Insurance Management

Apparently, the CCI has sent a letter to the Department of Financial Services last month enquiring whether its directions to four insurance companies to avoid any competition among themselves would lead to some sort of cartelisation. to quote from the report:

“….It asked the finance ministry to share the letter with it along with the justification for the move. In the absence of any reply from the finance ministry on the issue so far, the CCI is now planning to send a notice to the department to answer its queries.”

Now frankly, if the government wants the existence of a tacit cartel between four of the biggest Indian Insurance companies, then the Commission cannot do much about it. Government intervention, no matter how anti-competitive it may seem, is as of now justifiable under Indian competition law.

However, what is surprising is that the government seems to be least concerned about the procedure to be used by it in order to do so. Section 55 clearly allows the Central Government to issue directions to the Commission whenever it deems necessary on questions of policy. Furthermore, Section 56 also allows the Central Government to supersede the CCI, with Section 56(1)(c) clearly allowing such supersession when “circumstances exist which render it necessary in the public interest to do so.” by notification and for reasons to be specified therein.

We have highlighted this problem earlier in the Cement cartel case, wherein again the collection of information was not exempted by the Government via a notification and hence, became a ground for the action against the CMA on the grounds of cartelisation.

Indian Competition Law’s Dark Night. (A Post Script)

Just two queries to be asked in this post script to the previous post:

1. A valid contention was raised by one of the respondents on page 78 of the Order that the prices of Cement Corporation of India, a PSU, also rose along with the other respondent manufacturers. However, the DG did not take notice of this fact. A fair question. Why ??

2. Exactly why have large portions of the data published in the Order been hidden (crossed out to be specific) ?!

Any suggestions ??

Indian Competition Law’s Dark Night.

The analogy might seem stupid or funny to many, but I just couldn’t help but remember the movie Batman Begins while reading the news about the CCI’s Cement Cartel Decision. Think about it, just like the Batman, there are now those who love the CCI, proud that someone decided to teach the big corporations a lesson, and there are those who hate the CCI, who are not only crying themselves hoarse on the injustice meted out to the Cement Manufacturers’ Association (CMA) and its affiliated companies and who will surely appeal to the COMPAT, and if required, even the Supreme Court.

While I do support the decision (a day may come when I shall become Anti- CCI, but it is not today and shall probably not come for quite some time), there are a few questions or points which do merit consideration, just for the sake of clarification, if nothing else. They are as follows:

1. Almost all the companies as respondents have contended that there profits actually fell for the period in consideration, and hence, no benefit actually accrued to the companies who were allegedly members of the cartel. Even assuming that this is true, the argument is irrelevant under competition law. The U.S. Supreme Court held as far back as 1927 in United States v. Trenton Potteries Co. et. al., 273 US 392 (1927) that

“the aim and he aim and result of every price-fixing agreement, if effective, is the elimination of one form of competition. The power to fix prices, whether reasonably exercised or not, involves power to control the market and to fix arbitrary and unreasonable prices….Once established, it may be maintained unchanged because of the absence of competition secured by the agreement for a price reasonable when fixed. Agreements which create such potential power may well be held to be, in themselves, unreasonable or unlawful restraints without the necessity of minute inquiry whether a particular price is reasonable or unreasonable as fixed and without placing on the government”

The decision was further affirmed in United States v. Socony-Vacuum Oil Co., 310 US 150 (1940) wherein it was observed

“Any combination which tampers with price structures is engaged in an unlawful activity. Even though the members of the price-fixing group were in no position to control the market, to the extent that they raised, lowered, or stabilized prices, they would be directly interfering with the free play of market forces.”

2. Circumstantial Evidence also seems to have become a bone of contention with every respondent contending that the circumstantial evidence is not good enough to prove a cartel. This IS a contentious issue since the use of circumstantial evidence in competition law is as of now debatable. I would prefer to let the OECD do the talking on this subject, through their excellent policy roundtable paper on the same. The key point to note is that their primarily two forms of circumstantial evidence, communication evidence and economic evidence. Of the two, communication evidence is considered to be the more important as economic evidence is often ambiguous due to the multiple interpretations available for the same. This is more than evident in the Order itself, wherein a number of respondents have relied on the affidavits and expert opinion of economic experts to substantiate their case. ( One sees to get the impression that all of them have their own opinion regarding the same !! 😀 Also, pages 156 and 157 of the Order speak on the Commissions decision of circumstantial evidence).

3. There is a prickly issue in the claim that the collection of the information was asked by the government itself, and that after the closure of the Office of Development Commissioner of Cement Industry (DCCI) in 1989, the CMA was directed by the Department of Industrial policy and Promotion to collect and submit data which was earlier collected by the DCCI. Now Section 54 clearly allows the Central Government, by notification to exempt any enterprise or class of enterprises from the provisions of the Act where that enterprise performs a sovereign function on behalf of the Central Government. Also, in case an enterprise is engaged in any activity including the activity relatable to the sovereign functions of the Government, the Central Government may grant exemption only in respect of activity relatable to the sovereign functions. The collection of such information by the CMA for the Ministry of Commerce can be interpreted as the performance of the sovereign function for the Central Government. The catch: I could not find any notification issued by the Central Government published in the Gazette which grants such an exemption to the CMA. If the respondents possess one, then good for them. It will be a very strong argument before the COMPAT.

4. I don’t see the relevant market issue ( See pages 184 and 233 of the Order) as a serious problem as long the evidence points to a general collusion. However, only further proceedings before the COMPAT help us understand this issue better.

Some Thoughts on Cartels in India

This post arises out of the often lengthy (and occasionally extremely annoying to others!!) bouts of brooding which often hijack my head. Though the subjects of such musings are mixed and varied, this particular one was specifically on competition law. Eventually, the contemplation became more subject specific, i.e., on cartels in India. Therefore, I pen my thoughts below and invite an active discussion on the issues regarding the same.

1. Under Section 27(b) of the Act, the Commission can impose a penalty against any cartel which shall not be more than ten percent, of the average of the turnover for the last three preceding financial years upon each person or enterprise involved in any such a cartel. The Question: Will ten percent really be enough to deter any cartel formation ?? Allow me to explain. It is now accepted that the level of sanctions should be of such amount so as to deter crime. A high level of sanction therefore, contributes to minimise the costs of enforcing the law as a high penalty acts as an effective deterrent to crime. Now when it comes to a cartels, a firm shall only participate in such collusion depending on the advantage it may derive from such a cartel. Obviously, if the profits are not worth the risk, why bother to step on the shoes of the law in the first place ?!?! Now, even with the imposition of penalty (which to be noted cannot exceed ten percent as per Section 27(b)), would this clause of a ten percent limit on an imposition of the penalty actually act as a deterrent in the effective enforcement of the law ??

To take a hypothetical example, lets say four firms decide to enter into a cartel sensing to grab the opportunity to abuse their combine domination on the market. The Cartel presumably, is not discovered for atleast two years (its a lot harder than one would like to believe), and in the meantime each firm manages to garner a turnover/revenue of approximately 400 crore for each year. Therefore, for the two years, a turnover of 800 crore. The year before that (which would be required to calculate the penalty), on an average, each company use to make an average turnover/revenue of 200 crore. Therefore, an average of of the three years – 333 crore(approx.). Therefore, ten percent of this amount would result in 33.3 crore penalty on each firm. A paltry and insignificant sum as compared to the 400 crore advantage each firm derived in the two years of the existence of the cartel. Therefore, where and how does it create a deterrence amongst firms to engage in such future cartelisation , when it is more than obvious that irrespective of the penalties, the firms shall make a profit ?!?!

(Update: Of course, as it turns out, the above was a redundant questions as I completely forgot to take into account the proviso to Section 27(b) which does provide a solution to the dilemma. An unfortunate consequence of writing posts half asleep !! Deeply apologise for the error as regards cartels. However, the theory would still hold true for other anti – competitive arrangements.)

2. Should the Commission (and the DG of investigation) adjust penalties and sanctions by granting the incentive to one or more members of the cartel to undercut each other ?? Simply put, undercutting in cartels is allowing one firm an exemption from a probable penalty for participation in a cartel by encouraging it to break the cartel by offering their goods at lower prices than the collusive price among member of the cartel. Its not a tactic that Commission has used till now, but it should consider using such innovative methods if it intends to maintain competition in the market and still be able to effectively conduct investigations and pass orders in a reasonable time and prevent a backlog of cases, which is unfortunately, more than prevalent among other Courts and Tribunals in the Country.