I can make more money for the Van Leer Co. by meeting one-on-one with my competitors than I can in 20 meetings with my customers,” confessed one of the defendants before the US district court of Chicago when charged with forming a price-fixing cartel in the steel drum (barrel) industry.
Collusion by businesses to the detriment of consumers, or “cartelization” as it is commonly known, is an accepted outcome of free market economies, noted by economist Adam Smith as far back as 1776, who thought that it would be near impossible to stop businesses from colluding. However, modern anti-trust legislations along with innovative techniques of investigating cartels, already in force in developed countries and being adopted by developing countries, have created a serious dent in the practice of cartelization.
The Indian experience in investigating and punishing cartels began under the Monopolies and Restrictive Trade Practices (MRTP) Act, 1969, which is believed to have been ineffective in dealing with cartels. While several reasons are put forth as to why the MRTP Act proved ineffective in this area, more accepted issues are the lack of a conclusive definition of a cartel and limited power of the regulator under the Act to deal with cartels. The MRTP Commission could only issue “cease and desist orders” or seek to modify the cartel arrangements. The Competition Act, 2002, is all set to change this.
Illustration: Jayachandran / Mint
Foremost, the Competition Act defines a cartel. According to the Act, a cartel is formed if an association of producers, sellers, distributors, traders or “service providers” agree among themselves to “limit”, “control” or attempt to control the production, distribution, sale or price of or trade in goods or “provision of services”.
The charging section under the Competition Act covering cartels is section 3, dealing with anti-competitive agreements. Made effective from 20 May, this section presumes that cartels cause appreciable harm to competition and cartel participants are liable for the prescribed penalty. This presumption can, however, be challenged by cartel members by proving that their actions did not have any significant adverse impact on competition.
The other critical issue in dealing with cartels is detecting or investigating them. Direct evidence in the form of written agreements is hard to come by, though unannounced visits to the offices of suspected cartels, or “dawn raids”, do yield results, and investigative authorities around the world tend to rely on circumstantial evidence to get at cartels.
While identical movement in the price of similar products belonging to competitors lends strong circumstantial evidence to cartelized price fixing, it cannot be treated as conclusive. A producer can argue that mirroring the price of a competitor was to meet the competition rather than cartelized price fixing or that the identical increase was due to the increase in price of raw materials. Nevertheless, parallel price behaviour can sometimes serve as a clue to collusion.
Statistically, the most effective method in detecting cartels is the whistle-blower protection or leniency programme, that is, an official system of offering immunity or lenient treatment to a cartel member who reports the cartel. However, experience has shown that the effectiveness of leniency provisions is dependent on proactive investigation of cartels by the regulator. In other words, there should be a genuine risk of detection which drives a cartel member to “spill the beans”.
The Competition Act also incorporates certain leniency provisions. The Competition Commission of India (CCI) has the power to impose lower penalties on a cartel participant who has made vital disclosure to bust the cartel. In addition, the disclosure should be made before CCI has commenced investigations into the cartel.
CCI also has the powers to make regulations “consistent with the Competition Act” in order to effectively apply the Competition Act, and pursuant to these powers has released a draft of Lesser Penalty Regulations. Though currently in draft form and not in force, the draft regulations seem much more evolved than the Competition Act, in that these regulations provide for full leniency or waiver of the entire penalty.
It is open to debate whether the provision providing for full leniency or, in other words, no penalty under the draft regulations is “consistent” with the Competition Act since the latter only permits “lesser penalty” and does not permit CCI to waive the penalty.
Another point that can be mooted is whether leniency should be offered if disclosure is made after the investigations have been initiated by CCI, of course with the qualification that the investigation did not provide evidence sufficient for conviction. This, in fact, is the norm for evolved leniency programmes in other jurisdictions.
With legislation now in place to counter cartels, it is up to CCI to successfully detect and investigate cartels. A first step for successful investigations is probably staffing the organization with experts and conducting extensive market research. Given CCI’s current inactivity, it is best assumed that this is what CCI is presently doing.
This column is contributed by Daksh Trivedi of AZB & Partners, Advocates & Solicitors.
Send your comments to email@example.com