the market as valid approval from the Chief Controller of Explosives and a Bureau of Indian Standards licence is necessary to submit bids.
- The effective price has no sanctity since in addition to the L1 (the lowest bidder), contracts are also awarded to L2 and L3.
On the basis of the above conditions, it was contended that given the nature of the vertical arrangement (i.e. between IOCL and the LPG cylinder manufacturers), there was no scope for competition between the horizontal players (i.e. between the LPG cylinder manufacturers).
Alternatively, it was contended that price parallelism is inevitable where the buyer has a high degree of control and determines price, quantities and even the identities of the awardees at its discretion. It was further contended that even if there was a collusive agreement, as alleged, it did not have an appreciable adverse effect on competition.
The CCI sought to rebut the above contention by relying on Excel where the Supreme Court had accepted the CCI’s contention that price parallelism is “not applicable in bid cases and it fits in the realm of market economy”. The CCI further sought to rely on the above-mentioned market conditions as strong economic evidence of collusion.
The Supreme Court highlighted the purpose of the Competition Act by relying upon Excel and SAIL[4] and reiterated that the purpose of the Competition Act is not merely to eliminate anti-competitive practices but also to promote and sustain competition. The Supreme Court also relied upon the decision in Excel to explain the connotation of collusive bidding or bid rigging.
The Supreme Court held that there need not be direct evidence of cartelisation since such agreements are entered into in secret and the standard or proof required is that of balance of probabilities. However, the Supreme Court held that the presumption of anti-competitiveness attached to horizontal agreements is rebuttable by parties through evidence.
While examining the market conditions prevailing in the LPG cylinders market, the Supreme Court held that “those very factors on the basis of which the CCI has come to the conclusion that there was cartelisation, in fact, become valid explanations to the indicators pointed out by the CCI”. The Supreme Court noted that the above mentioned market condition led to a “situation of oligopsony that prevailed because of limited buyers and influence of buyers in fixation of prices was all prevalent”.
On the basis of the above factors, the Supreme Court held that the LPG cylinder manufacturers had discharged their onus by showing that the parallel behaviour was not a result of concerted practice but of the market conditions where IOCL was calling the shots insofar as price control is concerned.
Thus, the Supreme Court held that at this stage it was up to the CCI to inquire further in the case, which it failed to do. The Supreme Court also took note of the fact that the CCI had failed to summon the IOCL before it, despite the IOCL having “full control over the tendering process”.
Accordingly, the Supreme Court held that there was not “sufficient evidence” to hold the LPG cylinder manufacturers in violation of the Competition Act and set aside the COMPAT orders upholding the LPG cylinder manufacturers in violation of the Competition Act.
The above decision by the Supreme Court may prove to be a significant milestone in competition law jurisprudence as it nuances the position of law laid down by the Supreme Court in Excel by emphasising the importance of market conditions. Further, given the judicial standard set by the Supreme Court in this case, the CCI will feel the importance of obtaining stronger economic evidence to support its findings of contravention.
For further information, please contact:
Rahul Goel, Partner, Cyril Amarchand Mangaldas
rahul.goel@cyrilshroff.com
[1] Civil Appeal 3546 of 2014, Order dated 1 October 2018.
[2] Now merged with the National Company Law Appellate Tribunal (NCLAT).
[3] As decided by the Hon’ble Supreme Court in Excel Crop Care Ltd v Competition Commission of India & Ors (2017) 8 SCC 47
[4] Competition Commission of India v Steel Authority of India Ltd & Anr, (2010) 10 SCC 744
