This article is written by Jai Hindocha pursuing an Introductory Course: Legal Writing for Blogging, Paid Internships, Knowledge Management, Research, and Editing Jobs. This article has been edited by Ruchika Mohapatra (Associate, Lawsikho).
This article has been published by Sneha Mahawar.
Globalization has led to the opening of markets and economies all across the world wherein competition between businesses has increased, and therefore, it is important to ensure a level playing field for all players in a market.
Healthy competition, as a concept in business and in markets, is extremely crucial, as it ensures fair and competitive pricing, supply of quality goods and services to consumers, and it fosters innovation.
However, there are certain business practices, including anti-competitive agreements, cartelization, and monopolization, among others, that distort fair competition in markets. Such practices tend to restrict free and fair competition, negatively impacting the prices and quality of goods and services, and hampering innovation in markets.
Economic growth and development do not take place simultaneously across all nations- the timing, pace, and stages of development are different for different nations. The same is the case with competition legislation and enforcement to keep a check on anti-competitive practices like cartelization. While different nations such as the US, UK, Japan, and India enacted their own legislation and rules at different points in time, the impact of said regulations has been different in different countries. One common factor, however, amongst almost every competition law regime across the world is the fact that cartels are considered to be undesirable and anti-competitive. Through this article, the author seeks to talk about cartels and the various regulations governing said cartels.
What are cartels
Cartels refer to certain kinds of agreements, practices, and activities which are antithetical to free and fair competition in markets. They are mostly secret or implicit agreements that are highly undesirable.
The Competition Act, 2002 (‘the Act’) defines a cartel as an agreement or understanding between enterprises and players in a market, who decide to come together to limit, regulate, or control the production, supply, and prices of goods and services in a market. Cartels primarily involve-
- Fixing prices of goods and services;
- Regulating and controlling production and supply;
- Allocation of markets; and
- Bid-rigging or collusive bidding.
Such practices adversely affect the price, consumers’ choice, quality of goods and services, and innovation in the market.
Factors such as few players, difficulty for new players to enter the market, homogeneity among products and services sold, presence of trade associations, and high demand of the product or service, are fertile ground for cartelization.
Cartels under Indian Competition Act, 2002
Under the Indian Competition Act, 2002, the term ‘agreement’, under Section 2(b) has been defined, quite broadly, to encompass different types of anti-competitive agreements and arrangements that can come under the scrutiny of the antitrust regime, irrespective of whether they are formal or in writing or not.
Section 3 of the Competition Act, 2002 deals with anti-competitive agreements, and cartels come under the purview of horizontal agreements under Section 3(3) of the Act. Such agreements are entered into between parties that operate and function in similar industries, dealing in similar goods and services, and are presumed to be anti-competitive in nature, and are therefore void.
Cartel regulation and enforcement in India
The Competition Act, 2002 has been enacted in India which provides for the establishment of an authority known as the Competition Commission of India (CCI), whose mandate is to-
- keep a check on anti-competitive business practices;
- ensure free and healthy competition in markets;
- protect and promote consumer welfare;
- ensure freedom of trade.
The CCI is empowered to investigate and impose penalties for cartelization. It has an investigative wing consisting of the Director-General who conducts the investigations under the Act. If any party is aggrieved by the decision of the CCI, the National Company Law Appellate Tribunal (NCLAT) may be approached by way of an appeal, and furthermore, the Supreme Court may also be approached against the decision of the NCLAT.
In the Indian jurisdiction, some of the primary steps that are followed in the process of cartel investigation and regulation are-
- receipt of information by the CCI regarding the existence of a cartel under Section 19(1) of the Act, from any person, Central or State Governments. The CCI may even initiate an inquiry on a suo-moto basis.
- if there is a prima facie case of cartelization found, the CCI will send orders to the DG to initiate the investigation process, to be completed within a prescribed period of time
- After the DG conducts the investigation as per the instructions of the CCI, looking into all the evidence available regarding the existence and functioning of a cartel, a detailed report is prepared, which is shared with the CCI for further inquiry and evaluation.
- On receipt of the report, the CCI analyses and evaluates the same. It sends a copy of the same to all the concerned parties, i.e., the complainant and the parties accused of cartelization, inviting their responses, objections or comments.
- Subsequently, the CCI allows the parties to present oral arguments. If the enterprises are found guilty of forming a cartel, thereby violating Section 3(3) read with Section 3(1) of the Act, the CCI is empowered to impose penalties on them, as well as on individual persons involved.
- Any party aggrieved by the decision of the CCI may invoke the appellate jurisdiction of the NCLAT.
Recent cartel cases in India
In Re: Alleged anticompetitive conduct in the Beer Market in India
In September 2021, the CCI passed an order against 5 parties, which included 4 beer manufacturers, and a trade association is known as the All India Brewers’ Association, concluding, based on the inquiry and investigation process, that the concerned parties are guilty of cartelization, in contravention of Section 3(3) read with 3(1) of the Act.
The CCI had received information regarding alleged cartelization in the beer manufacturing industry by beer manufacturers, wherein they decided to collectively fix prices of the beers sold by them. There were also communications through email and meetings between the parties, and the All India Brewers’ Association also acted as a common forum for the same. After arriving at a prima facie opinion of the violation of Sections 3(1) and 3(3) of the Competition Act, the DG was ordered to conduct the investigation. On receipt of the DGs investigative report, and after hearing oral arguments and submissions of all the parties, the CCI concluded that there was cartelization by some players in the beer manufacturing industry, as they indulged in, inter alia, fixing of prices, regulating and controlling the supply of beer, and even allocating markets among themselves, and penalties were imposed on them. Even some of the individuals and executives who were involved were also penalized.
In Re: Anti-competitive conduct in the paper manufacturing industry
In 2016, the CCI, on receipt of information regarding alleged cartelization, initiated a suo moto case against certain paper manufacturing enterprises, and an association. It came to a prima facie conclusion that the parties had acted in contravention of Section 3(1) read with Section 3(3) of the Act. On receipt of the DGs investigative report, the CCI analyzed and evaluated the evidence and after considering the oral submissions of all the parties involved, concluded that the concerned parties had formed a cartel, and they were involved in price fixation of printing and writing paper. There were also meetings organized between the enterprises, wherein a trade association also provided a common platform for such meetings and discussions. The enterprises, through these meetings, coordinated their pricing strategies. Therefore, the CCI concluded that the enterprises acted in contravention of Section 3(1) read with Section 3(3) of the Act.
In Re: Cartelisation by Shipping Lines in the matter of provision of Maritime Motor Vehicle Transport Services to the Original Equipment Manufacturers
The CCI, on receipt of some information regarding alleged cartelization by four business enterprises, initiated a suo moto case in 2014 against such enterprises. The alleged anti-competitive practice related to the formation of a cartel among enterprises for providing maritime motor vehicle transportation services to automobile Original Equipment Manufacturers, for specific trade routes.
The CCI came to a preliminary conclusion and found that the concerned parties had indulged in cartelization, in contravention of Section 3(3) read with 3(1) of the Competition Act, 2002. After studying and analyzing the DGs investigative report, as well as taking into account the evidence and the arguments of all the parties, the CCI concluded that there was a cartel between the concerned business enterprises. The parties exchanged information that is considered commercially sensitive through meetings, emails, and contracts, in order to restrict and distort competition in the market. The parties were penalized and were also ordered to discontinue such conduct.
Cartel regulation and enforcement in the USA
In the US jurisdiction, the Sherman Act was passed in 1890, in order to ensure, inter alia, free fair, and healthy competition in markets. Section 1 of the Sherman Act declares contracts that restrict trade or commerce as anti-competitive and illegal. One unique feature of the US Antitrust system is that the Sherman Act provides for criminal penalties and sanctions for violation of its provisions, meaning thereby that the concerned persons may also face criminal prosecution for anti-competitive practices. Under the US system, there is a concept of parallel conduct between the parties involved in the alleged cartelization, wherein they intentionally adopt coordinated and same practices, and such parallel conduct needs to be proved. This proof of parallelism can be used in addition to other evidence.
The curious case of the oil and diamond cartels
Organization of the Petroleum Exporting Countries (OPEC)
Oil is the most crucial commodity in the world, and those entities that try to control the supply of oil, are said to indirectly impact the supply of natural gas as well, as natural gas can be extracted from oil.
To start with, there were 7 major oil companies that came together to influence the production and pricing of oil. The 2nd World War had the most devastating effect on the majority of the countries, and most nations decided that resources should be fairly distributed in their respective jurisdictions. There was speculation that there might be nationalization of oil, and fearing this, these seven companies decided to take oil-exporting countries on board and share half of the profits earned with them. Due to tough competition, the oil companies were compelled to reduce their prices, which the oil-exporting countries were not happy with. Over a period of time, both parted ways, with the oil-exporting countries forming OPEC.
OPEC is a 13-member cartel whose goal is to regulate and control the oil supply, in order to fix the prices of oil in the international market. The majority of the crude oil reserves in the world are controlled by OPEC, and their members are major oil-producing countries. Many nations have voiced their concerns regarding the functioning of OPEC and its negative impact on the oil market.
A unique and sustained advertising campaign has been run by De Beers, wherein they have successfully manipulated the social, emotional, and cultural weakness of the human psyche in order to create a niche market for a product that is neither scarce nor rare. By appealing to the people’s sentiments, they have created a collective desire to own diamonds. An abundant gemstone had been given an exclusivity status, and the company, by controlling its supply, had managed to make diamonds a high-value item.
De Beers company had introduced a system wherein diamond supplies would be routed through their distribution channel all across the world, thereby giving it the control of having control over the worldwide supply of diamonds. Gradually, countries like Russia, Australia, and Canada decided not to take this route. Furthermore, there were many litigations filed against De Beers, alleging monopolistic behaviour for global diamond supply.
The Competition Commission of India has definitely come a long way since its inception- it has grown and developed with the changing times, and is playing an active role, especially when it comes to cartel enforcement.
Cartels are considered the most injurious form of anti-competitive conduct, and their opaque nature makes their detection and investigation quite tricky. Furthermore, factors such as globalization, liberalization, digitalization, and the proliferation of cross-border partnerships have made the identification and regulation of cartels even more difficult. Therefore, the investigative tools and systems of different competition law authorities need to be fine-tuned and sharpened. In India, there has been a shift wherein the CCI focuses more on the circumstantial evidence for cartelization rather than direct evidence in every case.
In India, we also have the Leniency Regime for cartels, primarily covered under Section 46 of the Competition Act, 2002 and the Competition Commission of India (Lesser Penalty) Regulations, 2009. There is a mechanism of imposing ‘lesser penalties’ for cartel members who approach the CCI and provide genuine and relevant information regarding the cartel, and the CCI is empowered to grant a benefit of imposing a lesser penalty than what is provided for under the Act or relevant Rules if it feels that a party has disclosed vital, complete and correct information regarding the cartelization.
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