It was a rather busy week for the Competition Commission of India (CCI) which handed down two back-to-back cease and desist orders to cartelising Micro, Small & Medium Enterprises (MSMEs). The first instance concerned bid-rigging during the public procurement of axle bearings by the Eastern Railways. The second instance concerned cartelisation by four kraft paper trade associations and their respective members. Notably, the CCI did not levy any penalty in either of the two cases. In this newsflash, we break down the CCI's orders and analyse its approach towards imposing penalties against MSMEs.
Axle Bearings Cartel
On 11 October 2022, the CCI held that eight vendors of axle bearings (OPs) had rigged an Eastern Railway's tender for the procurement of axle bearings.1 In yet another case demonstrating the CCI's light touch approach towards MSMEs, the OPs were let off with a cease and desist order.
Factual background
The Eastern Railways (through the Chief Materials Manager) (Informant) filed a complaint with the CCI. It was alleged that six vendors of axle bearings rigged a tender floated by the Informant in 2019 for the procurement of "plain sleeve bearing" axle bearings (Impugned Tender).
The CCI noted that the OPs had, inter alia, quoted identical prices pursuant to negotiations, despite being located in different geographical regions. Based on this, the CCI formed a prima facie opinion of bid-rigging by the vendors and directed the Office of the Director General (DG) to conduct a detailed investigation in the matter (Prima Facie Order).
Investigative findings of the DG
The tender committee (Committee) constituted for the Impugned Tender had recorded that six out of seven eligible bidders quoted the exact same price. The Committee also observed that the vendors had exhibited collusive behaviour while quoting for previous tenders. For instance, certain bidders had reduced their prices in a coordinated manner during negotiations for an earlier tender.
Taking cue from the Committee's observations, the DG highlighted that the vendors had already been found liable for bid rigging in Reference Case No. 02 of 20182 for the period between 2012 and 2014. The DG then compared the pricing trends in the earlier tenders and the Impugned Tender, revealing a pattern of identical / similar bids over a period lasting eight years. This was despite the fact that the OPs had manufacturing units spread across the country (which presumably incurred varying costs).
The DG corroborated the price quote trend by examining evidence such as call detail records, records of bid allocations, and excel records. The examination unearthed that the OPs were, inter alia, maintaining and sharing records of tender allocations, and compensating each other in case of any shortfalls through cover bids.
Lastly, the DG relied on statements of admission given under oath by officials of the OPs. In particular, the employees of M/s Janardan Engineering Industries (OP-6) and M/s Sriguru Melters and Engineers (OP-4) admitted to rigging tenders floated by the Eastern Railway since 2012. In fact, the partner of OP-6 and OP-4 even filed leniency applications with the CCI during pendency of the investigation.
The DG concluded that the six vendors identified in the Prima Facie Order and two additional vendors (Jai Bharat Industries (OP-7) and V. K. Engineering (OP-8)) colluded to rig bids for the period between 2015 – 2019.
CCI's analysis and findings
The CCI's analyses affirmed the DG's finding of contravention against the OPs. The CCI observed that the bids placed by the OPs for the period 2012 – 2019 were identical or extremely close to each other. Further, a comparative analysis of the OP's breakup costs confirmed differences in production costs making it unlikely that they independently quoted identical prices.
The CCI also found that OP-7 and OP-8 provided cover bids by quoting a slightly higher price from that of the other OPs, in return for a share of tender quantity.
In view of the evidence on record, the CCI found the OPs liable for price-fixation and bid-rigging.
On penalty, the CCI noted that all the OPs were MSMEs and acknowledged the adverse impact of the COVID-19 pandemic on the economic viability of MSMEs in India. It further appreciated the fact that certain OPs had embraced a non – adversarial approach by admitting their involvement through the leniency programme. For these reasons, the CCI found it appropriate to only pass a cease and desist order and did not impose any penalty on the OPs.
Cartelisation in the kraft paper industry
Continuing with its light touch approach, on 12 October 2022, the CCI passed another cease and desist order against four trade associations of kraft paper manufacturers (including their 115 members) for colluding to increase the price of kraft paper and control its supply through mill shut downs.3
Factual background
The investigation was prompted by an information filed by three associations of corrugated box manufacturers, namely the Federation of Corrugated Box Manufacturers of India, Andhra Pradesh Corrugated Box Manufacturers Association and Uttar Pradesh Corrugated Box Manufacturers Association (collectively, Informants) against the Gujarat Paper Mills Association, Northern India Paper Mills Association, Hyderabad Kraft Paper Mills Association, South Indian Kraft Paper Mills Association, the Indian Argo and Recycled Paper Mills Association, and the associations' members (collectively, OPs).
It was alleged that during the course of 2009 – 2017, the OPs had time and again collectively increased the price of kraft paper which is used as the primary raw material for producing corrugated boxes. It was further alleged that the OPs had created an artificial shortfall of kraft paper by shutting down the operations of kraft paper mills collectively.
Based on the material placed on record, the CCI formed a prima facie opinion that the conduct of the OPs and their members was in contravention with the provisions of the Act. Consequently, the DG was directed to initiate an investigation into the conduct of the OPs.
Investigative findings of the DG
The DG undertook a thorough analysis of various evidence such as circulars / minutes of meetings issued by the trade associations, statements of certain individuals of the OPs, and communication records. Based on the confessional statements of certain individuals and upon the inspection of their phones, the DG found the existence of three region-wise WhatsApp groups of paper mills associations which were used to fix the prices of kraft paper. These WhatsApp groups were also used to discuss the input costs and to take decisions in relation to collective closure of the paper mills. It is pertinent to note that 31 OPs also filed leniency applications with the CCI.
CCI's analysis and findings
The CCI, in its analysis, agreed with the findings of the DG.
The CCI observed that during its meetings, the trade associations took decisions pertaining to (i) imposition of penalty on paper mills for not abiding by the calls for mill closures, (ii) increase in the prices of kraft paper, and (iii) discussions in relation to the credit period for the supply of kraft paper. The CCI also examined the various circulars and emails issued by the trade associations which directed its members to increase the price of kraft paper from time to time.
The OPs had argued that (i) the cartel was motivated by the prevailing conditions of the paper industry, which was suffering from losses and / or meagre profit margins, (ii) the directions to increase prices were not always abided by, and (iii) mills were shut down due to the excess unsold inventory. The CCI noted that the OPs had failed to evidence that prices were increased to ensure survival. Further, the shut downs evidently appeared to have been undertaken to increase the demand for kraft paper and consequently, prices.
Therefore, the CCI found the OPs to be contravening the provisions of the Act.
While dealing with the issue of imposition of penalty, the CCI placed weightage on the fact that the OPs were MSMEs, first time offenders and had adopted a non – adversarial approach by cooperating during the course of investigation. It also acknowledged the fact that the COVID-19 pandemic has adversely affected the economic viability of these paper mills. Due to these reasons, the CCI did not levy any penalty on the OPs and passed a cease and desist order.
Comment
Ever since the COVID-19 lockdowns, the CCI has demonstrated restraint while imposing monetary penalty for contraventions involving MSMEs. The CCI's restraint has been driven by the adverse impact of the lockdowns and risk of market-exit faced by the contravening parties. Notably, even contraventions which were committed well before the pandemic benefitted from the CCI's exercise of restraint. Some instances exhibiting the CCI's lenient treatment include, domestic automotive and industrial bearings market4; brake block manufacturers supplying to Indian Railways5; axle bearings manufacturers supplying to Indian Railways6; manufacturers of low density poly-ethylene covers7 andmanufacturers of carbon brushes supplying to Indian Railways8.
Today, even two years after the last nation-wide lockdown, the CCI continues to remain mindful during penalty imposition in cases involving MSMEs. The CCI's appreciation for the long-term impact of the pandemic is welcomed and suggests that its earlier orders were not mere lip-service to MSMEs.
The CCI's present approach also raises interesting questions for future cases. With MSMEs on a recovery path, will the CCI offer heightened weightage to factors such as the timing of contravention (whether pre or post pandemic)? Stakeholders will also recall that prior to 2020, orders of the CCI viewed bid-rigging in public procurement with stringency - often emphasising the importance of public procurement in achieving socio-economic objectives and the involvement of taxpayer money. Going forward, will the CCI increase the weightage afforded to the nature of procurement? While future penalty trends are difficult to predict, stakeholders must remain careful of the tenor of the CCI's orders.
Footnotes
1.In Re: Mr. Rakesh Khare Chief Materials Manager (Stores), Eastern Railway (Reference Case No. 02 of 2020) accessible here: https://www.cci.gov.in/antitrust/orders/details/1061/0
2.In Re: Eastern Railway, Kolkata (Reference Case No. 02 of 2018).
3. Federation of Corrugated Box Manufacturers of India v Gujarat Paper Mills Association and Others (Case No. 24 of 2017) accessible here: Competition Commission of India, Government of India (cci.gov.in)
4. In Re: Cartelisation in Industrial and Automotive Bearings (Suo Motu Case No. 05 of 2017)
5. Chief Materials Manager, South Eastern Railway v. Hindustan Composites Ltd. and Others (Reference Case No. 03 of 2016)
6. In Re: Eastern Railway, Kolkata v. M/s Chandra Brothers and Others (Reference Case No. 02 of 2018)
7. In Re: Food Corporation of India v. Shivalik Agro Poly Products Ltd. and Others (Reference Case No. 07 of 2018)
8. In Re Mr. Rizwanul Haq Khan, Dy. Chief Material Manager, Office of the Controller of Stores, Southern Railway Vs. Mersen (India) Pvt. Ltd. and Another (Reference Case No. 02 of 2016)
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