The Djinns of Concrete

The Competition Appellate Tribunal (‘CAT’) has set aside Rs 6,316 crore of penalty imposed on 11 cement firms by Competition commission of India (‘CCI’) on cartelization charges and asked regulator to hear the matter afresh again on grounds that adequate opportunity of being heard was not provided to them during the proceedings. 

Major Verdict of CCI Set Aside:

Earlier this year, in a ground breaking verdict that had sent shock waves in the Cement Industry, the CCI had passed an order imposing cumulative penalty of Rs 6,316 crore after an investigation into complaints of price cartelization among cement firms.  In two well-argued orders, the Regulator had found evidence of price cartelization among major cement firms in India and various other malpractices indulged by them to control the cement prices and limit the supply in the market.  The Commission had noted that “The act and conduct of the cement companies establish that they are a cartel.  The Commission holds that the cement companies acting as a cartel have limited, controlled and also attempted to control the production and price of cement in the market in lndia (para 178 of CCI order)”

On an Appeal by the Cement manufacturers, the CAT Tribunal has not only set aside the order levying penalty but has also allowed the cement manufacturers to withdraw the 10 per cent penalty amount already deposited with the CCI.  The CAT has now asked the regulator to hear the matter afresh on grounds that adequate opportunity of being heard was not provided to them earlier and pass a fresh order within three months.  The companies include ACC, Ambuja Cements, Binani Cements, Century Textiles Ltd, India Cements, JK Cements, Lafarge India, Madras Cements, Ultratech, JP Associates and Shree Cements.

Violation of Principles of Natural Justice:

The CAT believes that CCI has not thoroughly followed the principles of natural justice and has not given the company adequate opportunity of being heard.  The law of natural justice requires that if any incriminating material is to be used against an accused, it is pertinent that such a person or the accused is provided with adequate opportunity to defend himself.  This, the CAT believes is the fundamental error in law and is a sufficient reason for setting aside the order of CCI as the order was not passed in accordance with the law. 

Commenting on the procedures followed by the CCI, the CAT noted “We also feel the time has come for the Commission (CCI) to evolve a comprehensive protocol and lay down guidelines for conducting investigation/inquiry in consonance with the rules of natural justice”.  The CAT also noted "It should be realised that much of the appellate litigation would be obviated if a just and fair procedure is adopted for conducting investigation and inquiry and passing of orders under Section 27, 28 and the provisions contained in Chapter VI of the Act."

CCI didn’t hear arguments of learned counsel

Another grouse of the appellant which was agreed by CAT was that the CCI did not hear arguments of the learned counsel representing the appellants and therefore it could not be said that opportunity of being heard was provided to them.  Given that no such opportunity was provided, the accused could not become a party to the final order passed by the CCI and no penalty can be imposed.

CAT further said that the case records showed that BAI had filed a complaint with CCI on July 26, 2010.  In the complaint, it was alleged that the CMA and 11 cement manufacturers formed a cartel and did not undertake production as per their installed capacity resulting in exorbitant rise in the price of cement.  It was also alleged the cement manufacturers had deliberately manipulated the price of cement affecting the public at large.  Consequently, CCI ordered a probe into the matter, which found major cement manufacturers were controlling the cement market in India and were in violation of various provisions of the Competition Act.  On June 20, 2012, the CCI comprising the Chairperson and six Members passed two orders and declared that the appellants had acted in violation and imposed cumulative penalty of Rs 6,316.59 crore.  All the pages of both the orders have been initialed by the Chairperson. On the last pages of both the orders the Chairperson and six Members appended their signatures without any date. 

CCI chairman was absent on hearing dates

It also was argued before the CAT by counsel for one of the appellants that the "impugned order is vitiated due to violation of the rule that 'only the one who hears can decide'.  They pointed out that even though the CCI Chairperson was not a party to the hearing held between February 21-23, "and had no idea about the contentions raised by the counsel appearing for the parties, not only he became a party to the final order but also authored the same".   This according to the learned senior counsel “amounts to gross violation of the rule of fairness and impartiality and casts a shadow on the integrity of the process adopted by the Commission for adjudicating the issues raised in the information filed by BAI,"

What about the Evidence that CCI found?

One thing that seem to be missing from the ultra-technical legal interpretations and elaborate discussions on justice and fairness is the substantive evidence laid bare before the CCI.  One can argue that penalty could rightly be levied by the CCI on the grounds of substantive evidence alone and the fact that some technical rules had been violated does not set-off the force of evidence found by the CCI

Let us examine the evidence uncovered by the CCI in its proceedings:

Evidence	What it means
Price Parallelism	The Economic analysis of price data indicated that there was a very strong positive correlation in the prices of all companies.  Simply put the cement companies were increasing prices simultaneously in a scripted fashion.
Limiting and controlling production:	The documents obtained from the Commission shows that while the capacity utilisation increased, the production has not increased commensurately during this period and plant wise capacity utilisation across the board had decreased.  Simply put the cement companies were controlling production in spite of having an increased production capacity
Limiting and controlling supply:	The Commission found that the cement companies indulged in controlling and limiting the supply of cement in the market in an organized fashion.
Production Parallelism:	According to the commission, the cement companies reduced production collectively, although during the same period the production of the cement companies differed.  This was the clearest indication of co-ordinated and organized behaviour.
Dispatch Parallelism:	The Commission also observed that the dispatches made by the cement companies have been identical. Such identical despatch can only be a result of co-ordination and collusion.
Increase in price:	The Cement companies created a deliberate shortage in production and supplies.  Since the nature of Cement demand is relatively inelastic in nature this resulted automatically in higher prices for cement.  The Commission noted that it would be impossible to justify the lower capacity utilisation especially in a market which has high demand.  Therefore the behaviour was a co-ordinated attempt at raising prices by cutting production.
Price Leadership:	The commission noted that due to oligopolistic nature of the market and a few major cement manufacturers, the price leaders discussed with the other manufactures to co-ordinate their strategies to increase prices.

Next Steps - How will the CCI react to this order?

It is difficult to predict how CCI will react to this order? Will it go full swing again and levy the same penalty after following due procedures or will the long arms get weary with time.  The most important point to note is that the CAT has not quashed the CCI Order on Merits and neither has it passed negative observation on quality of evidence collected by the competition commission.  It has merely set aside the order on grounds of violations of principles of Natural Justice.  Given the above, all that CCI needs to do now would be to provide adequate opportunity of being heard to the Cement Manufacturers and follow just and due procedure both under the letter and the spirit of law and its fresh order will be legally fit and sound.    

Also, there is no reason that the evidence uncovered earlier cannot be re-used by the commission and its earlier observations cannot be called for again from the companies.  Again the commission also under no obligation to take note of its earlier order or place reliance on earlier evidence collated by it, in what is now a dead letter of law legally. 

So Round 2 of CCI could work both ways in favor of cement companies or against it.   CCI would make sure that CAT should find it difficult to find flaws in round 2 of its order, for this it would go in cautious, measured and studied steps.   But if members who passed the order are retiring, then one has to see how the new team in CCI would take up this legal juggle.  Alternatively, the companies could repeatedly challenge the proceedings before the Supreme Court or CAT in the new proceedings and buy time by exhausting all possible options.  This if done could mean severe delay in time in completion of proceedings and and the penalty may very well become a distant memory.