By way of an October 5 2017 order, the Competition Commission of India (CCI) has imposed penalties totalling Rs62.7 million on Aditya Birla Chemicals (India) Limited (ABCIL), Grasim Industries Limited (GIL) and Gujarat Alkalis and Chemicals Limited (GACL) for bid rigging and collusive bidding under Section 3(3)(d) of the Competition Act 2002.
Three chemicals are widely used for the production of potable water, namely:
- Poly Aluminum Chloride (PAC);
- alum (coagulant); and
- liquid chlorine (disinfectant).
PAC is most commonly used as it is easy to handle.
Claimant Delhi Jal Board procured PAC and liquid chlorine from ABCIL, GIL and GACL through a tendering process. It alleged that during price negotiations, the defendants colluded to negotiate or decrease the bidding prices for the chemicals and that between 2006 and 2007, they bid collusively by quoting similar prices with a difference of Rs200 to Rs400 for certain quantities of the chemicals. The claimant argued that this behaviour aimed to vitiate the purpose of the tenders as it had no other option but to accept the prices determined by the defendants.
The claimant referenced two similar complaints that it had brought before the CCI under Section 19(1)(b) of the Competition Act. In Ref Case 03/2013, the Delhi Jal Board argued that the defendants, along with Kanoria Chemicals and Industries Limited (KCIL), had indulged in collusive tendering and bid rigging in regard to tenders floated for the procurement of PAC between 2006 and 2012.
In Ref Case 04/2013, it argued that the defendants, KCIL and Punjab Alkalis & Chemicals Ltd had rigged bids and colluded with respect to tenders for the procurement of liquid chlorine between 2006 and 2012.
A director general investigation found that GIL, ABCIL and GACL had colluded to raise the bid prices and therefore violated Sections 3(1) and (3)(d) of the act. However, it found no violation by KCIL.
On examination of the rates offered by the defendants in response to the tenders for PAC between 2009 and 2015, the CCI found that the rates simultaneously increased every year and converged on a narrow band. Further, it noted that despite the fact that the companies were located in different geographical areas (which should therefore be reflected by the logistical costs), the rates quoted remained substantially similar. In normal market conditions, the freight rate per kilometre should decrease with the increase of the distance covered. However, GACL – which was the farthest from the claimant – had the highest freight rate.
On examination of the production costs of the product, the CCI found that GACL's costs remained constant, whereas those of GIL and ABCIL had increased. This contradicted the defendants' explanation that the narrow band pricing offered was as a result of PAC being a homogenous product. Examination of the costs offered to other customers also revealed that the defendants had charged the claimant higher rates than their remaining customers, which could not be explained.
With respect to GIL and ABCIL, the CCI noted that throughout the tender process the companies continued to exchange vital information such as the bid documents, the prices to be quoted and the negotiated prices to be offered.
With regard to the tendering process, the CCI found that unlike PAC, liquid chlorine is a hazardous, toxic by product and therefore the market conditions differ for the two chemicals. It also found that apart from the timing of bid submissions, there were no other factors indicative of a concerted action in regard to liquid chlorine. The CCI noted that the director general made no analysis of the basic price, transportation cost, taxes and policy of profit margin in regard to liquid chlorine. Therefore, no violation could be found in regard to the chemical based on the director general's report.
ABCIL and GIL argued that they were subsidiaries of the same parent company and therefore, being part of the same group, any agreement between them did not constitute an anti-competitive agreement under Section 3 of the Competition Act. However, the CCI held that at every stage of the bidding process, suppliers including ABCIL and GIL were treated as opponents and their bids were assessed individually, not collectively; therefore, they should be treated as competitors irrespective of whether they are related. The CCI also held that the concept of a 'group' applies only in regard to the regulation of combinations under Sections 5 and 6 of the act and thus does not apply to proceedings under Section 3 of the act.
Considering the allegations of collusive bidding, the CCI held that despite the significant variation in the fixed and variable production costs, transportation costs, taxes and policies on profit margin, the defendants' maintained a close margin in their bid prices for PAC year after year. It also noted similar behavioural patterns in tenders relating to other municipal corporations (other than the claimant). The CCI observed that the employees responsible for the tender proposals coordinated with each other at every stage of the process. Accordingly, in the absence of an economic rationale behind the similar rates quoted by the defendants, together with the prolonged supra-competitive pricing by GACL, the bid rotation, the tenders floated by other municipal corporations and the exchange of vital information, the CCI found sufficient plus factors to establish a concerted action.
Consequently, ABCIL, GIL and GACL were found to have acted in a concerted manner in respect of the tenders floated by the Delhi Jal Board for the supply of PAC from 2009 to 2015, thereby violating Sections 3(1) and (3)(d) of the Competition Act.
Regarding the amount of the penalty to be imposed, the CCI noted that since PAC is used to purify water, the criticality of procuring the product for public health was an aggravating circumstance. Therefore, it ordered penalties of 8% of the average relevant turnover for the first three financial years on ABIL and GIL and 6% of the average relevant turnover for the first three financial years on GACL, amounting to Rs20.9 million, Rs23 million and Rs18.8 million respectively.
The order marks a significant positive development in regard to the concept of a 'single economic entity' (SEE) in India, bringing practice in line with that of mature competition law jurisdictions. Previously, to determine whether an entity was a SEE in the market, the CCI adopted the preliminary step of examining the structural links between the entities in question. For example, in Exclusive Motors v Automobili Lamborghini the CCI held that provided that two enterprises form part of the same group, any internal agreement between them is not considered an agreement for the purpose of Section 3 of the Competition Act. It also followed this approach in In Re Association of Third Party Administrators.
The CCI's methodology held that in order to be considered a SEE, the entities must first qualify the group test under Section 5 of the act. In this case, ABCIL and GIL argued that there could be no collusion between them under Section 3 of the act because they constituted a group under Explanation (b), Section 5 of the act. Further, by way of an August 31 2015 order, which pertained to the merger of ABCIL and GIL, the CCI also held that the two companies were part of the same group. However, the CCI refused the defendants' argument since, pursuant to the tender, they had submitted independent bids, thereby creating the façade of fair competition to the procurer. It held that when two or more entities – even if part of the same group – submit separate bids in regard to the same tender, they present themselves to the procurer as independent decision makers. Therefore, they cannot avoid responsibility under Section 3(3) of the act merely on the submitted argument.
For further information on this topic please contact MM Sharma at Vaish Associates by telephone (+91 11 4249 2525) or email (email@example.com). The Vaish Associates website can be accessed at www.vaishlaw.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.