Friday, June 29, 2012

Analyzing the Impact of CCI’s Order Against Cement Companies

[In the following post, our guest contributor Rahul Singh analyzes the impact of CCI’s order in Builders Association of India v. Cement Manufacturers Association, Case No. 29/2010.
Rahul is Assistant Professor of Law, National Law School, Bangalore (on leave) & Counsel, Trilegal
A summary of CCI’s order is available here]
In a landmark decision, the Competition Commission of India (CCI) has imposed an unprecedented penalty of approximately Rs. 6300 Crores (USD 1.1 Billion) against 10 cement companies for cartelization.
This post analyzes certain common questions being asked by the stakeholders.
1. Will the CCI order determine future pricing ability of the cement companies and their decision related to utilization of production capacity?
The CCI does not have the legislative mandate to dictate future pricing abilities of the cement companies if such decisions are taken in accordance with independent economic analysis, leading to independent business justification.
The CCI’s order merely finds that there was a tacit understanding amongst the 10 cement companies to fix prices and to fix output. The trade association body - the Cement Manufacturers Association - was found to have acted as a platform for such price fixing and output fixing. Therefore, the CCI has passed a ‘cease-and-desist’ order against such collusive conduct.
However, the cement companies retain their ability to determine prices or determine their level of production, based upon their independent economic analysis and business justifications.    
2. How will the CCI enforce the penalty of Rs 6300 Crores? 
Para 8 of the CCI order states that “[t]he amount of penalty determined in case of different entities deposited within a period of 90 days from the date of receipt of this order”. The CCI typically sends a copy of the order to the parties through speed post. The parties will have 90 days to pay the penalty. If the parties fail to pay the penalty within 90 days of the receipt of the order, the CCI will issue a demand notice against the parties. The demand notice issued by the CCI usually gives 30 days to the parties to pay the penalty. Therefore, assuming the speed post will take at least a couple of days to deliver a copy of the order to the parties, the parties will effectively have a little over 120 days to pay the penalty.
In any event, §53B(2) of the Competition Act, 2002 states that “[e]very appeal...shall be filed within a period of sixty days from the date on a copy of the direction or decision or order made by the Commission is received...”. Since parties have 60 days to file the appeal and 120 days to pay the penalty, parties will have ample opportunity to argue their case before the appellate tribunal for a stay on the penalty.      
3. Is it true that until now, even though the CCI has imposed penalty, none of the contravening parties have actually paid the penalty?
No. In each case of contravention, parties have conducted their own cost-benefit analysis. Where the penalty imposed by the CCI was relatively small (e.g. Rs 1 lakh i.e. approximately, USD 2000), on balance parties found it worthwhile to pay the penalty to the CCI instead of fighting costly litigation.
However, where the penalty imposed have been relatively high (e.g. the cases of National Stock Exchange and DLF), parties have vigorously contested the CCI’s claim and sought a stay on the penalty from the appellate tribunal. For instance, in the case of National Stock Exchange, the CCI had imposed a penalty of Rs. 55.5 Crores (USD 9.8 million). Further, in the case of DLF, a penalty of Rs. 630 Crores (USD 111 million) was imposed. In both cases, a stay on the penalty was sought for and granted by the appellate tribunal.    
4. What are the chances of the appeal? What could be possible grounds for appeal?
Given the high stakes involved in the case, it is safe to assume that parties will appeal. Some cement companies have confirmed their decision to appeal. Others are expected to follow suit. Indeed, since the stakes are very high, irrespective of the decision of the appellate tribunal, the case is likely to reach the apex court - the Supreme Court of India.
Each of the cement companies made their own arguments before the CCI. The arguments at the appellate tribunal are likely to be both procedural and substantive in nature. If they stick with similar arguments that have already been made at the CCI, the appellate tribunal is unlikely to be impressed much. Parties ought to reassess the arguments that were made at the CCI, take a fresh look at their case and then approach the appellate tribunal.  
5. What is the appellate tribunal likely to do? Will the appellate tribunal at least grant a stay on the imposition of penalty?
This is extremely difficult to predict. Notwithstanding the precedents of National Stock Exchange and DLF, the appellate tribunal is all set to undergo a massive transformation with Justice VS Sirpurkar, former Judge of the Supreme Court of India, at the helm of affairs.
Justice Arijit Pasayat, the former Chairperson of the appellate tribunal was reluctant to decide cases after the Steel Authority of India Limited episode where a three-judge bench of the Supreme Court (which included Chief Justice Kapadia) had overturned his order. Indeed, the grant of stay on the imposition of penalty in National Stock Exchange and DLF under Justice Pasayat’s leadership was a bundle of contradictions. While the stay was granted in National Stock Exchange on the ground of the CCI’s lack of unanimous order (as two CCI members had dissented), stay was granted in DLF even though there was a unanimous order of the CCI (with a CCI member writing a supplementary order augmenting the majority decision).
To be sure, the settled jurisprudence on the grant of stay states that the three ingredients to be analyzed for the purpose of interim stay are: (a) the existence of a prima facie case; (b) balance of convenience; and (c) likelihood of irreparable injury. Interestingly, the appellate tribunal orders in both National Stock Exchange and DLF took note of these ingredients but also looked at other factors as mentioned above.        
6. Is the CCI order discriminatory? Have smaller cement companies been unfairly let off?
No. The CCI is dealing with two distinct cases against cement companies. While Case No. 29/2010 against the 10 large cement companies have been disposed off, another case RTPE No. 52 of 2006 involving several small cement companies is still pending. Indeed, para 6.14 of the CCI’s order clarifies the following:
         “The Commission, however, observes that decision as regards the involvement of the parties in anti-competitive agreement and the period of contravention in the instant case is limited to this case only and is independent of any other information which may be filed subsequently and also independent of decision in case no. 52 of 2006 pending before the Commission.” 
7. Though the media was rife with speculation about the penalty on Tuesday (June 19), and the order is incidentally dated June 20, why was the order posted online only on late Thursday evening (June 21)?
§57 of the Competition Act, 2002 states that, “No information relating to any enterprise, being an information which has been obtained by or on behalf of the Commission or the Appellate Tribunal for the purposes of the Act, shall, without the previous permission in writing of the enterprise, be disclosed otherwise than in compliance with or for the purposes of this Act or any other law for the time being in force”.
It is evident that the media had a whiff about the imposition of the penalty. While it is unclear whether this was due to any leak from the CCI’s office, the entire episode is likely to have a bearing upon the CCI’s reputation and its ability to handle confidential information.
8. Has the CCI been too harsh on the cement companies?
To be sure, the cumulative quantum of the penalty is unprecedented. However, the Competition Act considers cartelization to be egregious violation of competition law and mandates a deterrent penalty. Proviso to §27(b) of the Competition Act states:
         “Provided that in case any agreement referred to in §3 has been entered into by a cartel, the Commission may impose upon each producer, seller, distributor, trader or service provider included in that cartel, a penalty of up to three times of its profit for each year of the continuance of such agreement or ten per cent of its turnover for each year of the continuance of such agreement, whichever is higher
Clearly, the benchmark of the 3 times of profit under the legislative mandate indicates that the ceiling of the penalty on the basis of profits is 300%. The CCI has imposed 0.5 times or 50% of the profit as penalty, which is way below the ceiling. Curiously, however, for the benchmark of penalty related to turnover, the CCI has mistakenly interpreted the absence of discretion and computed the imposition of penalty on the basis of turnover to be at the rate of 10% and not lesser.
This means that the CCI reads the qualifier ‘up to’ in the proviso to be related to profit but not related to turnover. This is interesting as this proviso was amended in 2007 to make it discretionary. Prior to the amendment, the imposition of penalty was mandatory in nature and it read as: “Provided that in case any agreement referred to in §3 has been entered into by any cartel, the Commission shall impose upon each producer, seller, distributor, trader or service provider included in that cartel a penalty equivalent to three times of the amount of profits made out of such agreement by the cartel or ten per cent of the average of the turnover of the cartel for the last preceding three financial years, whichever is higher”.
The CCI’s interpretation of the proviso is peculiar. It seems to suggest that while the 2007 amendment made the application of penalty under the proviso to be optional, once the CCI has decided to exercise its discretion under the proviso (though it retains the option to impose a penalty lesser than 300% on the basis of profit) and if it chooses to impose the penalty on the basis of turnover it has no discretion but to compute the penalty at the rate of 10% of the turnover.
As a corollary, this also means that if the CCI decides to impose a penalty on the basis of turnover (and not profit) but if it wants to impose a penalty lesser than 10% of turnover it must seek the benefit of the main provision of §27(b) of the Competition Act and not the proviso. The main provision of §27(b), in relevant parts, states: “Where after inquiry the Commission finds that any agreement referred to in §3 or action of an enterprise in dominant position, is in contravention of §3 or §4 as the case may be, it may pass all or any of the following orders, namely… impose such penalty, as it may deem fit which shall be not more than ten percent of the average of the turnover for the last three preceding financial years, upon each of such person or enterprises which are parties to such agreements or abuse”.
There are several cases until now where the CCI has imposed penalty. It is high time that the CCI formulates guidelines for the computation/imposition of such penalty.           
9. What is the likely impact of this order? In addition to the penalty, can the cement companies be held liable to pay compensation?     
It is interesting to note that after DLF – a case against a builder; it is the builders’ association that has been successful against cement companies, manufacturers of their raw material. DLF case had qualitatively altered the landscape of Indian competition law with at least 200 cases being filed against real estate companies due to the DLF-effect. The case against cement companies is expected to have a similar, if not greater, impact on the emerging jurisprudence of Indian competition law.
Incidentally, under the Competition Act, besides the payment of penalty, the cement companies also run the risk of payment of compensation.
§53N(1) of the Competition Act states:
“Without prejudice to any other provisions contained in this Act, the Central Government or a State Government or a local authority or any enterprise or any person may make an application to the Appellate Tribunal to adjudicate on claim for compensation that may arise from the findings of the Commission or the orders of the Appellate Tribunal in an appeal against any findings of the Commission or under §42A or under sub-section (2) of §53Q of the Act, and to pass an order for the recovery of compensation from any enterprise for any loss or damage shown to have been suffered, by the Central Government or a State Government or a local authority or any enterprise or any person as a result of any contravention of the provisions of Chapter II, having been committed by enterprise”.   
10. What is the CCI’s incentive in imposing such a heavy penalty?
§47 of the Competition Act states that “all sums realized by way of penalties under this Act shall be credited to the Consolidated Fund of India”. Therefore, the penalty is paid to the Government of India ensuring that the CCI does not harbour any perverse incentive to impose heavy penalty.   
- Rahul Singh 

Thursday, June 28, 2012

The Indian Insider Trading Law Debate

In the context of Rajat Gupta's conviction in the US, my column published on June 25 in Business Standard underlines how Indian law on insider trading operates more stringently than in the US.

The response and feedback has been varied. Many find fault with the regulator for not being effective with use of its powers, and lacking in enforcement skills. Others feel that unless an accused is sent behind bars, there can be no real demonstration that the law works.  Yet others have said it is the clarity in the Indian law that hurts the regulator, and that one should have conceptual expansiveness to enable the regulator to bring charges successfully.  There has also been debate about some recent losses that SEBI has suffered in the courts.

The reality lies somewhere amidst all of these perceptions.  A loss in the appellate forum is not necessarily a reflection of the law being weak. It can also be a reflection of a wrong case having been chased.  That someone does not actually go behind bars is not necessarily a symptom of the strength of the law not having been truly demonstrated.  Worldwide, criminals operating from behind bars is a menace, and if imprisonment were a deterrent, there ought not to be so many repeat offences.  If there is lack of clarity in what constitutes compliance, even well-intentioned market players can be hauled up for breach, violating the canon of need for predictability in the legal system.

Equally, one important truth is that wide-ranging absolute power in the hands of an enforcement agency always dents the detection and prosecution skills of the police force.  Absolute power makes the agency complacent, secure in its belief in its ability to inflict injury on its own terms.  When the police indulges in "encounter" killings, the cadre gradually forgets and loses the skills necessary to bring home charges successfully to achieve conviction in a court - it believes it can put the accused to death, and need not bother with small niceties such as prosecuting and proving itself before an independent court.

Wednesday, June 27, 2012

Course announcement: NUJS Diploma course on Entrepreneurship Administration and Business Laws and How It is Useful for Law Students

[The following announcement is posted on behalf of the course administrators. It may be of interest to some of our readers]
Law schools or colleges in India do not really focus on teaching practical skills – they rather try to inculcate skills of research, writing and analysis – which are essential, but do not give you all the skills you need to provide legal services to a client. Consider the following:
You read contract law in class. But can you draft a contract? How about a franchisee agreement or a simple non-disclosure agreement?
Would you like to learn how to incorporate companies and limited liability partnerships, and how to draft a partnership deed or memoranda of association?
A few things to think about: What difference will it make if you learn all these practical aspects of law? Do you want to learn about the business side of law? Do you wonder how all the law you are learning will be useful eventually when you start practising?
A one of a kind online diploma course developed to address these issues is now being offered by NUJS. The recommended target group includes entrepreneurs, business managers, working professionals and consultants. The course will also be useful for law students of all sorts, irrespective of their year of study. Law students and young lawyers can benefit immensely from the practical skills that will be taught in the course.
For corporate and tax law enthusiasts, the course has modules covering steps for incorporation of companies and LLPs, how promoters can be remunerated from their company, annual compliance, getting licenses for import-export, tax registrations and filings, negotiating venture capital term sheets and investment agreements.
Imagine learning how to register a trademark, drafting contracts such as employment agreements and non-disclosure agreements, negotiating investments, getting business licenses and learning how to supply to the government, for your clients – these are not even taught in the best law schools.
However, make do ensure before you take the course that it falls in your interest area. Read the syllabus and the course website carefully.
Some pointers about the course
- If you are unsatisfied with how little practical legal skills are taught in you college, this would be of interest to you.
- Although the duration of the course is one year, the best thing about the course is that it will be taught over an online learning management system (LMS) – which means you can access it and learn at your own convenient time. There is no compulsory physical attendance requirement of any sort. This also means that you do not need to visit Kolkata to take the course.
- Qualification threshold (you need to submit your 12th pass certificate) has been kept low so that entrepreneurs can benefit from it – but that also means all law students can join the course.
- The assessment will be on the basis of periodic online tests. There will be a viva with NUJS faculty at the end, which can be taken online over Skype if you can’t personally visit NUJS.
- The course has been conceptualised and is being marketed by iPleaders, a venture started by two NUJS alumni who quit their law firm jobs to start this course.
Teaching Methodology and Faculty
The course will be taught online through a combination of study materials and video lectures, delivered on an online platform. The faculty will comprise experienced professionals from law firms, government and litigators.
For complete details, check the course website here.

Tuesday, June 26, 2012

Insider Trading and “UPSI”: Another SAT Order

Apart from the evidentiary aspects of the insider trading, which are quite challenging (as discussed on this Blog and in this episode on CNBC), the substantive aspects of the violation are equally daunting for regulators as they require several prongs to be established. At the same time, it is sufficient for the alleged violator to demonstrate the failure of any one of the prongs to demolish the regulator’s case. For example, under India’s Insider Trading Regulations, SEBI is required to establish that (i) the noticee was an “insider” (as defined), (ii) s/he was in possession of unpublished information that was price sensitive in nature, and (iii) s/he traded while in possession of such information.
One of the defences usually employed by alleged insiders is to demonstrate that the information in question was already known to the markets, and hence no longer amounts to “unpublished price sensitive information” (UPSI). Quite often, they have succeeded. In one such case, the Securities Appellate Tribunal overturned a ruling of SEBI in which Mr. Anil Harish and Mrs. Ratna Harish were found to be guilty of insider trading in connection with the shares of Valecha Engineering Limited.
Mr. Anil Harish was the chairman of Valecha Engineering, and the allegation was that he engaged in purchase of shares of the company during August 2009 prior to an announcement that the company was awarded projects worth Rs. 172 crores. The key question was whether that information in question was UPSI. The SAT’s conclusion was that it was not. The reasons were as follows:
It is the case of the appellants that the company is in the business of undertaking infrastructure projects.  Since it is the business of the company to carry out these projects, the orders bagged by it are in the nature of stock in trade in the business and it is not an unusual occurrence.  However, the company has laid down a policy in accordance with the general condition under regulation 36(7) of the Listing Agreement between the company and the stock exchanges that when the company reaches a level of orders of 100 crores, it informs the stock exchanges. This has been the practice of the company for a number of years and is not an exceptional occurrence.  The company has followed a constant practice of informing the stock exchange as and when orders of about Rs.100 crores are received. …
The SAT came to the conclusion whether information amounts to UPSI depends on the facts and circumstances of each case. Reliance was placed on the previous SAT order in the case of Gujarat NRE Mineral Resources (discussed here) where “it was held that earning income by buying and selling securities held in investment is the normal activity of the investment company …”. Hence, the SAT held in Mr. Anil Harish’s case:
On the same analogy, when a company which is in the business of infrastructure projects, bags an order in the normal course of its business, although it may be required to give intimation to the stock exchanges under Regulation 36(7) of the Listing agreement, the information need not necessarily be price sensitive.
Moreover, it was found that the information regarding the company’s tenders was generally known to the market, as the tenders were drawn and awarded by government departments which followed transparency norms.
The conclusion that can be drawn from SAT’s order is that the information was neither price sensitive nor did it remain unpublished at the timing of trading. On both counts, the ruling went in favour of the appellant.
This adds to the list of cases where appellants have been successful in overturning orders of insider trading passed against them by SEBI. This also demonstrates the substantive legal hurdles placed on the regulator in successfully pursuing insider trading violations. Although the Insider Trading Regulations have been constantly amended over the last few years to ease the burden of the regulator, these efforts have not materialised into more robust enforcement of the regulations.

RBI: Liberalisation in Capital Account Transactions

The Reserve Bank of India has taken measures to liberalise the process with respect to certain types of current account transactions. The measures announced include the following:
- manufacturing and infrastructure companies can avail of external commercial borrowings (ECB) to repay rupee loans towards capital expenditure; this is under the approval route with an overall ceiling of USD 10 billion (RBI circular here); and
- enhancement of the limit of USD 15 billion for FII investment in Government securities by USD 5 billion to USD 20 billion; broad-basing the non-resident investor base in Government securities, by including investors such as  Sovereign Wealth Funds (SWFs), Multilateral agencies, endowment funds, insurance funds, pension funds and foreign Central Banks to be registered with SEBI (RBI circular here).
It remains to be seen how far such measures will help boost economic growth in general and also arrest the slide in the value of the Rupee.

Monday, June 25, 2012

Singur Land Act Held to be Unconstitutional

Last year, the West Bengal legislature enacted the Singur Land Rehabilitation and Development Act, 2011 with a view to return land to the owners from whom it was previously acquired for purpose of establishing a manufacturing plant for Tata Motors. Since the project was stalled and subsequently relocated to another state, the issue pertains to the manner in which the land is to be dealt with.
The constitutional validity of the Singur Land Act was challenged by Tata Motors. Although it was upheld by a single judge of the Calcutta High court, it was found to be unconstitutional on appeal by a division bench, which pronounced its judgment last week.
The judgment, dated 22 June 2012, can be accessed through JUDISTata Motors & Anr. v. The State of West Bengal & Ors. (Coram: Justice Pinaki Chandra Ghose & Justice Mrinal Kanti Chaudhuri).
While the primary issue relates to constitutional validity and legislative competence (essentially the repugnancy of the Singur Land Act with the central legislation being the Land Acquisition Act), it brings to the fore various legal (as well as political) issues involved in land acquisition for industrial development. The following are key extracts from the judgment of the division bench:
After analyzing the arguments and decisions cited on behalf of the State and the parties we come to the conclusion and hold that both the Acts i.e. L.A. Act and present Singur Act come within the same field i.e. within the Entry 42 of List III.

Applying the tests laid down by the Court the question is now whether the law enacted by the State Government i.e. Singur Land Rehabilitation & Development Act, 2011 and the Land Acquisition Act, 1894 can go together and whether the impugned Act is repugnant to Land Acquisition Act, 1894.

It appears to us that applying all these tests we have come to the conclusion that Singur Act speaks about acquisition. We have also compared the Act with that of the Land Acquisition Act and it appears to us that the Act has failed to come over the test laid down by the Supreme Court in several decisions. It appears to us that there is clear and direct inconsistency between the Land Acquisition Act and the Singur Land Rehabilitation and Development Act, 2011, and, in our considered opinion, such inconsistency is absolutely irreconcilable.

It further appears to us that the inconsistency is such between the provisions of the two Acts that it would be direct collision with each other and it is impossible to obey the one without disobeying the other. …

In these circumstances, we have to hold that the Singur Land Rehabilitation & Development Act, 2011 is held to be unconstitutional and void since it is without having assent from the President of India.

The court, however, stayed the operation of the judgment for two months to enable aggrieved parties to go on appeal.

Saturday, June 23, 2012

Summary of CCI’s Order Against Cement Companies

[The following post is contributed by Karan S. Chandhiok, a senior associate with the competition law team at Luthra & Luthra Law Offices and a Member Executive of the Competition Law Bar Assocation. He graduated from Amity Law School in 2006 and did his BCL from Oxford in 2007.

The views are personal, and he may be contacted at

We hope to carry further comments and analyses on the order in due course]

Builders’ Association of India v. Cement Manufacturers’ Association & Ors.
The CCI, through its order dated 20 June 2012, imposed a penalty of approximately six thousand crores (approx. USD 1.1 billion) on cement manufacturers in India after holding them guilty of cartelisation in the cement industry. The penalty has been imposed at the rate of 0.5 times the net profit of such manufactures for the past two years. Additionally, the Cement Manufacturer’s Association (the CMA) has been fined 10% of its total receipts for the past two years for its role as the platform from which the cartel activity took place.   
The scope of this post is restricted the findings of the CCI, and a more detailed analysis will follow in due course.
Brief facts
The decision of the CCI emanates from information filed by the Builders’ Association of India on 26 July 2010 against the CMA and ACC, Gujarat Ambuja Cements Limited (now Ambuja Cements Limited), Ultratech Cements, Grasim Cements (now merged with Ultratech Cements), JK Cements, India Cements, Madras Cements, Century Textiles & Industries Limited, Binani Cements, Lafarge India and Jaiprakash Associates Limited.  
On 15 September 2010, the CCI formed a prima facie opinion on the contravention of the Competition Act, 2002 (the Competition Act) and directed investigations in the matter. On 31 May 2011, the Director General (DG) submitted his report (the Report) detailing contravention of the Competition Act by the respondents.
The CCI called for comments and objections from the respondents, and after considering their submissions came to the conclusion that the respondents had contravened sections 3(3) (a) and (b) of the Competition Act.
Before going to the principal findings of the CCI, it is important to note that the CCI restricted itself to the cement companies named in the information owing to the fact that such companies were the prominent participants in the market and were key players in the whole arrangement.
Similarly, as to the period of contravention, the CCI limited the period from 20 May 2009 to 31 March 2011. However, it made clear that this limitation was only relevant to the present case and would be independent of other cases.  
Preliminary Issues
Jurisdiction: The respondents had raised concern over the DG’s investigation and reliance on data prior to 20 May 2009 (the date on which the provisions of Section 3 of the Competition Act were brought into force). The CCI held that mere examination of data prior to 20 May 2009 cannot be construed to mean that the provisions of the Competition Act have been applied retrospectively. Moreover, relying on the Bombay High Court decision in Kingfisher Airlines v CCI, the CCI took the view that if the effects of acts taken place prior to 20 May 2009 were continuing, it had the jurisdiction to examine such conduct.
Failure to provide opportunity to cross examination: The respondents contented that the DG did not give them an opportunity to cross examine witnesses relied upon by him. The CCI rejected this submission and stated that by giving the respondents the chance to submit oral and written evidence before it, the proceedings were in accordance with the principles of natural justice.   
Incorrect reliance on motivated information and press reports: The respondents stated that the information filed by the Builders’ Association was motivated. This, again, was rejected by the CCI. It held that under the scheme of the Competition Act, the final outcome was to be determined on the basis of an inquiry after going into the questions whether competition forces were being inhibited due to certain anti-competitive behaviour.
Substantive Issues
The substantive question before the CCI was whether the conduct of the cement companies violated sections 3 (anti-competitive agreements) (discussed below). The CCI also examined whether there was an abuse of dominant position, but found that the market was characterised by several players and no single firm or group was in a position to operate independent of competitive forces or affect its competitors or consumers in its favour (cf.  explanation (a) to section 4 of the Competition Act).
In respect of violations of sections 3(1) (a) and (b), the CCI examined the following facts and submissions:
Market Structure of the Cement Industry: As previously stated, the CCI observed that no player can be said to be dominant in India as per the prevailing market structure. The industry is characterised by twelve cement companies having about 75% of the total capacity in India with about 21 companies controlling about 90% market share in terms of capacity. Given the oligopolistic nature of the market, each company takes into account the likely reactions of other companies while making decisions particularly as regards prices. In such a scenario, collusion between companies is possible and can be adduced from circumstantial evidence.
Circumstantial evidence is sufficient to prove violation: The chief objection taken by the cement companies was that the DG failed to support his findings with any direct evidence. The CCI, relying on international practice, noted that given the clandestine nature of cartels, circumstantial evidence is of no less value than direct evidence to prove cartelisation.      
Section 3 does not require a delineation of relevant market: The CCI has held that for an inquiry under section 3 of the Competition Act, there is no requirement under the Competition Act to determine a ‘relevant market’. The Commission states that there is a distinction between ‘market’ as used in section 3 and the ‘relevant market’ as defined in section 4 of the Competition Act.  
CMA is engaged in collecting competition sensitive data: The respondents contended that CMA collects retail and wholesale prices data from different parts of the country and transmits them to the Ministry of Commerce, as per the latter’s request. The CCI held that the competitors were interacting using the platform of the CMA and this gave them an opportunity to determine and fix prices. The fact that it was being under the instruction of DIPP did not absolve them of liability.
Further, the CCI noted that the CMA publishes statistics on production and dispatch of each company (factory wise) and circulates such information amongst its members. The sharing of price, production and dispatch data makes co-ordination easier amongst the cement companies.
High Power Committee Meetings: The CCI took note of the fact that cement prices increased immediately after the High Power Committee Meetings of the CMA which were attended by the cement companies in January and February 2011. It further noted that ACC and ACL, despite having ceased to be members of the CMA, attended these meetings. The CCI observed that whilst ACC and ACL admitted to having attended these meetings, both CMA and JAL refuted their presence. The inconsistencies in the statements of the different respondents established that they were keen on hiding material information.
Amendments to the CMA constitutional documents: Certain rules and regulations of CMA had serious competition concerns. These were highlighted in a CMA meeting on 30 November 2009. However, the amendments to those rules and regulations were only carried out once the DG sent notice to the respondents in the instant case.  
Price Parallelism: The DG had conducted an economic analysis of price data which indicated that there was a very strong positive correlation in the prices of all companies. This, according to the DG, confirmed price parallelism. The respondents argued that the correlation benchmark of 0.5 taken by the DG was arbitrary. Moreover, the prices used by the DG were incomparable since the prices submitted by the companies differed from each other (some had submitted gross prices, while others had submitted depot prices, average retail prices etc.).  The CCI did not accept these arguments and stated that given the nature of data exchanged between the parties, price parallelism could not be a reflection of non-collusive oligopolistic market conditions.
Limiting and controlling production: The Report submitted by the DG suggested that whilst capacity utilisation increased during the last four years, the production has not increased commensurately during this period. The various respondents contested these figures and led evidence to show that capacity utilisation was on the increase. It was also argued that the DG had incorrectly relied upon ‘name plate’ capacity whereas actual capacity was dependent on raw materials, plant stabilisation time, power supply etc. Therefore, if the aforesaid is taken into account, the capacity utilisation would be much higher. These submissions did not hold water with the CCI, which observed that on a year on year and plant wise basis, the capacity utilisation across the respondents had decreased.
Limiting and controlling supply: The CCI observed that the forces of demand and supply dictated that the dispatch figures should have been more than or equal to consumption of cement in the corresponding period of the previous year. However, in two months of November and December 2010, the dispatch was lower than the actual consumption for the corresponding months of 2009. It was not the case that the market could not absorb the supplies, but, instead, the lower dispatches coupled with the lower utilisation establishes that the cement companies indulged in controlling and limiting the supply of cement in the market.
Production Parallelism: The production figures across cement companies (in a particular geographical region) showed strong positive correlation. According to the CCI, in November – December 2010 the cement companies reduced production collectively, although during the same period in 2009, the production of the cement companies differed. This was a clear indication of co-ordinated behaviour.
Dispatch Parallelism: It was observed that the dispatches made by the cement companies have been almost identical for the period from January 2009 to December 2010. The cement companies argued that the parallelism in both production and dispatch is on account of the commoditised nature of cement, the cyclical nature of the cement industry and the ability of competitors to intelligently respond to the actions of their competitors. The CCI noted that the drop in production and dispatch in the November 2010 was unusual especially when November 2009 witnessed a mixed trend. Interestingly, the CCI held that the parties to a cartel may not always co-ordinate their action; periodically their conduct may reflect a competitive market. Where co-ordination proves gainful, parties will substitute competition for collusion.
Increase in price: The deliberate act of shortage in production and supplies by the cement companies and almost inelastic nature of demand of cement in the market resulted into higher prices for cement. The CCI was of the view that there was no apparent constraint in demand which could justify the lower capacity utilisation. Further, there was no constraint in demand during November and December 2010, and, in fact, the construction industry saw a positive growth in the third quarter of 2010-11.
Price Leadership: The CCI noted that the given the small number of major cement manufacturers, the price leaders gave price signals through advanced media reporting which made it easier for other manufactures to co-ordinate their strategies.
High Profit Margins: The profit margins of all the cement companies were examined by the Commission, which arrived at the conclusion that some companies posted a high Return on Capital Employed and higher EBITDA in 2010-11 as compared with 2009-10. Additionally, the CCI observed that the respondents earned huge margins over the cost of sales.
Factors set out in Section 19(3) of the Competition Act: It is worth noting that the CCI has stated that where contraventions of sections 3(3) (a) and (b) are proved, the adverse effect on competition is presumed. However, on account of the rebuttals raised by the respondents, it considered the factors mentioned in section 19(3) to determine whether an appreciable adverse effect on competition has been caused.
Although, the Commission did not go into the factors set out in section 19 (3) (a), (b) and (c), it held that the increase of price and reduced supply in the market was to the detriment of the consumers. Further, the efficiency defences in section 19 (e) and (f) were not available as the conduct of the respondents neither caused any improvement in production or distribution of goods nor any promotion of technical, scientific and economic development.
In view of the evidence and the analysis of the factors mentioned in sections 19(d) to (f), the contraventions of sections 3(3) (a) and (b) stood established.
Directions of the CCI
In cartel cases, the CCI has the power to to fine parties up to three times of its profit for each year of the continuance of the cartel or 10% of its turnover for each year of the continuance of the cartel, whichever is higher. The turnover and profit for the cement companies were examined and accordingly the following penalties were levied on the cement companies. 
Penalty (INR in Crores)
ACC Ltd.
Ambuja Cements Ltd.
Binani Cements Ltd.
Century Textiles Ltd.
India Cements Ltd.
J K Cements Ltd.
Lafarge India Pvt. Ltd.
Madras Cements Ltd.
Ultratech Cement Ltd.
Jaiprakash Associates Ltd.
In addition, the CMA was fined 10% of its total receipts for the past two years.
The respondents have been directed to pay the above penalties within 90 days of the receipt of the CCI order.
The CCI also directed the companies to ‘cease and desist’ from indulging in agreement or understanding on prices, production and supply of cement in the market. Similarly, the CMA has been directed to disengage and disassociate itself from collecting wholesale and retail prices through the member cement companies and also from circulating the details on production and dispatches of cement companies to its members.
- Karan S. Chandiok

Friday, June 22, 2012

Shareholder Power: Say-on-Pay

Recent Developments in the US: Dodd Frank Act, section 951, requires companies to approach shareholders for their non-binding vote on executive compensation and golden parachutes.
Recent Developments in the UK: A new proposal would require companies to approach their shareholders for a binding vote on executive pay.
Existing Position in India: Managerial remuneration has been historically restricted to a substantial extent. Subject to profitability of the company, senior management’s pay is subject to quantitative restrictions, to shareholders’ approval and often even to Central Government approval, all determined on the basis of sections 198, 269 and 309 and Schedule XIII of the Companies Act.
If the movements in the US and UK arose due to less regulation of executive pay, the grouse on the Indian side has been one of excessive regulation.

Regulatory Updates: SEBI and CCI

SEBI: Stock Exchanges and Clearing Corporations
SEBI has issued the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 that deal with the recognition, ownership and governance of stock exchanges and clearing corporations.
Certain minimum ownership and net worth requirements have been specified. Maximum shareholding by a single shareholder has been limited to 5% (with some exception). Moreover, a majority of equity shares is required to be held by public shareholders.
Relevant extracts are as follows:
17. (1) Atleast fifty one per cent. of the paid up equity share capital of a recognised stock exchange shall be held by public.
(2) No person resident in India shall at any time, directly or indirectly, either individually or together with persons acting in concert, acquire or hold more than five per cent. of the paid up equity share capital in a recognised stock exchange:
 Provided that,—
(i) a stock exchange;
(ii) a depository; 
(iii) a banking company;
(iv) an insurance company; and 
(v) a public financial institution,
may acquire or hold, either directly or indirectly, either individually or together with persons acting in concert, upto fifteen per cent. of the paid up equity share capital of a recognised stock exchange.
(3) No person resident outside India, directly  or indirectly, either individually or together with persons acting in concert, shall acquire or hold more than five per cent. of the paid up equity share capital in a recognised stock exchange.
Every stock exchange is required to have a minimum net worth of Rs. 100 crores.
In addition to the regulations, SEBI has issued a press release that details additional mechanism for regulating conflicts of interest in market infrastructure institutions such as stock exchanges and clearing corporations.
These regulations arise as a result of the settlement arrived at by SEBI with the MCX Exchange during the pendency of an appeal before the Supreme Court. They are also issued pursuant to decisions taken by SEBI on April 2, 2012.
CCI: Cement Companies
In a significant order, the Competition Commission of India (CCI) has imposed a hefty penalty on 11 cement manufacturers for anti-competitive practices. CCI’s accompanying press release summarizes the impact:
The Competition Commission of India has found cement manufacturers in violation of the provisions of the Competition Act, 2002 which deals with anticompetitive agreements including Cartels. The order was passed pursuant to investigation carried out by the Director General upon information filed by Builders Association of India. The Commission has imposed penalty on 11 Cement Manufacturers named in the information @0.5 times of their profit for the year 2009-10 and 2010-11. The penalty amount so worked out amounts to more than Six thousand Crores.  The Commission has also imposed penalty on the Cement Manufacturers Association.
[emphasis added]
The order is fairly lengthy (at 258 pages), and we will have the opportunity to analyze it in some detail soon.