Introduction

By way of a January 10 2018 order, the Competition Commission of India (CCI) exposed a cartel of three top coal-liaisoning companies, namely:

  • Nair Coal Services Ltd (NCSL);
  • Karam Chand Thapar & Bros Ltd (KCT); and
  • Naresh Kumar & Co Pvt Ltd (NKC).

The CCI held that in respect of tenders floated by Maharashtra State Power Generation Co Ltd (known as 'Mahagenco') for the award of coal-liaisoning contracts (involving linkage materialisation, shortage minimisation and quality monitoring work for seven thermal power stations), the companies had violated Sections 3(1), (3)(c) and (3)(d) of the Competition Act 2002. It held that the case fell within the category of hard-core cartels, since the coal-liaisoning companies had divided the seven thermal power stations in such a way that under each tender one of the companies would emerge as the lowest bidder. Therefore, the CCI imposed its highest recorded penalty at a rate of two times the total profits earned by each company during 2010 to 2011 and 2012 to 2013 in respect of tenders awarded during 2009 to 2014, amounting to:

  • Rs71.6 million for NCSL;
  • Rs1.116 billion for KCT; and
  • Rs169.2 million for NKC.

Facts

Mahagenco is responsible for the generation of power in the state of Maharashtra. To run its seven thermal power stations, it obtains raw coal from the subsidiaries of:

  • Coal India Limited – namely:
    • Western Coalfields Limited;
    • South-Eastern Coalfields Limited; and
    • Mahanadi Coalfields Limited; and
  • Singareni Coal Company Limited (SCCL).

To procure high-quality coal and ensure proper supervision of its supply through railways and other modes of transport, Mahagenco engages the services of liaisoning companies.

In March 2005 Mahagenco invited tenders for coal liaisoning in regard to coal supplied to its thermal power stations from the subsidiaries of Coal India. Four companies submitted bids – namely:

  • BSN Joshi & Sons Ltd;
  • NCSL;
  • KCT; and
  • NKC.

The rate quoted by BSN was the lowest; however, the company was not awarded the work due to the commencement of litigation before the Bombay High Court.

After prolonged litigation before the Nagpur Bench of the Bombay High Court (Writ Petitions 2444 and 4514/2005) and the Supreme Court (Civil Appeal 4613/2006), the work order was finally issued to BSN in 2009. However, after nine months the order was terminated on the grounds of pending arbitral proceedings under the Arbitration and Conciliation Act 1996. Mahagenco then awarded the contracts to NCSL, KCT and NKC on an area basis.

The claimant argued that Mahagenco had been regularly awarding contracts in favour of NCSL, KCT and NKC in the geographically distributed market, which was agreed between them by entering into a cartel. The claimant stated that through collusion with Mahagenco, the coal-liaisoning companies divided among themselves seven thermal power stations and effectively thwarted any new or existing company from participating in the tender process.

It also stated that Mahagenco favoured the formation of the cartel, as is evidenced by the fact that since September 2009, it has floated four tenders for the supervision and monitoring of coal loading into railway wagons for transportation to its thermal power stations from the subsidiaries of Coal India and SCCL, all of which have been cancelled for various reasons. The claimant argued that the cancellation of these tenders by Mahagenco resulted in NCSL, KCT and NKC becoming beneficiaries of the stop-gap arrangement. Therefore, Mahagenco and the coal-liaisoning companies had violated Section 3(3)(d) of the Competition Act by engaging in collusive bidding, thereby hindering competition and raising unnecessary disputes with regard to the qualifications of competitors in the market.

The claimant also argued that Mahagenco and the coal-liaisoning companies – three of the leading players in the coal liaison, quality and supervision market – had violated Section 4(2)(c) of the Competition Act by colluding to deny access to competitors, thereby preventing new players (if any) from participating in the bidding process.

By way of a December 11 2013 majority order, the CCI initially dismissed the case under Section 26(2) of the Competition Act. However, on appeal, the Competition Appellate Tribunal (COMPAT) set aside the order and instructed the director general to investigate the case and submit a report to the CCI. In particular, COMPAT instructed the director general not to presume that Mahagenco was a part of the cartel with the other defendants. On June 6 2016 the director general submitted its investigation report.

Director general investigation

The director general noted a distinct pattern in the quotes submitted by the coal-liaisoning companies in respect of tenders floated by Mahagenco between 2001 and 2013. On the basis of evidence collected, statements from representatives of the defendants, as well as third parties, and other material available on record, the director general held that through Tender T-03/2005 and subsequent tenders until 2013 for the procurement of services in coal liaisoning, NCSL, KCT and NKC had acted in a concerted manner by forming a cartel. The director general noted the following:

  • NCSL, KCT and NKC had distributed the different thermal power stations in various Mahagenco tenders for coal liaisoning. This was depicted in Tender 03/2005, wherein allegations of cartelisation were first levelled by Mahagenco, and all subsequent tenders until 2013 (excluding one instance).
  • In dividing the tenders geographically and accordingly giving their quotations to carry out such division, the defendants violated Sections 3(3) and (1) of the Competition Act.
  • In directly determining the bid prices, the defendants violated Sections 3(3)(a) and 3(1) of the act.
  • By sharing the tenders geographically, the defendants also violated Sections 3(3)(c) and 3(1) of the act.
  • The defendants' conduct amounted to bid rigging and collusive bidding in violation of Sections 3(3)(d) and 3(1) of the act.

CCI decision

After hearing the defendants' objections to the director general's report and both the claimant and the defendants in a detailed inquiry, the CCI agreed with the director general and held that the evidence – particularly the pattern of bidding the lowest rates for the pre-selected thermal power stations – proved the anti-competitive arrangement between NCSL, KCT and NKC.

The CCI examined the evidence submitted by the director general, which included the following:

  • The defendants quoted identical basic rates in respect of the tenders floated by Mahagenco.
  • The defendants quoted rates in a manner so as each of them would be allocated their chosen thermal power station.
  • NCSL made dummy bids for the Mahagenco tenders.

Further, the CCI found that the defendants could offer no convincing justification for their conduct, which showed clear coordination between them.

The CCI also found that the defendants' anti-competitive coordination – apparent from the pattern of their bidding – was corroborated by various plus factors, such as:

  • no plausible explanation or justification for quoting identical basic rates;
  • no justification for quoting higher or lower rates for chosen thermal power stations in a mutual way so as to allocate the stations among themselves;
  • purchasing tender documents on the same dates;
  • exchanging letters and pre-bid queries; and
  • financial transactions between the defendants, including sharing of ledgers and creation of bogus entries in the account books in order to show losses in the Mahagenco tenders.

The CCI therefore found that:

"It is apparent that [the defendants] did not compete in securing business as would have been expected as prudent business behaviour in a competitive market. Rather, [they] seem to be comfortable in continuing with their existing businesses under an arrangement to divide the market."

Further, it observed that:

"The Commission is of opinion that the present case falls in the category of hard core cartels as [the defendants] reached an agreement to submit collusive tenders and to divide the markets. Thus, the case deserves to be dealt with utmost severity. Accordingly, the Commission notes that it is a fit case for invoking the proviso to Section 27 of the Act and decides to impose a penalty on [the defendants] at the rate of 2 times of their total profits earned from provision of coal liaisoning services to all power generators, and not limited to the profits generated from MAHAGENCO alone, for continuance of the cartel for 2010-11 to 2012-13 years only based on the financial statements filed by them."

The CCI rejected the defendants' request that the penalty be restricted to the relevant turnover derived from the impugned Mahagenco tenders on the grounds of the Supreme Court's landmark judgment in Excel Corp Limited v CCI (Appeal 79 (2012)) and instead held that "the contention of the parties that only the revenue generated from the impugned tender alone would constitute relevant turnover is not tenable".

In Excel Corp the Appellate Tribunal categorically observed that turnover cannot be restricted to supply made only to the procurer whose tenders were rigged.(1) Therefore, the Supreme Court dismissed the appeal and upheld the order passed by the tribunal.(2)

Similarly, the CCI opined that the total revenue generated from all coal-liaisoning services was relevant for the present purposes and the parties' contention that the business of coal liaisoning in respect of washed coal is not akin to the contracts under consideration was both flawed and misconceived.

Comment

The CCI's order indicates a hardening of its stance towards hard-core cartels. This is evident not only from the highest penalties ever imposed,(3) but also from the fact that the CCI rejected the defendants' request to restrict the penalty to the turnover derived from the cartelised product.

The defendants will challenge the order before the National Company Law Tribunal and the outcome on the issue of the penalty amount will be worth watching for.

For further information on this topic please contact MM Sharma at Vaish Associates by telephone (+91 11 4249 2525) or email (mmsharma@vaishlaw.com). The Vaish Associates website can be accessed at www.vaishlaw.com.

Endnotes

(1) October 29 2013 order, paragraph 67.

(2) May 8 2017 order.

(3) Before this order, the highest penalty imposed was one times the profit in the first case of leniency application in the supply of brushless direct current fans to railways in suo moto Case 03/2014. The penalty was imposed on only one of the alleged cartel participants and the order is under appeal before the National Company Law Appellate Tribunal (for further details please see "CCI approves first leniency application for cartel member").

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