Cartels Only Have Negative Impact Upon the Consumers Benefit

Introduction:

The object of the competition policy, which is adapted in India, is to create a business environment where the firm can compete with each other and there should be always enough opportunities for the new firm to join the competition with the existing firms. Such kind of policy always promotes efficiency, means it gives an opportunity to the firms to increase their efficiency to do better business and earn better profit and also maximize the welfare of the people of the society because in such type of market position the people have enough choice in their hand in buying goods or services.

The main problem of a competition friendly market is some activities of the existing firms of the market. Very often these firms started to collude to their competitor or forcing the competitors to go out of the market or buying out the competitors. We can find all these activities of the firms in our Competition Act 2002. Section 3, 4 and 5 of this Act says about the anti competitive agreement, abuse of dominance and combination and merger respectively.

I have divided project into six parts, like introduction with hypothesis and issue, historical background, what is cartel under Indian Law, examples of cartels in India, provisions in Indian Law to detect cartels and at last the suggestion and conclusion of my project.

Hypothesis:

Cartels only have negative impact upon the consumers’ benefit.

Issue:

How the cartels work in the Indian market?

Chapter 2

Historical background:

Before the present Competition Act 2002, The Monopolistic Trade Practice Act 1969 was there. The MRTP Act 1696 was enacted in pursuant of a report submitted by “Monopolies Inquiry Commission”, which was setup by the Govt. of India to review the economic condition of India with regard to the concentration of the economic power to some private entities and also to examine the affect of the monopolistic and restrictive trade practice in India. With the changing of time it is felt that some change should be to the MRTP Act, because many new concepts, like globalization, liberalization etc, are coming, for which India has to change its business policy within and also outside of its jurisdiction. So the Competition Act 2002 is come into force. This new law is mainly came into force by the recommendation of the Raghaban Committee report, a committee set up by the Govt. of India, headed by S.V.S Rghaban. [1]

A committee, called Competition Committee of India (CCI) is also constituted under the present Competition Act 2002. The main functions of this committee are as follows:

To eliminate practices having appreciable adverse effect on the competition.

To encourage and sustain competition.

Preserve consumer welfare.

Maintain freedom of trade carried on by the other traders in Indian market.

Chapter 3

What is cartel under Indian competition law?

I have restricted myself in section 3 of the Competition Act, because it deals with the anti competitive agreement and cartel is a special kind of the anti competitive agreement [2] The word “anti competitive agreement” means an agreement entered by two or more firms of the market to prevent either directly or indirectly other firms from entering into the market or even try to exclude them. The effect of such kind of agreement is always to curve out the competition from the market. There are two categories of the anti competitive agreement, horizontal and vertical.

Horizontal agreement: It is an agreement entered between competitors operating at the same level of the production process i.e, enterprises engaged broadly in the same type of activity, for example agreement between producers or sellers or retailers dealing with same kind of goods. In this kind of anti competition agreement, there shall be a presumption of Appreciable Adverse Effect on Competition (AAEC). Means it shall presume that whenever there is such type of agreement, there will always be an adverse effect on the competition. The burden of disproving is upon the defendant. These types of agreements include the followings:

Agreement regarding price fixation.

Agreement relating to market allocation.

Agreement relating to bid rigging.

Agreement relating to limiting or controlling the product and supply market, technical developments, investments etc. [3]

Vertical agreement: It is an agreement between non-competing undertakings operating at different level of manufacturing and distribution process, for example, agreement between producers and whole sellers or between producers, wholesalers and retailers. [4] Here the irrebuttable presumption of the AAEC cannot be taken to be account; the “rule of reason” comes into play for determining the nature of the agreement of this kind. Means you have to apply your reason to determine the adverse effect of such agreement upon competition, it is also true that for vertical agreements, the test differ in case to case.

As cartels are a kind of horizontal agreement, so to examine cartels, first we have to know about the characteristics of the horizontal agreements.

No particular form is required for such kind of agreements, but results should be as such which is not permitted under the Act. So the circumstances of the agreement and word exchanged between the parties, telephones, messages etc are considered as evidence of the conspiracy. [5]

Whether the means used to accomplish the agreement is lawful or unlawful is not matter at all, the thing is to be taken into consideration is the object of the agreement should be unlawful, means it should prevent or restrict the competition in the market. [6]

Cause or likely to cause adverse effect is important for anti competitive agreements. Two things are important in this regard, one is adverse effect, means the consequence of the said agreement should be adversely affect the competition( U.S v. Griffith [7] ) and second thing is the intention of the parties to the agreement, but alone intention is not enough, there should be some overt act to give effect to that specific intention ( Ashton v. CIR). [8]

“Effect doctrine” is the other characteristic of anti competitive agreement in Indian competition law. It means the anti competitive agreement should have some adverse effect in India. In Haridas export v. All India float gas manufacturers [9] the commission says that It is immaterial in this regard that where the agreement is interred into by or who are the parties of the said agreement, if that particular agreement has some adverse effect on the Indian market that is enough for considering that agreement as anti competitive. [10]

An anti competitive agreement may be entered between the parties by “concerted practises”, such type of practise exists when there is a informal cooperation without having any formal agreement. [11] In this regard one case called ICI Vs. Commission [12] is really has great importance, which says about the difference between the parallel behaviour and the concerted practice. It also says that parallel behaviour is not amount to concerted practice, but it may act as a good evidence of the concerted practice. If there are some conditions in any competition, which, after giving due consideration to the nature of the market, considered as against the normal rules of the market, then it may presume the presence of the “concerted practise”.

Section 2 (c) of this Act define “cartel”, it says that “cartel includes an association of producers, sellers, distributers, traders or service providers who, by agreement amongst themselves, limit, control or attempts to control the production, distribution, sale or price of, or, sale in goods or provision of services.”

The main features of cartel are given below:

There should be an agreement, including arrangement and understanding.

The parties to this agreement should be engaged in trade of same or identical goods or services.

The agreement should be aimed at to limit or control or attempt to control the production, distribution, sale or price of goods or services.

Cartel is nothing but a formal association of manufacturers or producers, who tries to limit the competition or to impose restriction on trade or business. The definition of cartel given under this Act is very wide in nature; it includes both trade and competition, which have some anti competitive effects upon the market. Cartels may form for any or all of these given purposes:

To share an agreed or uniform price of the goods or services in the market.

For the market sharing arrangement.

Both of these above mentioned objects.

The main thing is that a cartel is always aiming at in improving the position of the profit of the members of it. [13]

Cartels are per se bad. It not only includes acts preventing or restraining the trade or competition, but also any attempt to do such type of restrains. To include “attempts” in the category of cartels, there are some conditions to be fulfilled,

There should be some intention to commit such type of offences.

Some over act should be done to accomplice that intention.

The overt act must have some direct relation to the act intended. [14]

Chapter 4

Examples of cartels in India:

Soda ash cartel: Alkali Manufacturers Association of India v. American Natural Soda Ash Corporation [15] is very important. This cartel was related to soda ash. Before formation of this cartel, there were 6 producers of soda ash, they were acting independently, after formation of this cartel they started to produce soda ash and supply them throughout the world in a very cheap rate. For this reason the local producers of different nations started to face difficulties to survive in the competition. In Indian also the same problem occurred. The Government of India charged a very high rate of anti dumping duty upon this cartel. [16]

Cement cartel: Now a day, a great boost is going on in the real estate industry in India. In this event, a great cartel was formed in the cement industry, as cement is the most needed component of the real estate business. In the year of 2000-2001 near about cement industry of India like, Grasim, lafarze, birla and many more entered into a cartel resulting prise control in Indian market. A complaint was filed to the Competition Cpmmittee regarding this. According to this complaint mainly in the city of Jabbalpur, the price of the cement increased significantly. The complaint also alleged about a concerted practice among the cement giants regarding the price fixation and it also gave detail of a minute report of a meeting where this concerted practice was carried on. The MRTPC ordered the 9 cement giants and the CMA to refrain from such activity like price fixing. [17]

If we make a close look to the condition, we can find that in March 2006 the production exceed the demand and the quarterly cost of production was also decline. In the mean time there was a sudden increase of the price by more than 11% in a month. In the absence of any solid reason behind such increase, we can say that there was a tacit cartel between the cement manufacturer regarding price fixation during that time. [18]

ATF cartel: The RIL has filed a complaint to the competition commission of India against the Public Sector Undertakings dealing with aviation turbine fuel. RIL alleged that they formed a cartel at the time for bidding for the ATF. PSU like IOC, BPCL, HPCL all were engaged in that cartel. RIL wanted to enter into the business of supplying the ATF to the Jet Airways, but for this cartel it failed to do this. [19]

Cartel in Road Transport: Road transport is considered as lifeline of the economic growth of any country, so India is not the exception to this. We can take example of Germany’s Autobhan, which makes a revolutionary change in the economic position of this country by connecting the major cities with the remote villages. At the beginning the road was considered as public matter and exclusively made by the Government, but with the changing of the time it is not possible for the Govt. to take all the responsibilities regarding the road transport, there is also a factor of investment. Particularly for the maintenance and for investing more fund with the increasing demand private and foreign investors come into the picture. Competition starts between them. There is no doubt that this road transport sector of India is huge and also very profitable, so the investors starts to inter into anti competitive agreements and also bid rigging, which are totally prohibited under the Competition Act 2002. There are also instances of entry barriers, resulting territorial allocation of contracts, which are also prohibited under the Act. Illegal competition is also going on with the raw materials needed for the road construction, like steel, roads, cement etc. Proper road transportation system is required for better implementation of the socio-economic policies of the country. It also affects the price of the goods. So, the CCI should make appropriate provisions to give a check and balance method to control the anti competitive activities in road transportation system. [20]

Railway cartel: In the very recent time it comes into picture that in Indian Railway a cartel is going on regarding the seats of the compartments. Previously foam was used to make these seats. Suddenly the RDSO, which is the research and development wing of Railway shifted to a new material called recron for making seats. It comes to know from an investigation that the recron seats take Rs. 50000 for one compartment, whereas the foam made seats charged Rs 18000 per compartment, the investigation further says that this recron is not suitable for the Indian weather also. The whole supply of the recron is given to two suppliers, without calling a tender for that and these two suppliers charged near about 200% more than the market rate of the recron seats. So, there is no doubt that these two vendors of recron act as cartel and the RDSO would never make any doubt regarding this. [21]

Another type of cartel in Railway can be found in Competition Commission of India v Steel Authority of India Limited and another [22] , this case was filed by one company against the SAIL, alleging that it entered into an exclusive agreement with Indian Railway for supplying of steel for the railway track.

Trucking cartel: Trucks are considered as the lifeline for the transportation of goods in India. In a country like India, transportation of goods plays a vital role in determining the price of goods. In this sector also we can find a huge cartel, which was consisted by some of the truck operators. They fixed the fare of the truck transportation and restrained the other truck operators to compete with each other regarding the price fixation. As a result of this there was an abnormal increase in the transportation cost, which leads to increase the price of the respective goods, causing detriment to the consumers. The MRTP Commission gave a cease and desist order to some of the truck operator union but as there was no provisions regarding penalties, so there were no penalties for these operators [23] .

Vitamin cartel: It is an international cartel, but affected India also. During 1990s some pharmaceutical companies from Japan, France and Germany entered into a cartel regarding the fixation of the price of the vitamins throughout the world and also made some division of market for vitamin throughout the world. This cartel was continued for a period of near about 10 years. Then France came out from this and coordinates with the US to restrain this cartel. France paid a huge amount as fine for this. India also faced a great loss for this cartel, but in the absent of any provisions relating to the oversee jurisdiction, no penalty was imposed by India [24] .

Chapter 5

Harms caused by the cartels to the consumers:

It is a worldwide accepted notion that cartels have negative effects to the consumers. If we take example of any of the international or national cartels, we can find that the effect of such cartels is an extraordinary price high of the respected goods or services. There are at least 30% to 40% price high occurs due to formation of any cartel. The people have to pay that high amount to avail that respected good or service, though actually that goods cost more less than what the consumers have to pay. So, it is considered as a great detriment to the consumer welfare.

Busting a cartel:

If we go through the provisions of the Indian Competition Law, we can find that there are many provisions relating to cartel detection. The related sections are as follows:

Section 19 which says about the grounds of enquiry in certain agreements.

Section 26 which says about the procedure of the inquiry.

Section 27 says about the orders which may be passed by the Commission.

Section 32 says about the extra territorial jurisdiction of the Act.

Section 33 deals with the power to issue interim order.

Section 36 gives a clear idea about the power of the commission to regulate its own procedure.

For the rectification of orders you can go through section 38.

Section 39 says about the execution of order of the commission imposing money penalty.

Section 46 is one of the most important sections regarding cartel detection. It says about the lesser penalty process of the commission. It should be read with the regulation which gives minute detail of this system.

Section 48 says about the liability of the company and its members regarding contravening of any of the provisions of the Act [25] .

Chapter 6

Conclusion and suggestion:

For detecting a cartel, the competition authority should have some extraordinary power, such as:

Most of the cartels are formed in secrecy, so the competition authority should posses some special features to detect a cartel, means, they have had something more than what a general investigation agency have.

More units of Competition Authority should be formed, with a special wing for cartel detection.

More importance should be given to the “leniency programme” and also to the whistle blowing system.

Huge penalty should be imposed, with criminalization of the persons involved in a cartel.

Focus should be given to the presence of any arrangement in the market, and not upon the consequences of such arrangement to the economy.

The Director General of the present Competition Committee has given a very wide power, which includes all the power of a Civil Court and also all power of “inspector” under section 240 and 240A of the Company Act.

The Director General now has a wide power regarding search and seizure; he can make a search even without prior notification to the person against whom the allegation has made.

As most of the evidences of such type of cartels are kept in computers, so in the investigation committee, the persons should have good knowledge of [26] .

Among all these suggestions some are already included in the Competition Act 2002 in India and the rest should be included to get a better result for detecting cartel, as cartels are the main impediment in the way to perfect competition.