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Cartelization In Railways Sector: Chief Materials Manager, South Eastern Railway v/s Hindustan Composites Limited

In the case at hand, the Competition Commission of India (CCI) was in receipt of references under Section 19 of the Competition Act, 2002 (‘the Act’) from different railway zones about alleged ‘cartelization behavior’ by 12 companies (‘Opposite Parties’) engaged, inter alia, in the manufacture and supply of industrial products including brake blocks. Some of these were micro, small and medium enterprises (MSMEs).

Background
Tenders were invited for procurement of composite brake blocks for different railway zones. In every zone, all the Opposite Parties submitted identical/higher bids in response to the invitation. After subsequent negotiations, the Opposite Parties offered identical reduction in their bids. Basis this coordinated behavior of the Opposite parties, the officers in charge of the various railway zones (Chief Materials Manager, Controller of Stores etc.) filed references with the CCI alleging the existence of a ‘cartel’ in violation of Section 3(3) of the Act.

On a prima facie analysis, CCI combined the references and directed the Director General (DG) to conduct a composite investigation.

Evidence
During investigation, several correspondence amongst the Opposite Parties in the form of WhatsApp messages, emails, SMSs etc. surfaced. The messages inter alia revealed that the Opposite Parties held meetings at different locations for discussions. Call records of the officials also brought to light that the Opposite Parties were in constant contact with each other. A few of the Opposite Parties and their officials admitted to the existence of a ‘cartel’. They gave a brief account of the activities— the Opposite Parties made collective decisions about bid value, bid response along with market allocation.

Ruling
The Opposite Parties inter alia argued that the Indian Railways owing to its economic strength negotiated aggressively with them to buy at the most ‘competitive’ price. Therefore, the acts of the Opposite Parties had no effect on the pricing conditions of the market and in turn, did not cause ‘appreciable adverse effects on competition’ (AAEC).

With no actual AAEC, the alleged conduct does not amount to violation of Section 3(3) of the Act, was the ultimate argument of the Opposite Parties.

The same was rejected by the CCI in its entirety on the following three grounds:
  1. A conduct under Section 3 which has not caused AAEC, but may potentially cause AAEC is also prohibited.
     
  2. Under Section 3(3), a cartel is presumed to cause AAEC. The said statutory presumption is rebuttable by the parties in light of the factors provided under Section 19(3) of the Act.
     
  3. However, in the instant case, the Opposite Parties have not been able to rebut the said presumption by leading adequate evidence, for some of the factors under Section 19(3), such as, how their conduct/cartel resulted into any accrual of benefits to consumers; improvements in production or distribution of goods or provision of services; or promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.

The Opposite Parties also submitted that due to onerous clauses introduced by Indian Railways in the tender documents, only a few of them were successful in obtaining purchase orders while the remaining were forced to stay idle. To prevent such situations of under-utilized production capacity from arising, the Opposite Parties undertook coordinated efforts (in the form of the alleged cartel) for equitable market allocation amongst them.

The CCI did not accept the justification and held that as a consumer, Indian Railways should be free to choose its service provider. The CCI added that the tough bargain by the Indian Railways to achieve the best price from the Opposite Parties was in turn necessary to accrue benefits to the railway passengers i.e. end consumers.

In view of the abovementioned, CCI found ten Opposite Parties liable for violation of Section 3(3) of the Act along with their officials who were held liable under Section 48 of the Act.

As far as remaining two Opposite Parties are concerned, there was nothing produced to establish their involvement in the cartel after 20th May, 2009 i.e. the date on which Section 3 came into effect. Therefore, the CCI did not find any contravention on their part.

Penalty
The CCI noted that the Opposite Parties offered full cooperation during investigation. Some of the Opposite Parties even admitted to their conduct further facilitating the process of justice. The CCI also looked at the small annual turnover of the parties, some of which were MSMEs. While taking into account the financial difficulties in the face of the global pandemic, the CCI emphasized upon several endeavors undertaken by the Indian Government to provide aid for survival of MSMEs. In light of all these observations, the CCI refrained from imposing monetary penalties on the Opposite Parties and their officials. The CCI merely directed them to cease the cartel behavior with immediate effect and desist from indulging in any such similar behavior in the future.

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