CARTELS UNDER COMPETITION ACT 2002 vis-à-vis

INTERNATIONAL NORMS AND PRACTICES

University School of Law and Legal StudiesGuru Gobind Singh Indraprastha University

Dwarka, Sector 16-C

New Delhi-110075

Submitted by

ADITI SAROHA 05116503811

ABSTRACT

The term cartel came up for alliances of enterprises in about 1880 in Germany. The

name was imported into the Anglo sphere during the 1930s. Before this, other, less

precise terms were common to denominate cartels, for instance: association,

combination, combine or pool. In the 1940s the name cartel got an Anti-German bias,

being the economic system of the enemy. Cartels were the structure the American

Anti-Trust-campaign struggled to ban globally.

A cartel is a form of agreement among the competing firms. It is a formal

organization of producers that agree to coordinate prices, marketing and production.

Cartels are prevalent in the oligopolistic economy, where in, there are small number

of sellers and involves dealing in homogenous product. Cartel members may agree on

such matters as price fixing, total industry output, market shares, allocation of

customers, allocation of territories, bid rigging, establishment of common sales

agencies, and the division of profits or combination of these. The basic object behind

such agreement is to maximize the individual’s profits by way of curbing down the

competition.

The cartel has been defined, in Section 2 (c) of Competition Act 2002 as under:

“Cartel” includes an association of producers, sellers, distributors, traders or service

providers who, by agreement amongst themselves, limit, control or attempt to control

the production, distribution, sale or price of, or, trade in goods or provision of

services.

Going by the definition given above, in order to form a cartel, two or more agents

must come together. It must be noted that a cartel requires an agreement between

firms. The association of the agents must be in respect to control the production,

distribution, and sale or price of, or, trade in goods or provision of services.

The cartelization was earlier governed under the MRTP Act. India enacted its first

anti-competitive legislation in 1969, known as the Monopolies and Restrictive Trade

Practices Act (MRTP Act).

The Monopolies and Restrictive Trade Practices Act came into existence during the

1970’s era and was designed to serve the needs of the prevailing socio economic

objectives of that time. However with the passage of time the Government realized

that the MRTP Act was not an effective mechanism to deal with issues and matters

relating to protection of competition in the new business environment. The

Liberalization era in India began in the year 1991 with the government opening its

doors towards an age of planned industrialized growth. As a result, the government of

India chose to enact the new law called Competition Law. The competition law was

enacted due to the drawbacks of the MRTP Act and has been successful in rectifying

the drawbacks. The cartels, therefore, has been covered under the competition law.

The producers or the businessmen forming the cartels form it by taking into

consideration the factors like- price fixing, the quantity limiting, market sharing and

bid rigging. Under the price fixing, the competitors enter into agreement whereby they

fix or raise or maintain the price of the goods to be sold. Under the quantity limiting,

the competitors enter into agreement to fix the output quota or to lower the output.

Under the market sharing, the cartel firms agree to divide the relevant market between

them and agree not to sell in each other’s designated area, thereby enabling each to set

prices knowing that the others will not undercut them. And under bid rigging, an

agreement is entered upon in which one party of a group of bidders will be designated

to win the bid and bidders keep the bid amount at a predetermined high level.

It is very necessary to break up the cartels because cartels are the most damaging form

of anti- competitive activity. Their purpose is to increase prices by removing or

reducing competition and allow the businesses to achieve greater profits for less effort

to the detriments of consumers and the economy as a whole. As a result they directly

affect the purchasers of the goods or services whether they are public or private

businesses or individuals. Cartels also have a damaging effect on the wider economy

as they remove the incentive for businesses to operate efficiently and to innovate. It is

the duty of the competition commission of India to curb the cartels as the cartels can

have the devastating effect on the national economy.

Therefore, detecting and taking enforcement action against the businesses involved in

cartels is therefore one of commission’s main priorities.

The present study attempts to analyze cartels under Competition Act 2002.

CONTENTS

Page no.

Abbreviations (I)

Table of cases (XIV)

Introduction (1)

I. Nature, meaning & types (7)

2. Basic concept of Cartel (12)

3. Various definitions (14)

4. cartels under Indian law (15)

5. types of cartels (19)

II. Characteristics and functioning

of cartels (21)

1. characteristics (22)

2. how does cartels operate (25)

3. Pattern of Bid Rigging (33)

4. understanding theory of

Collusion (34)

5. factors promoting cartel

activity (35)

III. Impact of cartels (39)

1. impact of cartel activity

on developing countries (42)

2. impact on consumers (48)

IV. control of cartels (56)

1. introduction (56)

2. International mechanism-position

of OECD (57)

3. Anti-cartel legislation and

judicial practice (60)

4. Imposing Sanctions (62)

5. whistleblowing and leniency (64)

6. some international case laws (65)

7. Recent Action against

Cartels (67)

8. Indian mechanism-Indian

Competition policy (69)

9. Position in India (73)

10. Power of CCI to impose fines (75)

11. Some Indian case laws (76)

V. Counterview and Conclusions (98)

Bibliography (124)

ABBREVIATIONS

AIR All India reports

BIFR Board for Industrial Finance and

Restructuring

CCI Competition Commission of India

CUTS Consumer Unity & Trust Society

DOJ Department of Justice

EC European Commission

MRTP Monopolies and Restrictive Trade

Practices

OECD Organization for Economic Co-

Operation and Development

OFT Office of Fair Trading

WTO World Trade Organization

TABLE OF CASES

Page no.

Airlines cartels case 67

Auction House Case 107

Ferromin International Trade Corporation, et. al. 46,48

Vs. UCAR, et. Al

Graphite Electrode Cartel case 45

Haridas exports Vs. all India float

Glass manufacturers association 110

International salt V. U.S 53

Lombard Club Case 107

Lysine Cartel case 67

Plasterboard cartel case 107

RRTA Vs. Bata India Ltd. 110

Sarabhai Chemicals P. Ltd and another, in re. 77

Soda Ash Cartel Case 102

Sodhi Transport Co. Vs. state of Uttar Pradesh 110

Standard oil co. of California Vs. United States 108

TATA Engineering and locomotive company Vs.

Registrar of Restrictive trade Agreements 78

Trucking Cartels case 77

Vitamin’s cartel case 66

INTRODUCTION

In today’s economic scenario, competition among the firms is a must for the

upliftment of nation. Competition is the vital element in the lives of consumers. For

the consumers competition in the economy is a crucial factor in determining benefits,

appropriate prices and the variety of choice to choose from. The following anonymous

quote aptly sums the essence of competition in achieving maximum good to

consumers. “Competition is good for consumers for the simple reason that it compels

producers to offer better deals- lower prices, better quality, new products and more

choice.” The object of competition or anti-trust laws is to ensure that consumers pay

the most efficient price coupled with the highest quality of goods and services they

consume. The said object can only be achieved if and only if when effective

competition policies are in place. Competition is beneficial in all angles for it

encourages produces to be more efficient, places pressure on producers to perform

effectively, optimizes allocation of resources, compels effective pricing, increases

consumer choice and options and promotes consumer welfare

In common parlance, competition in the market means sellers striving independently

for buyer’s patronage to maximize profit (or other business objectives). A buyer

prefers to buy a product that maximizes his benefits whereas the seller prefers to sell

the product at a price that maximizes his profit. Fair competition as contemplated by

competition or antitrust authorities, globally aids consumers, producers, distributors

thus benefiting society at large. However there is the presence of unfair competition

when practices such as collusive price fixing, deliberate reduction in output in order

1

to increase prices, creation of barriers to entry, allocation of markets, tie in sales,

predatory pricing etc. are present.

However, the perfect competition1 is the most efficient structure of market wherein

firms produce least cost output and charge marginal cost price. The firms do not have

any influence on price. But in reality, in competition large numbers of the firms play a

major role, therefore, selling a homogenous product is rarely found. These firms have

the tendency to differ from the product they produce. By doing so, the firms get the

command over prices and output simultaneously. The firms can charge higher price

and sell lower output and can earn higher profits. The firms are required to put lot of

efforts to make their product look different from others. If these firms agree to reduce

the competition, they have the opportunity to save the efforts on differentiation and

can charge even higher price. Hence, one can say that colluding to reduce competition

is one of the profitable business strategies of firms.

This was producers perspective, let us understand how it affects the consumers? If the

market starts moving from perfect competition to monopoly2, number of suppliers

decreases and so does the competition in the market. The consumer faces fewer

choices, poor quality and has to pay higher prices. Therefore, the consumer looses on

one hand and producer gains on the other. The loss caused to the consumer is not

personal but a loss borne by whole economy. This loss is characterized as lower

output, inefficiency in production, and no incentive for firms to innovate as firms

have no competition to face.

In order to check the anti-competitive practices in Indian market, the Government

passed ‘Monopolistic & Restrictive Trade Practices (MRTP) Act, 1969”. The object

behind the enactment of this act was to ensure that the operation of the economic

system does not result in the concentration of economic power in the hands of few, to

provide for control of monopolies and to prohibit monopolistic and restrictive trade

practices.

1 Perfect competition is the market structure wherein there are many buyers and sellers of product, the quantity of products bought by any buyer or sold by any seller is so small relative to the total quantity traded that changes in these quantities leave market prices unchanged, the product is homogeneous, all buyers and sellers have perfect information there is both free entry into and exit out of market.2 At the opposite extreme to perfect competition is the monopoly. Here the assumption of many sellers is replaced by the assumption of just one seller. So it is concentration of market or economic power in one hand.

However, MRTP Act focused only on curbing the monopolies. It was not in anyway

concerned with the promotion of competition of market. This act was a tool to check

only the public and private sector monopolies and not to the government departments

engaged in business. Therefore, MRTP Act had no role in Competition Advocacy3

and it did not have and provision to impose penalty on the offender enterprise.

Due to flaws in MRTP Act, Government of India enacted a new act called

“COMPETITION ACT, 2002”.

Competition Act, 2002 does not take dominance as per se4 anti-competitive. It also gives space to “Rule of Reason” theory i.e.

Whenever it comes to assess the abuse of dominance or market power or reason

behind profitable increase in price by the dominant firm it gives due attention to gains

or more precisely efficiency aspect of such action.

Firms may come together through mergers, horizontal agreements, acquisitions and so

on. One of the core enforcement areas of the act is ‘Horizontal Agreements’. A

Horizontal Agreement is an agreement between competing firms; in the same industry

which may result in competition problems where it causes negative market effects

with respect to prices, output, innovation or the variety or quality of products. The

Horizontal cooperation can lead to substantial economic benefits where it is the means

of sharing risks, making coast saving, pooling know-how and launching innovation

faster i.e. these are the agreements between actual or potential competitors to restrain

the rivalry between them. The agreements between the firms may include:

common pricing

common production quotas

information sharing

3 The aim of competition advocacy is to foster conditions that will lead to more competitive market structure and business behavior without direct intervention of the commission.4 Per se rule would mean that there would be very limited scope for discretion and interpretation on the part of the prosecuting and adjudicating authorities.

In most of the cases, these horizontal agreements take the form of cartel. Cartel is a

group of legally independent producers who act together to fix price, to limit supply

or to limit or regulate competition. Cartel is different from monopoly. Cartel-form of

horizontal agreement tends to curb the competition and are one of the most difficult to

detect anti-competitive agreements as generally they work in secrecy.

The fixing of prices, bids, output and markets allocation by cartels has no generally

accepted plausible efficiency justified. However, the prevailing national competition

policies are oriented towards addressing harms done in domestic markets and in some

cases merely prohibit cartels without taking some strong enforcement behavior.

It must be pointed out that cartels are unstable in nature6. Once the cartel is formed

and they are agreed upon the higher price and selling quoted output, firms have

incentive to sell more at that fixed price.

As the output sale increases in the market, prices tend to go down over a period of

time and the motive of cartel is not met. But studies have shown that cartels do not

always fall quickly under the weight of their own incentive problems. Empirical

studies have shown that on an average, cartels survive over six to seven years.

In competition literature, cartels are further categorized as hardcore cartels to address

the harm of price fixing, bid rigging, output quotas and divide markets by allocating

consumers more clearly.

Though, in the act the word ‘Hardcore Cartel’ has not been used but act includes all

four forms of cartels that are suggested in definition of hardcore cartel given by

OECD7.

Given by prisoner dilemma6 Report on Hard Core Cartels for the Meeting of the OECD Council at Ministerial Level, 2000

NATURE, MEANING AND TYPES

Merriam-Webster defines competition in business as "the effort of two or more

parties acting independently to secure the business of a third party by offering the

most favorable terms".

It is increasingly recognized more than ever that competition in markets promotes

efficiency, encourages innovation, improves quality, boosts choice, reduces costs and

leads to lower prices of goods and services. It also ensures availability of goods and

services in abundance of acceptable quality at affordable price. It is also a driving

force for building up the competitiveness of the domestic industry; businesses that do

not face competition at home are less likely to be globally competitive. Competition

ensures freedom of trade and prevents abuse of economic power and thereby

promotes economic democracy. Thus, competition in markets is benign for

consumers, business houses and economy as a whole. Cartels are generally considered

among the most serious competition infringements.

Basic concept of cartels

In a clear and concise statement of what a cartel is, the United

Kingdom’s Office of Fair Trading website explains:

In its simplest terms, a cartel is an agreement between businesses not to compete with

each other.

The three common components of a cartel are:

1) An agreement;

2) Between competitors;

3) To restrict competition.

The agreement that forms a cartel need not be formal or written. Cartels almost invariably involve secret conspiracies. The term competitors most often refer to companies at the same level of the economy (manufacturers, distributors, or retailers) in direct competition with each other to sell goods or provide services. The aspect of a restriction on competition distinguishes conduct that targets open competition from ordinary course of business agreements between firms.

The basic factors that make cartels activity, a success are as follow:

Price fixing;

Output restrictions or quantity limiting;

Market allocation; and

Bid rigging

Price fixing is an agreement among competitors to raise, fix, or otherwise maintain the

price at which their goods or services are sold. Price fixing can take many forms, and

any agreement that restricts price competition violates the law.

Quantity limiting is an agreement among competitors to fix output quota or to lower

the output.

Market sharing is one more alternative to price-control cartel; firms can attempt to

achieve the same benefits. In market sharing cartel firms agree to divide the relevant

market between them and agree not to sell in each other’s designated area, thereby

enabling each to set prices knowing that the others will not undercut them.

Bid rigging is a form of price fixing and market allocation, and involves an agreement

in which one party of a group of bidders will be designated to win the bid and bidders

keep the bid amount at a predetermined high level.

Cartels are common opponents of Consumers, Competition Authorities and

Government Agencies and hence need to be analysed effectively to enable improved

detection and stronger deterrent steps to curb their acts. In the struggle against Cartels,

Anti Cartel Enforcement Authorities must be able to daunt members on the very

grounds conducive for the growth and survival of Cartels.

Cartels under Indian law

Definition and Meaning

A cartel is said to exist when two or more enterprises enter into an explicit or implicit

agreement to fix prices, to limit production and supply, to allocate market share or

sales quotas, or to engage in collusive bidding or bid-rigging in one or more markets.

Such an agreement is presumed to have appreciable adverse effect on competition and

therefore such agreements are expressly void under the Competition Act, 200223.

Cartel is defined in section 2 (c) of Competition Act as under:

"Cartel" includes an association of producers, sellers, distributors, traders or service

providers who, by agreement amongst

themselves, limit, control or attempt to control the production, distribution, sale or

price of, or, trade in goods or provision of services.

As discussed above, before the enactment of Competition Act, cartels were governed

under the Monopolies and Restrictive Trade Practices Act, but, MRTP Act was not at

all successful and as a result Competition Act was enacted.

However, the competition act 2002, as amended by the competition (Amendment)

Act, 2007 prohibits any agreement which causes, or is likely to cause appreciable

adverse effect on competition in markets of India. Any such agreement is void24.

Cartels are agreements between enterprises (including association of enterprises) not

to compete on price, product (including goods and services) or customers. The

objective of a cartel is to raise price above competitive levels, resulting in injury to

consumers and the economy.

Therefore a cartel is said to exist when two or more enterprises enter into an explicit

or implicit agreement To fix prices

To limit production and supply

To allocate market share or sales quotas, or

To engage in collusive bidding or bid rigging in one or more markets.

Agreements between enterprises engaged in identical or similar trade of goods or

provision of services are commonly known as horizontal agreements, including

cartels of four types specified in

24 “competition law in India: policy, issues and developments” by T.Ramappa; p. 22

16

the Act are presumed to have appreciable adverse effect on competition and hence are

void and anti-competitive. The main element in the definition of a cartel is that it

requires an agreement between competing enterprises, not to compete, or to restrict

competition.

Cartels an anti competitive practice

Cartels are generally considered among the most serious competition infringements.

Competition authorities around the world are increasing their efforts to pursue cartel

offences, both domestically and internationally25.

However, under the act, cartels form a part of anti-competitive agreements. This is

explicitly provided in section 3 (3) thereof. Section 3 (3)26 declares that:

“Any agreement entered into between enterprises or associations of enterprises or

persons or associations of persons or between any person and enterprise or practice

carried on, or decision taken by, any association of enterprises or association of

persons, including cartels, engaged in identical or similar trade of goods or provision

of services, which—

a) Directly or indirectly determines purchase or sale prices;

b) Limits or controls production, supply, markets, technical development, investment

or provision of services;

c) Share the market or source of production or provision of services by way of

allocation of geographical area of market, or type of

25 “control of cartels and other Anti-competitive agreements” by Richard Whish; P 40

26 The Competition Act, 2002 as amended by The Competition (Amendment) Act, 2007 (39 of 2007); P 7

d) Directly or indirectly results in bid rigging or collusive bidding, shall be presumed to

naive an appreciable adverse effect on competition.

“Provided that nothing contained in this sub-section shall apply to any agreement

entered into by way of joint ventures if such agreement increases efficiency in

production, supply, distribution, storage, acquisition or control of goods or provision

of services.”

CONCLUSION

Cartels are anticompetitive per se in almost all the jurisdictions because of their

inevitable adverse effects. For the same reasons cartels are presumed to have

appreciable adverse effect on competition in Competition Act, 2002 i.e. it also takes

for granted or believes that cartels exert appreciable adverse effect. Therefore, cartel

restriction and chastisement is a fundamental duty of any competition authority.

INDIAN CONTROL MECHANISM OF CARTEL

INDIAN COMPETITION LAW AND POLICY:

Competition Law & Policy throughout the globe result in equity among producers and

reduce profit maximization behavior. India has well defined and clearly laid out policies

and regulations which discourage the formation of unscrupulous associations or cartels,

articulated through two acts, the Consumer Protection Act and the Competition Act. The

rule and regulations have provisions to sustain and encourage fair competition and protect

consumers against unethical and exploitative trade practices. Parties found violating the

provisions/norms of these acts faces severe punitive actions or consumer is adequately

compensated. Major provisions and implications of the Act are summarized next.

Consumer Protection Act

The main objective of the act is to provide for the protection of consumers. It applies to

all goods and services, covers all the sectors

31 See www.usdoj-gov/atr/public/press_releases/2005/212002.htm

whether private, public or cooperative. This act is compensatory in nature and is intended

to provide fast and cost effective redressal to the consumers' grievances. It provides for

the damage or loss incurred to the consumer as a result of the unethical and unfair trade

practice of the industry or the company.

Under the provisions of this act, the consumer is protected against the marketing of goods

and services which are hazardous to his/her life and property and is properly informed

about the quality, quantity, potency, purity, standard and price of goods/services. He has

access to a variety of good/services at competitive prices as well as information. He can

seek redressal for exploitation by unethical and unfair trade practices.

Indian Competition Act 200232

In the context of the new economic policy paradigm, India has chosen to enact a new

competition law called the Competition Act, 2002. The Competition Act was adopted due

to the drawbacks of the MRTP Act and the widespread consumer movement for imposing

an effective and better market regulatory system.

The Act protects interests of consumers and ensures freedom of trade for all participants

in competitive markets. Under this act, any firm or association of firms cannot engage in

any association or Cartel which directly or indirectly:

Determines sale or purchase price

Limits production, supply, markets, technical development, investment or

provision of services.

32 “evolution of competition policy and law in India” available at http://www.competition-commission india.nic.in/speeches_articles_presentations/Presentation_on_evolution_of_competition_in_India.pdf

70

limits market share or source of production or provision of services by allocating

of geographical area of market, or type of goods or services, or number of

customers in the market etc.

results in bid rigging or collusive bidding

has an appreciable adverse effect on competition

Coming back to cartels, the evidences show that cartels often were formed following a

period of declining prices, but these price declines were not generally associated with

macro economic fluctuations. They were the result of increasing competition and market

integration.

The potential profit associated with successful cartelization create a financial rationale for

firms to devise means to overcome the short-term incentives to deviate from a cartel

agreement; to frustrate entry by new firms; and to prevent detection by competition

authority. Some cartels have turned even to govt. policies to achieve their ends; for

example, international cartels may employ anti-dumping law, quotas, regulations, or

govt. surveillance etc. They also employ a variety of private measures including vertical

restraints, or use of a common sales agent, patent pooling, joint venture, and mergers.

Cartels are particularly damaging form of anti-competitive activity. Their purpose is to

increase prices by removing or reducing competition and allow the businesses to achieve

greater profits for less effort to the detriments of consumers and the economy as a whole.

As a result they directly affect the purchasers of the goods or services whether they are

public or private businesses or individuals. Cartels also have a damaging effect on the

wider economy as they remove the

71

incentive for businesses to operate efficiently and to innovate33. For the purchasers of their goods or services this means:

higher prices

poorer quality

less or no choice

Competition Commission of India34

The Central Government has established the Competition Commission of India (CCI)

with effect from 14.10.2003. The CCI is formed to prohibit and eliminate the formation

of anti-competitive agreements, abuse of dominant position by an enterprise and to

regulate certain

“combinations” which include acquisition of shares, acquiring of control and

mergers/amalgamation between and amongst enterprises. CCI ensures that no single firm

shall create of barriers to new entrants in the market or drive existing competitors out of

the market. It is also ensured that consumer surplus does not diminish and benefits must

accrue to the consumer.

CCI provides judicial opinion and advice to the Government on the possible effect on

competition emanating from its policy, statute, rules and regulations. The commission

can conduct an enquiry and is entitled to impose penalty; award compensation to

aggrieved party, modification of agreement, issues order regarding payment of costs, or

division of enterprise enjoying dominant position.

33 http://www.conferences.unimelb.edu.au/ace2005/Cartels%20brochure.pdf34 http://www.cci.gov.in/

POSITION IN INDIA

The Government had appointed a committee on Competition Policyand Law under the

chairmanship of Mr. S. V. S. Raghavan in October 1999 for shifting the focus of the law

from curbing monopolies to promoting competition in line with the international

environment. The Committee submitted its report to the Prime Minister on May 22, 2000.

It is pertinent to note that this High Level Committee only discussed the comparative

approach with respect to existing laws in other countries in their recommendations in the

report35. It however does not mention the subject of imposing criminal sanctions on

individuals as a penalty.

However, in criminal law, there is a provision for pardon, wholly or partly, in respect of

offences perpetrated, if the guilty admits the offence and turns as an approver to bring

home the guilt of others. On the analogy of criminal jurisprudence, when a member of

Cartel makes full, true and vital disclosures which results in bursting the ‘Cartel’, the

Competition Commission of India (CCI) has been empowered to levy lesser penalty

under the Competition Act, 2002. However, the party making disclosure will, be subject

to other directions of the Commission36 as per provisions of the Act.

In terms of Section 3 (3), certain agreements shall be presumed to have an appreciable

adverse effect on competition, if agreements are entered into between enterprises or

associations of enterprises or

35 Report of the High Level Committee on Competition Policy & Law (SVS Raghavan Committee Report) available at http://cci.gov.in/36 The competition Act, 2002 as amended by The Competition (Amendment)

Act,2007

persons or associations of persons or between any person and enterprise or practice

carried on, or decision taken by, any association of enterprises or association of persons,

including cartels37 engaged in identical or similar trade of goods or provision of services,

and which:

1) directly or indirectly determines the purchase or sale price;

2) limits or controls limits or controls production, supply, markets, technical

development, investment or provision of services;

3) shares the market or source of production or provision of services by way of

allocation of geographical area of market, or type of goods or services, or number

of customers in the market or any other similar way;

4) Directly or indirectly results in bid rigging or collusive bidding, shall be presumed

to have an appreciable adverse effect on competition within India.

Agreement falling within any of the above clauses (a) to (d) of Section 3 (3) of the

Competition Act, 2002 will be void under section 3 (2) read with Section 3 (1).

Further, in terms of section 19, the commission has the power to inquire into alleged

contravention of the provisions contained under section 3 following the procedure

prescribed under section 26. In terms of section 27, the Commission (CCI) may impose

penalty not exceeding ten percent of the average turnover of last three preceding

37 Thus, ‘Cartels’ are included in the category of agreements, which are presumed to have appreciable adverse effect on competition.

financial years, upon each of person or enterprises which are party to prohibited

agreement38.

In case any agreement which is prohibited by Section 3 has been entered into by any

cartel, the Commission may impose upon each producer, seller, distributor, trader or

service provider participating in that cartel, a penalty of up to three times of its profits for

each year of the continuance of such agreement or a penalty up to ten percent of its

turnover for each year of the continuance of such agreement whichever is higher.

However, CCI has been given power to impose lesser penalty in cartel cases if the

requirements of the law as provided under Section 46 are met39.

Power of CCI to impose lesser penalty in cartel cases40

In India, the Competition Act, 2002 incorporates leniency principle under section 46.

Section 46 of the Competition Act, 2002 empowers CCI to impose lesser penalty in

respect of violation of section 3 with reference to cartel cases in accordance with the

provisions of section 46.

However, it is important to note that power to impose lesser penalty is not the right of

party seeking leniency. In other words, CCI has discretion in the matters relating to

imposing lesser penalty and hence parties cannot claim leniency as a matter of right.

Discretion is not unguided as the Competition Act, 2002 in its wisdom has laid down

conditions for obtaining leniency, which in turn creates atmosphere of transparency.

38 “cartels, price-fixing and Bid-rigging” by Farhad Sorabjee39 ibid, P-440 Avaantika Kakkar on a farewell to cartels” available at http://www.ebc-india.com/practicallawyer/index2.php?option=com_content&itemid=1&do_pdf=1&id=15819

COUNTERVIEW AND CONCLUSION

It is increasingly recognized more than ever before that competition in markets promotes

efficiency, encourages innovation, improves quality, boosts choice, and reduces costs,

leads to lower prices of goods and services. It also ensures availability of goods and

services in abundance of acceptable quality at affordable price. It is also a driving force

for building up the competitiveness of the domestic industry: businesses that do not face

competition at home are less likely to be globally competitive. Competition ensures

freedom of trade and prevents abuse of economic power and thereby promotes economic

democracy. Thus, healthy competition in markets is benign for consumers, business

houses and economy as a whole27.

Cartels are equally or rather more harmful in developing economies where the rate of

detection and quick judicial punishments may not match with those in the developed

world. In the developed economies, some of the famous cases of international cartels

are:-

1. The Lombard club case28- in which the European Commission imposed fines totalling Euro 124.26 million on eight Austrian

banks (the ‘Lombard Club’) for their participation in a wide ranging price cartel

which extended to all banking products and

27 Ajit Singh, Competition and Competition Policy in Emerging markets: international and DevelopmentalDimensions, available at http://www.unctad.org/en/docs/gdsmdpbg2418_en.pdf28 COMP/36.571/D-1

services and the member banks fixed interest rates for loans and savings for

private and for commercial customers with the object to avoid competition in

‘interest rates’. The minutes of meetings, memoranda, records of telephonic

conversations, correspondences unearthed a network of cartel committees

(e.g. ‘Lending Rates Committees’, the ‘Deposits Rates Committees’, etc.)

2. The auction house cartel case29- involving the famous auctionhouses, Christie’s

and Sotheby’s of UK, which were found to be

involved in a collusive agreement fixing trading terms. The purpose of the cartel

was to reduce the fierce competition between them that had developed during the

1980s and early

1990s. The European Commission fined Sotheby’s with Euro

20.4 million which was a sixth of its world wide turnover. This fine included 40

reductions for its co-operation in the investigation. Christie’s, on the other hand,

escaped a fine being the first to provide crucial evidence to the Commission

under its Leniency Programme.

99

virtually all the plasterboard manufactured in the countries concerned. The

objective of the cartel was their common desire to reduce competition to a level

that suited their interests on the German, French, UK and Benelux markets as, in

previous years, the price of plasterboard has fallen sharply as a result of fierce

competition, which had directly benefitted consumers.

The commission found that ‘the concerted action took the form of discussions on

the fringes of trade association meetings, the sending to competitors of letters

announcing price increases to customers and even the sending, to the private

addresses of the directors of the German subsidiaries, of the instructions given to

sales forces.’ Holding that such conduct constituted a very serious infringement

of the competition rules laid down in Article 81 of the EC treaty, it imposed fines

on members of the cartel.

4. Standard oil co. of California Vs. United States31- was acase where Standard Oil, like its competitors, had entered into

agreement with its retailers that they would buy all their requirements of gasoline

and petroleum products only from standard. The US Supreme Court held that this

requirement

under the agreement violated section 3 of the Clayton Act32, as it restricted access for its retailers of other channels of

31 221 US 1 (1910)32 ‘section 1. Every contract, combnation in the form of trust or otherwise, or conspiracy , in restraint of trade and commerce among the several states or with foreign nations, is hereby declared to be illegal. Every person who shall make any such contract, or engage in any such combination or conspiracy, shall be deemend uilty of a misdemeanor, and, on conviction thereof, shall be punished by fine bot exceeding $5,000, or by imprisonment not exceeding one year, or by both said punishments, in the direction of the court.Section 2. every person who shall monoplise, or attempt to monopolise, or combine or conspire with any other person or persons to monopolise, any part of the trade or commerce among the several states, or with foreign nations, shall be deemed guilty of a misdemeanor and , on conviction thereof, shall be punished bu fine not exceeding $5000, or, by imprisonment, not exceeding one year, or by both said punishments, in the direction of the court.

100

procuring petrol and petroleum products and that therefore, competition had been

foreclosed in a substantial share of the line of commerce.

CASES IN INDIA

In India, Cartels are generally considered among the most seriouscompetition

infringements. India has well defined and clearly laid out policies and regulations which

discourage the formation of unscrupulous associations or cartels. Some of the cartel

related casesdecided in the Indian territory are as follows:-

1. The Soda Ash cartel case- in which the American Natural SodaAsh Corporation

(ANSAC) comprising six American producers of soda ash attempted to shift the

consignment of soda ash at cartelized price to India. Though the MRTPC, based

on the ANSAC membership agreement, held it to be a prima facie cartel and

granted interim injunction in exercise of its powers under Section 14 of the MRTP

Act, but this order was set aside by the Supreme Court, inter alia, on the ground

that section 14 of the MRTP Act did not give any extra territorial jurisdiction to

the MRTPC. This lacuna in law has now been removed as Section 32 of the

Competition Act, 2002 confers extra territorial jurisdiction to the CCI in respect

of such anti competitive agreements, which though executed outside India may

have an effect on competition in the relevant market in India

2. Haridas Exports Vs. All India Float Glass Manufacturers

Association33- The Supreme Court held that the mere formationof cartel by itself

will not give rise to an action. Something more

must have to be proved to demonstrate the detrimental effect. These hurdles came

in a way of a palpably existent cartel of cement manufacturers. Cement

Manufacturers’ association with 44 cement manufacturers were arraigned in an

enquiry initiated by the MRTP commission against them. It was alleged that the

manufacturers had formed a cartel, which was responsible for the increase in

prices of cement in all parts of the country. The commission immediately granted

an injunction which, when contested, had to be revoked because the assumptions

relied upon did not stand proved.

3. RRTA Vs. Bata india Ltd.35- In this case Bata industriesengaged in in the manufacture of leather and rubber canvas

footwear, entered into agreement with small-scale manufacturers for purchase of footwear to be sold by it under its own brand. The agreement prohibited these manufacturers from purchasing raw material and components from parties other that those approved by Bata. It was also required by them to use the moulds sold/ supplied by Bata exclusively for manufacturing for

Bata’s requirement. The commission held that these conditions imposed by Bata

are restrictive and prejudicial to public interest.

Looking at the recent scenario, the formation of cartels has been pointed out in Indian

premier league by the people and media.36 Committees have been formed by the

concerned authorities which in investigating into the matter.

33 (2002) CTJ 353 (sc) (MRTP)34 RTP Enquiry No. 3/1974

Therefore, the competition authority of India i.e. competition commission of India has

been a boon for the country as it has made many successful attempts in controlling

cartels. Under section 27(b) of the competition Act 2002, the CCI is authorised to impose

heavy fines or penalties. However, the MRTP Commission was not fortunate enough to

get the treatment as CCI got from the government of India.

SUGGESTIONS

“Fighting cartels is one of the most important areas of activity of any competition

authority. Cartels are cancers on the open market economy, which forms the basis of

our community38.”

The key question is whether there is a broad ranging support to treat and prosecute cartels

as serious offences? By now the contentions against cartel activity and its harmful effects

are well established but what really are the learning lessons for a country like India to

adopt? Several challenges confront competition policy system that denominates antitrust

offences as crimes and punishes culpable individuals with imprisonment. The road ahead

for India in curbing anti cartel activity is lengthy yet not difficult. To strengthen

enforcement and treatment of the offence is the first step that CCI would have to adopt to

successfully prosecute cartels. Social and Political acceptance for a vigorous criminal

competition policy would need to find its place.

Thus India a developing country yet to fully increase its efforts to detect and defeat

cartels must adopt the following important measures in addition to the existing legal

framework:

I. Stricter Sanctions39

The present penalty under Indian law for cartels is the mere levy of a fine. S. 27 sub

section (b) states that the commission in case of any agreement referred to in section 3

may impose upon each producer, seller, distributor, trader or service provider included in

a cartel, a penalty of upto three times of its profit for each year of the continuance of such

agreement or ten percent of its turnover for each year of the continuance of such

agreement, whichever is higher. It

38 Mario Monti,Why should we be concerned with cartels and collusive behaviour.39 http://www.justice.gov/atr/public/articles/240611.htm

must be remembered that fines solely do not act as a strong deterrent to minimize or curb

cartel activity.

Donald Baker stated “as long as you are only talking about money, the company can at

the end of the day take care of me – but once you begin talking about taking away my

liberty, there is nothing the company can do for me40”

The current Indian Law by the existing provision in the Act does not treat hardcore cartel

activity as a crime and as a result prosecutions of individual’s participants are over

looked. Thus it is proposed that law makers and administrators should consider inclusion

criminal sanctions on individuals for participation in cartel activity.

II. Deterrence41

Competition law reflects the willingness of the State to intervene in economic activities

by directing and encouraging businesses to conform their practices to the achievement of

a wider goal which is the running of a competitive market, that is to say a market where

consumers can acquire good quality products for reasonable prices. The deterrent level of

a sanction can be defined as the capacity to dissuade a potential offender from

committing a certain offence and thus depends on the one hand on the level of a sanction

and on the other hand on the probability of being caught. Thus, in the context of

economic regulation, the higher the belief of the potential offender that he will be

prosecuted and punished in a way that will not leave any room for profit, the greater the

deterrent effect.

40 Baker (2001) at p.70541 “legal control of cartels” available at http://cci.gov.in/images/media/ResearchReports/law_soumya_20090114122922.pdf

The level of sanctions applied by authorities and courts is an essential factor that

determines the deterrent effect. The degree of deterrence also depends upon the

probability of detection. In order to levy high deterrence measures it is essential for the

Indian law to have stronger detection mechanisms which can be enforced by the CCI.

One can say that deterrence is the main goal of the public enforcement that wants to see

the economic operators evolve in an undisrupted market. The public authority’s job is one

of general interest.

III. Whistle blower programme42

Throughout the world cartels exist and they continue to injure economies. Cartels in the

present context are becoming extremely sophisticated. Cartel members who collude and

engage in anti competitive practices are becoming increasingly careful to avoid detection.

Apart from the success of leniency and amnesty programs incorporated in several

jurisdictions including India it is of utmost significance to notice other key factors that

might aid detection thus strengthening enforcement. Therefore there is the need of having

an effective whistleblower program within the Indian Competition Legislation to enable

authorities to widen their reach on cartels and prosecute their actions. Law enforcers have

to be conscious that a change in enforcement methods, law and penalties will definitely

cover a significant effect on controlling cartel activity.

Whistleblowers may be informants, current or ex employees of a corporation or any

person aware of a conspiracy or an organisational

42 “cartels amnesties granted: worldwide whistleblowers” available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1285469

plan which breaches existing laws or regulations. Since cartel requires a certain number

of individuals to hatch and carry out the plan, more individuals can effectively be sources

of information on illegal cartel activity. Competition Authorities must pursue such

employees as vital sources in the information, evidence and trial collection stages to

throw further light into the acts of cartels43.

For a whistleblower program to be triumphant it is necessary that such individuals

providing information as whistleblowers are suitably rewarded. The object of protecting

whistleblowers is to encourage them to have a personal investment in the enforcement of

laws and in the integrity of their organisations. It is necessary to realise that

whistleblowers are an aid in enforcing statutes and in furthering public policy. While

rewarding whistleblowers, authorities must also consider the downfalls that such

individuals would face for sharing/ leaking information regarding cartel activity. Thus

apart for monetary compensation adequate socio-economic protections would also have

to be guaranteed.

The key elements of an effective whistleblower programme should include:

a) Gathering information : The main objective is cartel detection; hence it is

imperative to collect substantial information for effective prosecution.

43 Vivek Ghosal; Rewarding whistleblowers, Global Competition Review, volume 11, Issue 3, March2008.

b) Suitable Rewards: competition authorities must suitably reward whistleblowers

for the information shared in order to compensate them from the greater loss they

may face.

c) Socio- economic protection: Mere monetary compensation will not suffice an

effective reward scheme; soft factors such as the possible discrimination against

the employee, his future job prospects must be safeguarded. In case these

provisions are not effectively guaranteed no employee will see the benefit in

blowing the whistle.

d) Confidentiality measures: This remains the most prime factor while developing a

whistleblower program to ensure that the whistleblower is adequately protected of

his identity so that no possible harm may come his way. The authorities may also

need to safeguard the employee from any kind of revenge the employer may

decide to resort to in any event any information leaks out to the latter.

e) Structured Rewards: The reward mechanism should rest on the basis on

information provided. Highest consideration must be given to quality and nature

of evidence given. Whistleblowers need to be compartmentalised on the basis of

factual material submitted.

f) Job protection: Whistleblower’s usually pay the price for the information paid by

losing their jobs and a possibility of bleak future employment in the market. Job

protection still remains

Bibliography

ARTICLES

1. Vivek Ghosal; Rewarding whistleblowers, Global Competition Review,

volume 11, Issue 3, March 2008

2. Richard Whish; Control of Cartels and other Anti CompetitiveAgreements

Competition Law Today, Oxford University Press2007.

3. Dr. Robert Lieffmann : cartels, concerns and trusts

4. Policy brief; Hard Core Cartels–Harm and Effective sanctions, OECD May

2002.

5. Ajit Singh, Competition and Competition Policy in Emergingmarkets:

International and Developmental Dimensions, G 24Discussion Paper Series,

United Nations Conference on Trade and Development, No 18, September

2002.

6. Konkurrensverket, Swedish Competition Authority: fighting cartels, why

and how?

7. Farhad Sorabjee: cartels, price-fixing and Bid rigging, what can we expect from

Competition Commission; Jyotisagar Associates

8. Comdt. M.M Sharma: Predicting Business Cartels- Lessons for India

9. Jeffery Fear: Cartels and Competition: Neither Markets nor Hierarchies;

Harvard Business School

10. Soumya Narayan Hariharan: Legal control of Cartels; competition commission

of India

11. Suman Sanwal: Guidelines for cartels; competition omission of India

12. Christopher Harding and Julian Joshua, Regulating Cartelsin Europe: A study of

Legal Control of Corporate Delinquency ,

Oxford University Press 2007

13. Marc Escrihuela-Villar: cartel sustainability and cartel stability

14. Sullivan, Arthur; Steven M. Sheffrin (2003). Economics:Principles in action.

Upper Saddle River, New Jersey 07458:Pearson Prentice Hall.

15. Joseph Emmett Harrington: how do cartels operate

16. Adam Jones, "Blowing the Whistle - American-Style," TheTimes, February 24, 2000.

BOOKS

1. T Ramappa, Competition Law in India: Policy, Issues

andDevelopments, Oxford University Press 2006.

2. Vinod Dhall, Competition Law Today: Concepts, Issues and thelaw in

Practice, Oxford University Press, 2007.

3. D.P. Mittal, Competition Law, Taxmann’s 2003.

4. Mark S. Leclair, International commodity markets and role ofCartels, M.E.

Sharpe ,2000

ACTS REFERRED

1. The Competition Act 2002.

2. The Enterprise Act 2002.

3. The Sherman Anti trust Act 1890.

4. The claytons Act, 1914.

5. Monopolies and Restrictive Trade Practices act, 1969.

WEBSITES VISITED

1. http://www.usdoj.gov/atr/

2. http://www.oft.gov.uk/

3. http://www.cci.gov.in/

4. http://ec.europa.eu/comm/competition/index_en.html

5. http://www.internationalcompetitionnetwork.org/

6. http://www.unctad.org/Templates/StartPage.asp? intItemID=2068

7. http://www.competition-commission.org.uk/

8. http://www.oecd.org/home/