CCI introduces Leniency “Plus” regime in India- Will it suffice?
CCI imposes highest penalty in terms of profit on a hard core cartel for coal liaisoning services for supply of coal to seven thermal power stations of Maharashtra State Power Generation Co. Ltd.
The Competition Commission of India (CCI) vide its order dated January 10, 2018 has exposed a cartel of three top coal liaisoning agents –Nair Coal Services Ltd.(NCSL)/OP2, Karam Chand Thapar & Bros. Ltd.(KCT)/OP 3 and Naresh Kumar & Co. Pvt. Ltd. (NKC)/OP4 in getting work of coal liaisoning ( involving linkage materialization, shortage minimization and quality monitoring) in respect of the tenders floated by Maharashtra State Power Generation Co. Ltd. (MAHAGENCO) for award of contract of coal liaisoning work for its various thermal power stations ( TPSs) in contravention of the provisions of Section 3(1) read with Section(3)(c) and Section 3(3)(d) of the Competition Act, 2002 ( the Act).
The CCI, while imposing the highest penalty, at the rate of 2 times of the total profits, observed that the case fell in the category of hard core cartels whereby the three opposite parties divided the seven TPSs amongst them in such a way that in each tender floated by MAHAGENCO a particular coal liaisoning agent will emerge as the lowest bidder in the pre-selected TPS (NCSL – Chandrapur, Nasik ;KCT- Khaparkheda, Parli, Koradi and NKC –Bhusawal, Paras) .CCI imposed penalty earned by each of the opposite parties during the period 2010-11 to 2012-13 from provision of coal liaisoning services to MAHAGENCO in respect of tenders awarded during the period 2009 to 2014 ,amounting to Rs. 7.16 crore, Rs. 111.60 crore and Rs. 16.92 crore upon NCSL, KCT and NKC, respectively.
Background and Facts of the case
MAHAGENCO is responsible for generation of power in the State of Maharashtra. For the purpose of running its 7 Thermal Power Stations (‘TPSs’), it obtains raw coal from the subsidiaries of Coal India Limited (‘CIL’) [viz. Western Coalfields Limited (‘WCL’), South-Eastern Coalfields Limited (‘SECL’), Mahanadi Coalfields Limited (‘MCL’)] and Singareni Coal Company Limited (‘SCCL’). In order to procure quality coal and to make proper supervision of the said supply through rail and other modes of transportation, MAHAGENCO engages services of liaisoning agents. As per the Information, in March, 2005, MAHAGENCO had invited tenders for coal liaisoning, to supervise the quality and quantity of coal supplied to its TPSs from the subsidiaries of CIL. Four companies submitted their bids to the said tender process i.e. B.S.N. Joshi & Sons Ltd. (‘BSN’) and OP-2 to OP-4. The rate quoted by BSN was the lowest. However, the said company was not awarded the work in spite of being the L1 bidder due to commencement of litigation before the Hon’ble Bombay High Court. After prolonged litigation before the Nagpur Bench of the Hon’ble Bombay High Court in Writ Petition Nos. 2444 and 4514 of 2005 and thereafter before the Hon’ble Supreme Court in Civil Appeal No. 4613 of 2006, work order was finally issued to BSN in 2009. However, the same, after a while (9 months) was terminated. The termination of work order was stated to be pending arbitral proceedings under the Arbitration and Conciliation Act, 1996. Post-termination, the contracts were awarded by MAHAGENCO to OP-2 to OP-4 on area wise basis and the Informant has alleged that since then, MAHAGENCO has been awarding contracts regularly in favor of OP-2 to OP-4 only in the geographically distributed market, which was actually agreed between them by means of entering into a cartel. The Informant stated that OP Nos. 2 to 4 being in collusion with OP-1 have conveniently divided amongst themselves 7 TPSs for doing liaison work by effectively thwarting any newcomer or any other existing company from participating in the tender process. It was also stated that MAHAGENCO is favoring formation of such cartel, particularly between OP-2 to OP-4, as is clear from the fact that since September 2009, MAHAGENCO has floated 4 tenders for granting work of supervision and monitoring of loading of coal into wagons for its TPSs by rail mode from WCL, SECL, MCL and SCCL; however, the said tenders have been cancelled for various reasons. The Informant also alleged that cancellation of such tenders by MAHAGENCO actually resulted in OP-2 to OP-4 becoming beneficiaries of the stop-gap arrangement. It was accordingly alleged that OP-2 to OP-4 have violated clause (d) of Sub-Section (3) of Section 3 of the Act as they have engaged in collusive bidding for projects with MAHAGENCO thereby scuttling any competition between themselves and raising unnecessary dispute with regard to qualification of any other competitor in the market. It was also submitted that there is also violation of clause (c) of Sub-Section (2) of Section 4 of the Act as together with MAHAGENCO, three of the leading players in the market of coal liaison/ quality/supervision work, have all colluded to deny access to other players in the market and thereby were preventing new players, if any, from participating in the bidding process. Hence, it was alleged that there was a clear violation of Section 4 of the Act also by OP-1 along with OP-2 to OP-4.
When the matter had initially come up for consideration, the Commission, by a majority order dated 11.12.2013 passed under Section 26(2) of the Act, had closed the information. However, in the appeal filed before the erstwhile Hon’ble Competition Appellate Tribunal (COMPAT), the said order of the Commission was set aside and the Director General (DG) was directed to investigate the case and submit its report to the Commission. Noticeably, while directing investigation by the DG, the COMPAT particularly directed that the DG shall not presume that MAHAGENCO was a part of the cartel with the OP2 to OP4.
Accordingly, the DG investigated the matter and, after seeking extension, submitted the investigation report to the Commission on 06.06.2016.
Investigation by the DG
On investigation, the DG noted that there existed a distinct pattern of quoting by OP-2 to OP-4 in respect of the tenders floated by MAHAGENCO during 2001 to 2013. On the basis of evidence collected, statements of the representatives of OPs as well as third parties and other material available on record, the DG noted that in the tenders floated by MAHAGENCO for procurement of services of coal liaisoning agents vide Tender No. T-03/2005 and subsequent tenders (till 2013), OP-2 to OP-4 had acted in a concerted manner by forming a cartel. The DG noted that OP-2 to OP-4 had distributed the different TPSs in various MAHAGENCO tenders for coal liaisoning. The said distribution was also depicted in Tender No. 03/2005 wherein allegations of cartelization were first levelled by MAHAGENCO. Further, in the subsequent tenders till (last) tender of 2013, the same conduct (except in one instance) was observed by the DG. The conduct of these OPs in geographically dividing the tender areas and accordingly giving their quotations to carry out such division was found to be in violation of Section 3(3) read with Section 3(1) of the Act. Further, the DG opined that through the said concert, OP-2 to OP-4 were directly determining the bid price which was a violation of Section 3(3)(a) read with Section 3(1) of the Act as these OPs first decided to divide the TPSs in different MAHAGENCO tenders and thereafter, to ensure such division, quoted accordingly in successive tenders. By sharing of tenders geographically, these OPs were also found to have contravened the provisions of Section 3(3)(c) read with Section 3(1) of the Act. The said conduct of OP-2 to OP-4 was also found by the DG as amounting to bid rigging/collusive bidding in violation of S section 3(3)(d) read with Section 3(1) of the Act.
CCI’s Observations
After considering the objections filed by OP-2 to OP4 to the findings in the DG investigation report and after hearing both the Informant and the OPs in a detailed inquiry, CCI, agreed with the findings in the DG investigation report and found that the evidence on record relied upon by the DG, particularly, from the pattern of bidding the lowest rates for the pre-selected TPS by the respective OPs , the anti-competitive arrangement between OP2 to OP 4 stood proved . CCI carefully examined various pieces of evidence put together by the DG, which included quoting of identical basic rates in respect of the tender floated by MAHAGENCO, quoting of rates in a manner so as each of them gets the chosen TPSs, making dummy bidders for the MAHAGENCO tenders by OP2, and found that the OPs were not able to offer any convincing justification for their conduct, which showed clear co-ordination between them. CCI also found that the anti -competitive coordination by the OPs, apparent from the pattern of bidding by the OPs, was also corroborated by the various “plus factors” such as no plausible explanation or justification for quoting of identical basic rates by these OPs, no justification for quoting lower rates for chosen TPSs and the remaining two OPs quoting higher rates for such TPSs in a mutual way so as to allocate TPSs amongst themselves, purchasing of tender documents by these OPs on the same dates, exchange of letters/ pre-bid queries amongst OPs, financial transactions inter se OPs including sharing of ledgers and cooking up of bogus entries in the books of account to show losses in MAHAGENCO tenders etc.
Conclusion
CCI, accordingly, found that “it is apparent that OP-2 to OP-4 did not compete in securing business as would have been expected as prudent business behaviour in a competitive market. Rather, OP-2 to OP-4 seem to be comfortable in continuing with their existing businesses under an arrangement to divide the market “ and observed that “the Commission is of opinion that the present case falls in the category of hard core cartels as OPs reached an agreement to submit collusive tenders and to divide the markets. Thus, the case deserves to be dealt with utmost severity. Accordingly, the Commission notes that it is a fit case for invoking the proviso to Section 27 of the Act and decides to impose a penalty on OP-2, OP-3 and OP-4 at the rate of 2 times of their total profits earned from provision of coal liaisoning services to all power generators, and not limited to the profits generated from MAHAGENCO alone, for continuance of the cartel for 2010-11 to 2012-13 years only based on the financial statements filed by them. Noticeably, regarding the quantum of penalty, the CCI rejected the specific request made by OPs that penalty may be restricted to the relevant turnover derived by them from the impugned tenders of MAHAGENCO, in terms of the land mark judgment of the Supreme Court in the Excel Corp Case and observed that “the contention of the parties that only the revenue generated from the impugned tender alone would constitute relevant turnover, is not tenable. In Excel Crop Care Limited v. Competition Commission of India & Ors., Appeal No. 79 of 2012, the Hon’ble Appellate Tribunal vide its order dated 29.10.2013 (in para 67) categorically observed that turnover cannot be restricted to supply made only to the concerned procurer whose tenders were rigged. The Hon’ble Supreme Court vide its order dated 08.05.2017 dismissed the appeal filed against the aforesaid order and upheld the order passed by the Hon’ble Appellate Tribunal. Similarly, the Commission is of the opinion that it is the total revenue generated from all coal liaisoning services that is relevant for the present purposes and the contention of the parties that business of coal liaisoning in respect of washed coal is not akin to the contracts under consideration, is both flawed and misconceived. It makes no difference as to coal liaisoning services are provided for washed coal or raw coal. “
COMMENT: The present order of the CCI indicates a hardening of stance of the Commission towards hard core cartels, which is evident from not only the highest ever penalties imposed in terms of double the size of the profit (before this order, the highest penalty imposed was at 1.0 Times the profit in the first case of leniency application in the supply of brushless DC fans to the Indian Railways in suo moto case no. 03 of 2014 imposed on only one of the alleged cartel participant. The order is under challenge in an appeal filed before the National Company Law Appellate Tribunal) but also from the fact that the Commission has rejected the argument of the OPs to restrict the penalty to the turnover derived from the cartelized product in the State of Maharashtra . Of course, the order will be challenged by the OPs before the NCLAT and the outcome on the issue of quantum of penalty would be worth watching for.
Key words– hard core cartel, bid rigging, allocation of market, coal liaisoning services.
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