In June, the Competition Commission of India imposed a penalty of Rs 6,300 crore on the top 11 Indian cement manufacturing companies (equivalent to 50 per cent of their profits in financial year 2010) for engaging in cartelisation. In another order in July, CCI imposed a fine of Rs 8 crore on three cable operator companies in Punjab and the Union Territory of Chandigarh for cartelisation.
These two cases, among many others, highlight the heightened enforcement of anti-competition laws. As such heavy penalties leave a substantial impact on a company’s profit earnings and reputation, there is a need for corporates to strengthen their controls and stay prepared against any such proceedings from the CCI.
A cartel necessarily implies an agreement amongst companies engaged in identical or similar trade of goods or provision of services to limit, control or attempt to control the production, distribution, sale or prices.
The CCI must, therefore, demonstrate that competitors shared non-public, price-sensitive information through some mode of communication — telephone, e-mail, personal meetings, or trade associations — and fixed prices, which essentially had the effect of limiting competition.
The vital defence of the parties accused in such cases will be to demonstrate that the movement in the market price of the product was on account of changes in various factors influencing the cost of product (such as raw materials, labour, increased cost of investment, or normal market volatility) and not merely due to mutual discussion between competitors.
To prepare their response to any allegation of cartelisation, companies will have to improve their cost accounting systems and records, and be ready to present their costing model to CCI to disprove allegations of anti-competitive practices. If companies are prosecuted by CCI for cartelisation, they should:
Conduct a robust cost accounting analysis with assistance of experts to demonstrate that changes in prices of goods or services are backed by changes in costs and other relevant factors, and are not mutually agreed with competitors for mutual benefit;
Maintain and retain records related to costing of goods and services to be used as defence in proceedings by CCI; and
Conduct periodic surprise checks in the form mock raids at depots and production units to unearth any unfair competition practice(s) employees at may be indulging in.
Companies should also proactively
Enforce a code of conduct that respects rules of fair competition, and prohibits anti-competitive behaviour and abuse of a dominant market position, to ensure employees adhere to these principles; and
Institute a training programme for employees, especially in sales and marketing, to educate them about anti-cartelisation and fair competition practices.
Kunal R Gupta is Associate Director - Forensic Services, PwC India