ISSUE VI : Secret agreement – Fragile evidence

Introduction

Collusive Bidding or Bid rigging denotes collusion of bidders (actual or potential) with an intention to keep the bid amount at a pre-determined level. Collusion must be generated by a “secret” agreement between two or more parties for an illegal purpose. Such “secret” agreement may be horizontal1 or vertical2. If bid rigging results in an adverse effect on competition in India, it is prohibited by Section 3(3) of the Competition Act, 2002 (“Act”). The Act defines bid rigging as “any agreement, between enterprises or persons engaged in identical or similar production or trading of goods or provision of services, which has the effect of eliminating or reducing competition for bids or adversely affecting or manipulating the process for bidding.

Competition Commission of India (“CCI”) aims to eliminate such anti-competitive practices, so as to ensure free trade in India, and protect the interest of the end users. CCI has passed several orders to eliminate anti-competitive agreements and bid rigging. This bulletin examines an order of August 06, 2013 where the CCI discussed bid rigging and market allocation in a reference filed by the Directorate General of Supplies & Disposal (“Informant”), a government department, against eleven shoe enterprises (“Opposite Parties”) situated across India. It clearly discloses the ability of CCI in concluding inquiries and passing orders without sufficient evidence and, thereby, proved CCI’s ability to control anti-competitive practices in India.

Case Facts

The Informant filed a reference under section 19(1)(b) of the Act with CCI against the Opposite Parties, alleging they engaged in bid rigging and market allocation while bidding for a tender floated by the Informant for polyester blended duck ankle boots (“Product”) and conclusion of new rate contracts for the period December 01, 2011 to November 30, 2012. The Product was procured by various government agencies against the Rate Contracts awarded by the Informant. The Informant provided the following information alleging cartel formation and violation of the various provisions of the Act by the Opposite Parties.

The Opposite Parties quoted the prices with only a slight variation for 45 types of the Product. They did not consider the cost of transportation to be incurred by them while offering the prices. Further, they restricted the quantity to be supplied by them during the 12 month period specified in the tender. The Opposite Parties mutually agreed the quantity allocation by sharing the allotments among themselves. Contravention of section 3(4)3 of the Act was also alleged as the Opposite Parties were involved in different levels on the production chain of the Product.

Objections raised by the Opposite Parties

The Opposite Parties made unjustifiable and lame objections to the allegations made by the Informant. They stated they are small and micro enterprises who enjoy special consideration from the government and participation in a meeting under the platform of trade federation is not a ground to conclude that they discussed about the tender before making an offer. Similarities in tender rates occurred as the Opposite Parties are in the same trade, having almost same and similar plant and machinery, source and cost of raw material, production specification and delivery time. Further, the Informant had the machinery to check the fairness of the rates quoted by them for the Product, hence the offered rates could not be treated as final. In addition, the Opposite Parties also highlighted the decision of the Supreme Court of India that the conscious price parallelism is not unlawful44.

Observation & Order of CCI

After hearing the objections, CCI noted and observed that the Opposite Parties quoted identical or near identical rates for the Product despite variations in cost factors arising out of differences in product range, installed capacities, size of operations and sources of procurement of raw materials. The rates quoted were inclusive of applicable taxes, which were different as they were located in different geographical regions. Therefore, the rates of suppliers with lesser taxes should have been lower than the rates of other competitors due to the advantage of lower tax rate. In such a scenario, the cost component ought to have been different.

The Opposite Parties limited the quantities to be supplied and restricted the options of procuring the Product from other parties. This imposition of quantity restrictions had been started by all the Opposite Parties simultaneously one year before the 12 month tender period, whereas there were no such restrictions in the prior periods. Moreover, they were registered manufacturers with the Informant at the same level of production chain with different production capacities of the Product. Their turnover ranged from INR 28,400,000 to INR 397,100,000 (i.e. USD 429,198 to USD 6,001,213) and their profit margins also varied from 2% to 15%. Further, one of the Opposite Parties had submitted copies of certain documents being performance statements pertaining to other Opposite Parties which included the details about total value of orders received, value of orders due for supply, cut of dates and value of orders supplied or to be supplied.

After careful consideration, CCI concluded that the conditions prevailing the Product, price, quantity, and market were conducive for the Opposite Parties to reach an agreement for bid rigging and mutual allocation of market. CCI held that the above arrangements clearly establish that the Opposite Parties determined the price, supply of the Product, and its market share, thereby violating the provisions of section 3(3)(a), (b) & (c) of the Act, which is expressly barred. Further, CCI also stated that the Opposite Parties are not entitled for the benefit emanating from aforementioned decision of the Supreme Court as it refers to accidental or incidental price uniformity or pure conscious price parallelism. Apart from the conscious price parallelism, there is circumstantial evidence, which establishes anti- competitive conduct and results in an adverse effect on competition in the market.

Accordingly, CCI passed an order against the Opposite Parties, directing them to cease and desist immediately from indulging in such anti-competitive conduct in future by filing an undertaking within 30 days and imposed a penalty at the rate of 5% of the average turnover for three years of each enterprise, i.e. a sum of INR 30,968,000 (i.e. USD 468,007) payable within 60 days. CCI concluded that the Opposite Parties are at the same level of production chain in the same market for supply of the Product. Hence, there is no contravention under section 3(4) of the Act.

Assessment

As stated previously, in terms of section 3 of the Act, no enterprise or association of enterprises can enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which cause or are likely to cause an appreciable adverse effect on competition within India, and such agreements are void. In the present case, the Opposite Parties offered almost similar rates. The rates were not influenced by differences in product range, sources of procurement of raw materials, installed capacities, size of operations and taxes. This falsified the explanation and justification advanced by the Opposite Parties that manufacturing cost was the same and, therefore, the rates quoted were identical.

It is evident that the total quantity for the 12 month period was restricted to almost half of their original and maximum capacity, which could not be supported with any valid justification. Further, such restrictions commenced only one year before the 12 month period, and it resulted in their collusive action for mutual allocation of the market. Competitors generally do not share their information about value of orders, due dates, etc. In the present case, one of the Opposite Parties had submitted copies of such documents pertaining to all, thereby clearly establishing the mutual sharing and exchange of information amongst them. On a careful consideration of entire circumstances i.e. quotation of similar prices despite the different geographical locations of the units with varying tax structure and different margins, possession of the performance statements of other bidders, participation in association meetings, and failure on the part of the Opposite Parties to provide any reasonable explanations, CCI held that the Opposite Parties entered into a secret agreement to determine prices besides rigging the bid.

In conclusion, there may be possibility of bid rigging, when few enterprises repetitively supply goods or services for identical or very similar price. Meetings for such anti-competitive practices are held in secret and documentation is limited. Hence, the evidence to establish unlawful conduct of the enterprises may not suffice to conclusively establish such conduct, so it is imminent that the CCI reconstitutes some details by presumption based on what is available.

Authored by:
E. Sathish Kumar

1 A horizontal agreement is one between enterprises or persons engaged in similar trade.

2 A vertical agreement is among enterprises or persons at different levels of product chain in different markets.

3 Agreement among enterprises or persons at different stage or levels of the production chain in different markets in respect of production, supply, distribution, storage, sale or price, trade in goods or provision of service.

4 Union of India V. Hindustan Development Corporation, (1993) 3 SCC 499.

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