In the past, the Competition Commission of India (CCI) has adopted a loose preponderance of evidence standard, which has been repeatedly questioned on appeal. However, in two recent cases regarding alleged bid rigging in railway supplies, the CCI accepted the parties' objective justifications and dismissed the cases, thereby demonstrating its maturing and evolving jurisprudence with regard to cartels.

Overview

Public procurement constitutes about 30% of India's gross domestic product, with a total annual expenditure of between Rs15 and Rs20 trillion. The government alone has an annual expenditure of between Rs2.5 trillion and 3 trillion. Public procurement is highly susceptible to corruption – not only between suppliers and the government, but also between suppliers themselves. The latter emerges in the form of cartels (ie, bid rigging and collusive bidding). Cartels between suppliers are common in public procurement and thus have led to the corruption of procurement officials – a symptom rather than cause of cartels. Unfortunately, public procurement policy has thus far focused only the symptoms, ignoring the root cause of the issue.(1)

Among the various forms of cartel, collusive tendering and bid rigging are the most prevalent, consistently attracting the attention of competition regulators worldwide. For instance, until 1993, 70% of cartel cases investigated by the US Department of Justice involved bid rigging rather than price fixing. Of those, most cases involved bid rigging in public procurement. As such, much of the evidence on the impact of cartels on the economy relates to bid rigging. The available evidence suggests that bid-rigging cartels generally lead to prices in excess of 10% (sometimes in excess of as much as 20%) of the competitive levels. As such, almost all competition laws characterise price-fixing and market-sharing agreements (as in bid-rigging cases) as 'object' infringements or per se infringements. Consequently, the highest fines are reserved for entities found to be engaged in bid-rigging cartels.

Penalties

The CCI heavily punishes bid-rigging cartels and has imposed significant penalties on parties involved in bid-rigging cartels in public procurement.

The maximum penalty for participation in a cartel (which is considered a civil offence in India) is 10% of the average turnover for the last three years or up to three times the profit earned for the duration of the cartel – whichever is higher. The former penalty is aligned with that prescribed in other developed countries (although some countries (eg, the United States) impose criminal penalties, including imprisonment for cartel members). Unfortunately, even the higher penalties prescribed under Indian law have failed to deter participants, considering the growing number of cases being reported to the CCI.

Attractiveness of cartels

Whether an industry is likely to attract cartels depends on the incentives for market players and how sustainable a cartel is likely to be, as well as common factors (eg, market concentration, the number of producers, high and sustained demand and the absence of alternative products). The incentives to create a cartel depend on the profitability of market players in the presence of a cartel versus the absence of one. In turn, the sustainability of a cartel depends on:

  • whether the incentives to violate the cartel agreement outweigh the likelihood of such action being detected and punished by other cartel members; and
  • the enforcement authority's reputation (ie, whether it can quickly detect and punish cartels according to the law) and its success rate in related investigations.

In addition, non-cartel suppliers' responses can undermine a cartel – in particular, where the relevant market can be entered easily or where non-cartel members can easily increase their output in response to cartel members raising their prices, making the cartel unsustainable. In this way, non-cartel suppliers can neutralise a cartel. This is also known as "the response of the market forces".(2)

Evidence of bid-rigging cartels

Cartels are secret agreements between competitors which allow them to fix prices, allocate markets or rig tender bids. The most important part of a cartel case is simply proving that such an agreement exists. However, since cartels are executed in secret, direct evidence of a collusive agreement (ie, proof that a meeting took place or that the participants have communicated and the contents of the agreement) cannot typically be found – even in advanced jurisdictions. As such, circumstantial evidence is relied on heavily.

Cartel cases in which no direct evidence of an agreement exists often begin with a suspicion of parallel pricing. However, parallel pricing alone does not prove that a cartel exists. As such, competition authorities must look for certain additional factors (eg, trade association meeting minutes (ideally where future prices and business strategies have been discussed), homogenous products, predictable and frequent demands, limited suppliers and exchanges of information on capacity utilisation). By themselves, these additional factors are not indicative of a collusive understanding between participants. Therefore, each case requires an economic analysis of the market, as this may indicate competitive pressures due to stringent buyer requirements, giving a false impression of coordination among market players.

Until now, the CCI has convicted parties in most of its bid-rigging cases on the basis of the 'preponderance of the evidence' theory (a legacy of the jurisprudence on departmental inquiry cases), which considers whether the parties quoted identical rates in the tender, despite the fact that they were located in different areas and had different cost structures, without insisting on corroboration from independent sources.

CCI's evolving jurisprudence

In the last six years, the CCI has developed a reputation as a strong and proactive regulator by conducting investigations based on references from government departments. It has successfully prosecuted cartel allegations in 33 cases of anti-competitive agreements, including 12 bid-rigging cartels in public sector undertakings (two of which were transferred from the erstwhile Monopolies and Restrictive Trade Practices Commission (MRTPC)). The cartel cases relate to a wide range of sectors,(3)including an increasing number of bid-rigging cases in the defence sector in relation to military procurements.(4) Most recently, the CCI penalised four public sector insurers Rs6.7 billion for participating in a cartel and bid rigging tenders for social welfare schemes held by the Kerala government.

Appeals have been or will be filed by the parties in almost all of these cases. However, in a fairly transparent legal structure, these challenges are a sign of developing jurisprudence.

Analysis of CCI orders
While alleged cartel members have been exonerated in price-fixing and market-sharing cases due to a lack of evidence or where alleged infringers have provided justifications, in the first six years of enforcement no case of alleged bid rigging was resolved after a detailed investigation under the Competition Act, 2002 without the imposition of a penalty.

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A review of the CCI's orders in bid-rigging cases during the last six years shows a tougher stance: the quoting of identical rates – despite bidders being in different locations and having different production costs – is seen as sufficient evidence for a conviction where collaboration or additional factors (eg, pre-bid meetings or active industry association) exist.

For instance, the penalty imposed by the CCI in February 2014 on three manufacturers of feed valves (ie, spare parts for diesel locomotives) in response to a tender issued by Indian Railways(5) was based on the fact that the manufacturers had quoted identical prices (matching up to two decimals), despite being located in different regions and having different production costs. There was no direct evidence of collusion.

However, two recent cases involving allegations of bid rigging in the supply of products to Indian Railway's production units demonstrate the CCI's evolving stance.

Case against disc brake suppliers
In September 2015(6) two (out of the three in the above case) manufacturers of a disc brake system supplied to the Rail Coach Factory, Kapurthala (Punjab) which quoted identical prices (matching up to two decimals) in response to three emergency purchase tenders issued by Indian Railways were exonerated from bid-rigging allegations, despite the director general finding evidence of bid rigging after a detailed investigation.

These manufacturers were the only two approved suppliers of the disc brake system and thus genuine competition between them would have brought the products' prices down. While the CCI has typically found similar bids (despite the bidders being in different locations) to suggest a strong probability of bid rigging, it ignored this yardstick in the case at hand.

As regards the other factor often considered by the CCI (ie, whether production costs were similar), it accepted the parties' refusal to disclose their cost analysis to Indian Railways in the post-tender scrutiny. Due to a legal loophole, Indian Railways cannot appeal this order.

Although the CCI found that no cartel was formed, it noted that the railway's procurement policies contributed to a lack of competition between the suppliers (as there were only two) and advised the Ministry of Railways to modify its policies in order to incentivise other suppliers. It also advised that the role of the Research Design and Standard Organisation (RDSO) be reviewed in order to maintain competition.

Case against leather upholstery manufacturers
Similarly, in another case decided in July 2015(7) the CCI exonerated all five companies from allegations of bid rigging.

The allegation was filed by North Western Railway against five companies that had been approved by the RDSO to supply "fire-retardant vinyl upholstery fabric leather confirming to RDSO specifications" to Indian Railways. North Western Railway alleged that the companies had rigged the bids to supply its railway zone, so that only the largest of them – M/s Responsive Industries Ltd – secured all of the orders. The prices quoted by M/s Responsive Industries were allegedly higher than those it quoted in other railway zones and were uncompetitive (even extortionate) in nature.

However, after a detailed investigation, the director general of the CCI noted that the prices quoted by the bidders were actually lower than the indicated price of upholstery determined by the Railway Board, thus undermining the allegation that the bidders had quoted excessive prices. Agreeing with the director general's findings, the CCI also found that M/s Responsive Industries (the primary respondent) was justified in quoting higher prices on account of devaluation of the rupee and a hike in petroleum prices, which led to an increase in the manufacturing cost of the upholstery.

The CCI noted that the parties had proved themselves to be independent entities and that the IP addresses of the computers from which the bids were submitted were distinct. No evidence of collusion or cartel activity which would have resulted in a violation of the Competition Act was found. Thus, the CCI accepted the accused party's objective justification, demonstrating the CCI's changing stance.

Comment

The CCI's jurisprudence with respect to cartels and bid rigging is evolving. The two decisions above show a possible maturing in the CCI's thinking. Identical prices may no longer be sufficient proof of allegations of cartelisation. That said, the CCI may change its stance depending on the facts in future cases. In the face of this prevailing uncertainty, any parties accused of cartelisation should seek expert legal advice at the earliest opportunity to chart a successful defence.

For further information on this topic please contact MM Sharma at Vaish Associates by telephone (+91 11 4929 2525) or email (mmsharma@vaishlaw.com). The Vaish Associates website can be accessed at www.vaishlaw.com.

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