On 1st May 2018, the Competition Commission of India (“CCI”) issued its third leniency order in the case of Nagrik Chetna Manch vs. Fortified Security Solutions and Others (Case No. 50 of 2015), wherein it granted partial leniency to four out of six leniency applicants involved in bid-rigging of five tenders floated in 2014 by the Municipal Corporation of the City of Pune (“PMC”), for “Design, Supply, Installation, Commissioning, Operation and Maintenance of Municipal Organic and Inorganic Solid Waste Processing Plant(s)”.

Nagrik Chetna Manch, a public charitable trust, had filed an information before the CCI stating that as per information available on the website of PMC, regarding bid information and tender documents submitted by the bidders for certain tenders, it appeared that the bidders were involved anti-competitive conduct of bid rigging and /or collusive bidding. Prima facie satisfied, vide order dated 29th September 2015, the CCI directed the Director General (“DG”), its investigating arm, to carry out an investigation and submit its report. Though the investigation was initially directed only against two entities, the ambit of the investigation was later enlarged by the DG, with due approval of the CCI, to include four more entities. Five parties filed leniency applications before the CCI between 2nd and 5th August 2016 in the following order, namely, Mahalaxmi Steels (“Mahalaxmi”), Sanjay Agencies (“Sanjay”), Lahs Green India Pvt. Ltd. (“Lahs Green”), Ecoman Enviro Solutions (“Ecoman”), Raghunath Industry Pvt. Ltd. (“Raghunath”). The sixth party, namely, Fortified Security Solutions (“Fortified”) filed it on 20th September 2016.

Investigation Report: As per the investigation report of the DG dated 23rd November 2016, Ecoman had emerged as L-1 bidder in all the five tenders that were the subject matter of investigation, while the remaining five players had provided cover bids. Further, the individuals who owned/managed the aforesaid entities either belonged to the same family or shared close personal bonds with each other. Mahalaxmi, the first leniency applicant, as also few other bidders, did not even operate in the relevant market as they were engaged in various other trades and industries such as steel trading business, distribution and stockists ship of drugs, sales and services of electronic security systems, health and medical equipment etc. Nonetheless, they had participated in the PMC tenders and provided cover bids.

As disclosed by the parties in their leniency applications and /or found by the DG during the course of investigation, some of these entities had common office address managed by common person. Even the ‘contact details of a person for the bid’, required to be submitted by the bidders during online filing of the tender, were same for some of the bidders. Further, the Demand Drafts (“DD”), which were required to be submitted as earnest money deposits (“EMD”) along with the bids, revealed consecutive serial numbers, having been issued on the same day by the same bank, despite the offices of the bidders being situated in different cities. Further, such DDs for EMD were prepared by debiting the accounts of a common person. Some of the bidders had also used the same Internet Protocol address (“IP address”) to upload the tender documents, with their log in and log out time being in very close range. Even the IP addresses of some of the bidders were registered with the same mobile number, indicating that the documents for the tender were uploaded from the same place by the same person. It also revealed that the owner of Ecoman had procured the digital keys from the office of PMC on behalf of other bidders.  In view of the above, the DG concluded that all the evidences indicated that the bidders were hand-in-glove with each other and had engaged in bid rigging/ cartelisation in all the five tenders.

A copy the DG’s investigation report was forwarded to the parties, as also to their officers who were identified by the DG for having indulged in the practice of bid rigging / collusive bidding, on 30th August 2017 for filing their objections/ suggestions, if any. The CCI also heard the parties on 16th November 2017.

Contentions of the parties during the proceedings before the CCI:  

While agreeing with the conclusions arrived at in the DG’s report, the parties raised several issues in their defence. In the main, their submissions were as follows:

That the present case does not fall under the ambit of Section 3 of the Act as they are not engaged in ‘identical or similar trade of goods or provision of services’ nor are they competitors of each other. Some of the parties also submitted that in view the guiding principles laid down by the Hon’ble Supreme Court in Excel Crop Care Limited versus Competition Commission of India and Anr. 2017 Comp. LR 0355 (SC) on the aspect of ‘relevant turnover’, no penalty could be imposed on them as they did not have any ‘relevant turnover’ or ‘relevant profit’, since they were engaged in businesses other than the infringing product.

That their rights and reputation was adversely affected as ‘confidentiality’ granted to them as leniency applicants was breached in as much as their statements, recorded during investigation and contained in the DG report, were disclosed to the other parties, even before their consideration by the CCI.

That since the e-auction tenders were open for all bidders, entry was not restricted in any manner by any alleged agreement/ cartel which can be presumed to have an appreciable adverse effect on competition. It was submitted that apart from Ecoman, the L-1 bidder in all the five tenders, no other eligible bidder participated in the PMC tenders during 2013-2015, even in cases where the period for bidding was extended. It was submitted that the objective of alleged cartelisation was merely to ensure that PMC does not extend the tender period. It was therefore contended that no actual loss was caused to PMC nor did Ecoman foreclose the market to other competitors.

In addition to the above, the parties also urged the CCI to consider the following submissions, namely, that the DG came to know about the details of the mode and manner of the actions complained of through the Lesser Penalty Application filed by them; that neither any consideration was received or offered to them from the L-1 bidder; that they were not aware of the provisions of the Act; that they have never been involved in any kind of cartelisation, bid rigging, proxy bidding or any such activity before and that they undertake not to indulge in any such activity in future.

Accordingly, prayers for a holistic evaluation of substantial value addition done by them, as well as prejudice caused to them due to the procedural flaws, was made for grant of maximum reduction in penalties.

Analysis by the CCI:

As regards the issue whether the provisions of Section 3(3) of the Act are applicable in the instant case, when all the parties are not engaged in ‘identical or similar trade of goods or provision of services’, the CCI rejected the contention of the parties and held as follows:

“…In the instant case, the Commission is of the view that it is the business activity of the parties that they are actually bidding for and the one regarding which the violation of law has been alleged which is relevant for the purpose of the applicability of Section 3(3)(d) Act rather than any other business activity(s) parties ‘were’ or ‘are’ engaged in. If the parties were allowed to escape the grasp of the Act by considering them as not competitors on the pretext that they are actually engaged in varied businesses, it may defeat the very purpose of the provisions of Section 3(3) (d) of the Act. Any construction other than this would mean that new entrants are totally exempt from the provisions of bid rigging for the reason that they are or were not involved in that business at the time of bidding. …”

As regards the issue of breach of Confidentiality,  the CCI held:

 

As regards the issue of reputational harm, the CCI held that “the parties are claiming reputational harm not simply because some confidential information was disclosed in the investigation report of the DG but more because such information was disclosed to the public at large. In this regard, the Commission observes that it is well recognized fact that the investigation report is not a public document and is not to be shared with public. This aspect is enshrined in Regulation 47 of the Competition Commission of India (General) Regulations, 2009 (hereinafter, ‘General Regulations’), which clearly provides that the proceedings before the Commission are not open to public, except where the Commission so directs. In the instant case, there being no direction to make proceedings open to public, there was no question of sharing the investigation report of the DG with public”. The CCI also reasoned that despite this regulatory provision, the Informant, who had shared the investigation report with the media, was directed to file an undertaking that the contents of the investigation report as well as other information, documents and evidence obtained during proceedings would not be disclosed to any person who is not a party to the proceedings or used for a purpose other than the proceedings under the Act, which was subsequently filed. In view of the foregoing, contention of reputational harm due to action / omission of the DG / Commission was held to be misplaced.

The CCI also rejected the contention of the parties that no appreciable adverse effect on competition in India has been caused. In this regard, the CCI observed that under the provisions of Section 3(3)(d) of the Act, bid rigging shall be presumed to have adverse effect on competition independent of duration or purpose and, also, whether benefit was actually derived or not from the cartel. The CCI further observed that the charged parties ‘have neither been able to rebut the said presumption nor been able to show how the impugned conduct resulted into accrual of benefits to consumers or made improvements in production or distribution of goods in question’.

Further, with respect to the contention that as bid rigging has not restricted entry there is no appreciable adverse effect on competition and, hence, no contravention of the provisions of Section 3(3) of the Act, the CCI observed that ‘mere possibility that other bidders could have bid for the tender cannot absolve the colluding OPs from their conduct of bid rigging. Explanation to Section 3(3) of the Act makes it clear that bid rigging even includes an agreement that has the effect of reducing competition for bids or adversely affecting or manipulating the process of bidding. Therefore, even if a subset of bidders collude amongst themselves to rig or manipulate bidding process, it would be a violation of Section 3(3)(d) of the Act’.

Penalty Order:

The CCI found all the six charged parties to have indulged in bid rigging/ collusive bidding in contravention of the provisions of the Act. Accordingly, in terms of Section 27 of the Act, it imposed monetary penalty to the tune of 10% of their average annual turnover of the preceding three financial years. However, in deciding the quantum of penalties upon each of the charged parties, the CCI gave due weightage to the extent to which the leniency applicants had contributed in the completion of the investigation.

As regards Mahalaxmi, the first leniency applicant, the CCI held that it had supported the investigation and co-operated fully and expeditiously on a continuous basis. The CCI also acknowledged its role in unearthing the existence of a cartel for rigging the bids in few of the tenders. Though it was the first one to file the leniency application, the CCI held that since Mahalaxmi did not file the leniency application at the very beginning but at a later stage in the investigation when some evidence had already been collected, reduction in penalty by 50% could only be granted to Mahalaxmi.

Regarding Sanjay, the second leniency applicant, the CCI observed that it had disclosed the modus operandi by revealing the names of individuals associated with Ecoman, the ring leader of the cartel, and had also provided copies of certain critical e-mails. Accordingly, the CCI granted 40% reduction in the penalty to it.

As regards Lahs Green, the third leniency applicant, the CCI observed that it had provided information which aided in unearthing the cartel for rigging of bids for certain tenders, which information was not provided by Mahalaxmi or Sanjay. Accordingly, the CCI decided to grant 50% reduction in the penalty imposed upon it.

Regarding Ecoman, the fourth leniency applicant and the L1 bidder in all the tenders, the CCI observed that most of the information / evidence regarding the cartel was already available with the DG when Ecoman had filed the leniency application and the only value addition which it made was with respect to purchase/procurement of digital keys by its owner for uploading the bid documents on the website of the PMC on behalf of other bidders. Despite noting that Director of Ecoman had orchestrated the entire cartel and emerged as L1 bidder in all the five tenders, the CCI decided to grant 25% reduction in the penalty imposed upon it owing to the co-operation extended by it during investigation, value addition made in establishing the cartel and role played by it in the cartel.

As regards Raghunath and Fortified, the fifth and the sixth leniency applicant respectively, the CCI held that the disclosure by these entities did not lead to any value addition in the investigation and accordingly no reduction in penalties was granted to them.

In terms of Section 27(b) of the Act, the CCI also imposed penalties on the officers / persons, found to have indulged in the aforesaid contravention under Section 48 of the Act, at the rate of 10% of their average income during the preceding three financial years.

As regards PMC, the CCI made scathing remarks for its failure to detect cartelisation in its own tenders. It observed that evidence such as uploading of one of the tenders by a bidder from PMC’s IP address, call data records of communication between some of the officials of PMC with the L1 bidder and other systemic failures on its part indicate that its conduct may have facilitated bid-rigging in these five tenders. It further observed that that PMC did not exercise due diligence while scrutinizing the bid documents. Even though there were several apparent indications of collusion like same IP addresses, common proprietor/ director, same office address, consecutive serial number for DDs etc., these were not taken into consideration by PMC while determining the eligibility of the bidders. Further, in few tenders, an ineligible bidder was allowed to participate despite the fact that it neither had requisite experience in solid waste management, as required under tender conditions, nor had been authorized to supply composting machines by any manufacturer. Thus, the CCI found glaring acts of omission and commission on part of PMC, which intentionally or otherwise aided the bidders in cartelisation. However, since PMC’s conduct could not be said to be in contravention of the provision of Section 3(3)(d) of the Act, it could not be held liable under the provisions of Section 3 of the Act. 

Analysis of the Order:

For the very first time, the CCI has made a distinction between confidentiality granted to the identity and information provided by a leniency applicant under the CCI (Lesser Penalty) Regulations, 2009 and confidentiality granted by the DG to the information/evidence collected by the DG during investigation under Regulation 35 of the General Regulations, such as those collected through oral examination of parties and through issue of notices to the parties, on the ground of being separate set of evidences. It thus held that the confidential treatment granted under Lesser Penalty Regulations does not extend to evidence obtained or collected by the DG, even if such an evidence is obtained from a Lesser Penalty Applicant. In our view, this appears to be a hyper-technical view, which may deter players to file leniency applications as they now face a higher risk of exposure and class action suit for damages being filed against them. It is also uncertain whether the DG, consistent with the provision for grant of confidentiality under the Leniency Regulations, would be inclined to grant confidentiality under the General Regulations; it may very well be the case that these provisions may not be read together or harmoniously construed by the DG, which may deter parties to actively seek protection under the Leniency provisions. As a result, cartel activities may continue for a longer period longer than they would have been otherwise.

In contrast to the decision dated 19th April 2018 in Zinc carbon dry cell batteries cartel case (Suo Motu Case No. 02 of 20), wherein all the three charged parties had filed leniency applications and the CCI had granted reduction in penalties to all of them notwithstanding the fact that information/ evidence on cartel furnished by two of the applicants did not result in ‘significant value addition’, the CCI has decided in the instant case not to grant any reduction in penalty to two of the leniency applicants on the ground that the applicants ‘did not provide significant value addition to the evidence already in possession of the DG’. Further, the CCI has not granted any reduction to two of the parties despite recording that they ‘supported the investigation and co-operated with the investigation/ inquiry throughout and accepted information indicating the modus operandi of the cartel and evidence in its possession or available to’ them. Thus, it appears that the approach of the CCI is inconsistent with its order in the Zinc carbon dry cell batteries case. Accordingly, while the instant order reflects a hardening of stance by the CCI, it suffers from inconsistent approach in as much as it applies different standards to parties similarly placed under the leniency provisions.

This order also reflects that the CCI places a premium on the time period when the leniency application was filed. In the instant case, the first leniency applicant got a reduction in penalty by 50%, unlike the Zinc Batteries case where the first leniency applicant got 100% reduction, because leniency application was filed at a very late stage wherein the investigation had commenced and substantial evidence had been collected by the DG.

In the facts of the case, the CCI has interpreted the term ‘turnover’ purposively and in furtherance of the objectives of the Act. In doing so, it has not been constrained by the Apex Courts’ order in Excel Corp Care case wherein the term ‘turnover’ in Section 27 of the Act was interpreted to mean ‘relevant turnover’. The CCI has rightly held that ‘in the peculiar facts of this case where OPs have admittedly submitted cover bids but are not engaged in the solid waste management i.e. the activity relating to which bid-rigging has taken place, interpretation of ‘turnover’ in Excel Crop Care case would not be applicable’. It is, however, still not clear whether CCI’s interpretation of the provisions of Section 3(3) of the Act would also be applicable in cases other than bid rigging, such as in cases where enterprises  do not operate in the same horizontal relevant market or operate in the related vertical market or in another adjacent market but are nonetheless engaged in cartel activities on the horizontal market, either as facilitators or co-conspirators, as is the ratio of the case of AC Treuhand (Case C 194/14 P, judgement dated  22nd October 2015) adjudicated upon by the European Court of Justice. 

Conclusion: On the whole, the CCI has passed a very reasoned and detailed order. There is a greater clarity now as to how the various provisions of the Act would be interpreted and applied by the CCI. The need of the hour is to develop consistent legal tools to fight the menace of cartel and perhaps to buttress it with a robust antitrust whistle-blower policy.