The recent order by the Competition Commission of India against 11 cement companies is undoubtedly a landmark, because it is a sign that the competition regulator is ready to take on powerful corporate interests to protect consumers. Users of cement have been complaining for several years about having to deal with a cartel that fixes prices.
However, the quality of evidence that CCI has offered in its order leaves much to be desired. The regulator offers circumstantial evidence. Here is what the order says: “In order to find out whether there is an agreement and concerted action among the cement manufacturers to raise prices in a consistent manner, in absence of no direct evidence circumstantial evidences, including behavioural indicators, were analyzed by the DG (director general)”.
For instance, the competition regulator alleges, without much documentary evidence, that big cement manufacturers sent signals to others to increase prices by making announcements in the press or on TV channels about forthcoming price hikes.
The order also mentions that prices of cement manufactured by all the top companies who were present in meetings of the high-powered committee of the Cement Management Association (CMA), the industry lobby, held on 3 January 2011, 24 February 2011 and 4 March 2011 increased prices soon after. There is no evidence to prove that prices were discussed at these meetings. Moreover, prices of cement change almost every week and sometimes many times in same week, it could be an error of judgment to attribute the same to these meetings.
Also cement companies can easily argue in their appeal that it is wrong to conclude that there exists a price parallelism because of cartelization as such parallelism is bound in occur in cases where similar product is sold in same market.
CMA has argued that for a cartel to exist there should be a mechanism in place for
1) Coordinating the cartel agreement and to ensure its functioning.
2) Monitoring the behavior and conduct of the members of the cartel
3) Punishing the members of the cartel who do not fall in line with decision of cartel.
While it is necessary to check the anti-competitive practices of cement firms, CCI should stop relying on ambiguous behavioural indicators alone. It should also provide documentary evidence, such as wire taps, emails and correspondence.
Take a look at the Rajat Gupta case, though it dealt with allegations of insider trading rather than cartelization. The evidence against Gupta was also circumstantial, for example the fact that Raj Rajaratnam bought Goldman Sachs shares following a phone call from Gupta after a board meeting of the investment bank. No proof was offered that Gupta actually discussed the board decisions during that call. Yet, the circumstantial evidence was strong, and not just backed by behavioural patterns as CCI has done.
Yet, the action against the cement companies is good news for the Indian economy because a powerful competition regulator will act as a useful antidote for crony capitalism.