This article has been written by Jagrit Chawla pursuing the Diploma in Business Laws for In-House Counsels from LawSikho. This article has been edited by Prashant Baviskar (Associate, Lawsikho) and Smriti Katiyar (Associate, Lawsikho).
The competition commission of India is responsible for the regulation and enforcement of Cartel laws which is governed by the Competition Act, 2002. The decision of the competition commission regarding any particular case can be challenged and appealed to the National Company Law Appellate Tribunal (NCLAT) and following to the Supreme Court of India. The Competition Commission Act, 2002 bars the civil courts from the enforcement of any proceeding in respect of any particular matter which is enunciated by the Commission and NCLAT under the governed act.
The collusion of the companies into a single entity generally happens due to the fear of missing out in the market. Generally, strong competing firms have an added advantage to grab huge amounts of attention from the public for selling its products and services, therefore, in order to curb that competition, the firms merge together to attain a higher amount of profits collectively.
What is collusion?
Collusion is the conduct in which rival firms cooperate with each other over time to raise prices above competitive levels through coordinated action.
The types of collusion
They are two ways of collusion, one is implicit and the other is explicit collusion. An explicit collusion agreement occurs when the members of the cartel actually meet to decide upon how to control the market. Such collusion is considered illegal in the jurisdiction of India by the competition act. While on the other hand, Implicit collusion which is also termed as “ tacit collusion” essentially occurs when the members of the collusion show willingness through their actions to engage in an agreement collectively.
What are cartels?
A cartel is a group of firms that conspire to reach an agreement over such conduct by explicitly communicating with each other for the purpose of collusion.
A cartel simply means an agreement between two or more companies or business partners who are engaged in providing goods and services to the public in order to engage in the regulation of manipulative pricing structures. The companies which come under the purview of cartel organizations act as a single or complete entity.
A cartel basically has less command in the market than a monopoly. It enshrines a situation where a single entity in the market owns all aspects of products and services to make them available to the public in abundance. Some cartels formed in order to curb the competition while other cartels formed for illegal trade such as drugs and illegal substances. The cartels act as a hindrance to new business startups which generally stops the innovation for that particular product. This then leads to a monotonous situation where the cartel has the sole authority to provide goods and services to the public.
The Organization of Petroleum Exporting Countries (OPEC) is considered the world’s largest cartel. It consists of a group of 13 oil-producing countries whose motive is to coordinate and manage the petroleum policies of its member countries. The activities of the OPEC is to be considered legal because U.S. foreign trade laws protect them.
What are the legal implications of cartels?
Cartelization in India is to be considered a civil offence that is prohibited under the Competition Act, 2002. Cartel formations are strictly prohibited under Section 3(1) to be read with Section 3(3) of the act.
Section 3 of the act certainly prohibits and renders the agreement void when the business partners enter into an agreement with respect to the production of supply, distribution, storage, goods or provisions of the services which are likely to cause an ample amount of adverse effect to the competition in India.
Section 3 also stipulates the provision which basically prohibits the anti-competitive agreement among the cartel enterprises which includes:-
- Implicit and explicit determination of purchase and sale of goods.
- Limiting the control of production, investment and sales services.
- Allocation of the geographical market.
- Indulging in the collusive bidding.
Such agreements are consequently to be considered void.
Breaking the code of Section 3 of the Competition Act, 2002 is to be considered a civil offence. All the enterprises who are involved in the formation of the cartel would get penalized with a fine of up to three times the stipulated collected profits or ten percent of the total turnover, whichever is higher.
The act also involves cases with a criminal offence in the following cases namely:-
- Non-compliance with the orders of the competition commission.
- Breaking an order of the National Company Law Appellate Tribunal (NCLAT) without any reasonable grounds.
Under the cartel legislation stipulated under the Competition Act, 2002, both companies and individuals can be prosecuted. Under Section 27 of the Competition Act, 2002, the commission can pass the orders against the companies who are involved in contravening Section 3 of the act:-
- To cease from any anti-competitive conduct.
- Paying penalty upto three times of total collective profits or ten percent of the turnover.
- To modify any agreement with the contravention of Section 3.
Individuals can also be prosecuted under Section 48 of the act. Every person who is involved in the cartelization of the company would be responsible and is deemed to be found guilty.
What are the penalties imposed?
The Competition Act, 2002 does not have criminal punishments or sanctions for involvement in the cartel formation, both for companies and individuals. But, if the companies or individuals do not comply with the stipulated orders of the competition commission, then they have the power to initiate criminal proceedings with the metropolitan magistrate. The punishment may range for up to three years with a fine of INR 10 Million or both.
How are penalties in cartels determined?
There is no governed norm or any guideline which determines penalties in the cartel cases in India. But, however, based upon the practice, the competition commission will have to consider a certain or aggravating amount when determining the degree of penalty.
In Excel Crop Ltd V. Competition Commission of India, the Supreme Court held and set aggravating and mitigating factors which would then be used to determine the quantum of the penalty. Such factors include:-
- The extent and nature of the contravention;
- The time period of cartels;
- Any kind of damage due to cartelization;
- Bonafide intent of the company;
- Profits that derived from the contravention.
Cartel conduct with outside jurisdiction related matters
Section 32 read with the Section 19(1) of the Competition Act, 2002 generally empowers the Competition Commission of India (CCI) to deal with the extraterritorial jurisdiction, thereby giving the power to inquire to any cartel which operates outside India or any foreign company forming a cartel within India.
The court, in this case, held that there was no violation of Section 3 of the act even when the information had been exchanged between the competitors. The commission in this case noted that as there is no fixation of prices in their agreement, thus, the presumption of appreciable adverse effect on competition (AAEC) did not apply.
The Supreme Court in this case held that despite the identical fixation of prices by the bidders and a trade association meeting, the court found out that there was no involvement of any collusive bidding. The parallel pricing fixation is the nature of the market and not the collusion.
- Madhya Pradesh Chemists and Distributors Federation V. Madhya Pradesh Chemists and drug association ( Case 64/2014)
The court, in this case, held that any agreement which causes an adverse effect on competition but is not actually covered under section 3 of the Competition Act, 2002. However, in such concerning cases, the onus to prove the guilty side of the cartel is on Commission.
In this case, the Appellate tribunal stated that the legal machinery under the Competition Commission Act, 20020 cannot certainly be moved by a person who actually has no interest in whatsoever the subject matter of the information is.
The Cartel laws in India which are governed by the Competition Commission of India under the Competition Act, 2002 is well versed to deal with any such kind of related cartel issues and includes penalties and punishment to the wrongdoers. The main motive of the competition commission is to strike balance and curb the monopolistic autonomy in the market. The cartel laws not only apply to just companies but also to those individuals who are involved in such collusive activities. Generally the competition act, 2002 derives civil wrong against the cartelization of the companies, but if they do not obey the orders given by the Competition Commission of India, then they also have to face criminal charges. In respect of striking a balance in the market, it is a dire need for the competition commission to keep a thorough check of the companies about whether they are engaging in healthy competition or not. The biggest essential requirement for cartel formation is an agreement, thus if the agreement between the companies includes things that involve any kind of cartelization, then it would be considered to be void as per section 3 of the competition commission act, 2002.
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