• Competition Commission of India Imposes US$ 1.1 Billion Penalty in Cement Cartel Case
  • July 11, 2012 | Authors: Manoj Bhargava; Emily S.Y. Lam; Hiromitsu Miyakawa; Peter J. Wang
  • Law Firms: Jones Day - Singapore Office ; Jones Day - Beijing Office ; Jones Day - Hong Kong Office ; Jones Day - Tokyo Office ; Jones Day - Shanghai Office
  • India's Competition Commission, which was established in 2003 and has been enforcing the cartel provisions of the law since 2009, has imposed fines of approximately US$ 1.1 billion against 11 internationally and locally owned cement manufacturers and their industry association for price fixing. After years without making any penalty decisions, the Commission has recently 'come to life' and made several cartel infringement decisions in rapid succession, of which this case is the most significant.

    To reduce the chance that their first decisions are overturned in the courts, new competition agencies often prefer to enforce against blatant breaches through direct evidence. This cartel case is remarkable in that it relies wholly on circumstantial evidence to establish a cartel, one consisting of both fixing prices and limiting output. The Commission's Director General has the power to demand the production of documents, take compulsory interviews under oath, and conduct dawn raids. However it appears there was no use made of these powers to obtain direct evidence. In establishing what level of evidence should be regarded as sufficient in such cases, the CCI has cited enforcement actions in other jurisdictions - the High Fructose Corn Syrup case (U.S.), the News Paper Cartel case (Brazil), the hen eggs case (Latvia) - and an OECD discussion document.

    The circumstantial evidence in this case consisted of lay evidence that there was extensive exchange of price and quantity information within the industry and quasi-economic evidence, including price parallelism, low levels of capacity utilization, dispatch parallelism, and super-normal profits. The parties have vigorously denied the existence of a cartel and have themselves relied on economic evidence refuting each element of the circumstantial evidence against them. It is almost inevitable that this case will be appealed in the Tribunal and the Courts.

    This case stands in stark contrast to the early cement cartel case by the Competition Commission of neighbor Pakistan, in which there was a copy of a written cartel agreement found at the cement industry's headquarters that set prices and output and capacity limits. In that case auditors were even engaged to ensure that the parties adhered to the cartel agreement.

    The Indian competition law has an administrative decision making framework, rather than a prosecution framework. Therefore the question before the courts will be whether the Commission has made an error in its process or decision, rather than the court itself directly taking evidence and determining the facts of the case. In cases involving multiple cartel respondents, a particularly common weakness is whether the evidence is adequate against each defendant taken individually. In this regard the authority may have left itself more open to challenge.

    The case also illustrates the way in which the unique Indian procedure works. The complainant in this case was the very vocal building industry association, which provided an array of allegations to commence the process. After the Commission established that there was a prima face case, it referred the matter to its independent autonomous Director General for investigation. The ensuing report was made available to the accused and the complainant for comment, and comments were lengthy and detailed. In effect this has resulted in an adversarial process between the Director General, supported by the complainant on the one hand, and the accused on the other, with the Commissioners themselves acting in a quasi-judicial way to decide which side has the stronger case.

    A final point of interest concerns the manner in which the fines have been calculated. The maximum fine is determined by reference to the higher of 10% of turnover and three times the net profit. This echoes the approach in many other countries. In this case it appears that submissions were not received from the parties on the quantification of turnover or profits and the Commission establishes the applicable maximums quite simply. On the Commission's analysis, the net profit measure is higher than the turnover measure and the Commission proceeds to then set the fines for all companies at 50% of the net profit for the cement producers and 10% of receipts against the industry association. There is no explicit rationale for choosing those 50% and 10% figures; in this respect, the decision is likely to be particularly vulnerable on appeal.

    Overall this case is one that has substantially illuminated business as to the approach of the Indian cartel enforcement system. It is likely to continue to do so as it works its way through the appeals process.