Introduction
A cartelization is a form of civil offense whereby an association of individuals or businesses like producers, sellers, distributors, traders, or service providers try to control the open market and run a monopoly over the production, distribution, sale, or price of, or trade-in, goods or provision of services. In short, they try to obstruct other businesses’ right to participate in the open market. It is defined in the Competition Act of 2002 (the Act) under Section 2(c) and is prohibited under Section 3(1) r/w. Section 3(3) of the Act. A cartel is formed when two or more competing entities sign a horizontal agreement agreeing to fix the prices of products, to limit or control the supply, production, technical development, or provision of services, to share or allocate different geographical markets or sections of customers, or to rig the bidding processes. Section 3 is responsible for prohibiting horizontal agreements like those between competing entities in the market and vertical agreements like those between the entities at the various stages of production. Cartelization
It is specifically defined and prohibited under the Competition Act of 2002, which in turn makes it a civil offense, for the sole reason that cartelization is an issue of competition, or for the lack thereof, that it creates, in the market.
Procedure
A practical approach is taken by the CCI (Competition Commission of India) in the prevention of any suspected cartels, whereby it is required to prove the existence of any horizontal agreement in this regard between any two or more competing business entities. If the existence of such an agreement is proved, they are automatically assumed to cause appreciable adverse effects on competition (AAEC). This agreement need not be a written contract nor does it need to be legally binding, but instead, this ‘agreement’ is given a broader meaning to include any meeting of minds or combined action by all the parties involved, resulting from such meeting of the minds. To prove the existence of such an agreement, the CCI applies the test of preponderance. This basically means that the CCI has to draw inferences by coincidental similarities across a variety of events and discussions, which when taken together, can have no other meaning or final inference apart from the proving of the existence of such an agreement. The main procedure to be followed while opening an investigation in this regard are:
The CCI has the authority to inquire into any cartel arrangement it suspects so as to initiate investigative measures to prove the existence of an agreement. The CCI gains the right of inquiry in the following circumstances-
Receipt of information filed by an individual or their business
Receiving reference by any statutory authority
Getting receipt of a leniency application.
Or by its own motion (Suo Moto)
Upon receiving such information, the CCI shall have to form a prima facie opinion on the matter and pass an order which is either of the two:
If the CCI finds that there is no prima facie matter, it shall close the matter and pass an order under Section 26(2) of the Act or;
If the CCI finds that there is a prima facie matter worth investigating, it shall direct the Director General (DG) to investigate the matter under Section 26(1) of the Act.
The Director General is the investigation sector of the CCI, and in case it receives direction from the CCI to open an investigation pursuant to suspicious cartel activity, the DG is obligated to review all such information on record with the CCI and further investigate and collect more information and evidence regarding the same. After it has collected the requisite information and evidence, it is required to submit a report to the CCI containing all its findings and its analysis of the allegations made.
The CCI again gets the right to inquiry as per the following two scenarios:
If the DG finds that there is indeed contravention as per the Act, the CCI has the discretion to either agree with the findings of the DG and pass any kind of order under Section 27 of the Act or;
If the DG finds that there is no contravention as per the Act, the CCI has the discretion to either invite objections from any of the parties in connection to the DG report, agree with the findings of the DG and close the matter, or disagree with the findings of the DG and further direct an investigation or inquiry or Suo Moto proceed with an inquiry.
In addition to this, Section 32 also empowers the CCI to inquire into any anti-competitive behavior exhibited by any business entities outside the territory of India, but whose effect was felt in India. In other words, CCI has the right to investigate cartel arrangements done by business entities that originate outside India but have a direct impact on the healthy competition of Indian business entities in that particular sector or otherwise.
Penalties for Cartels under the Act & the right to appeal
The penalty imposed under the Act for the cartels violating the provisions of the Act is a monetary fine which is up to 10% of the average turnover of the violating businesses for the preceding 3 financial years or in case the cartel remains operational in the future, an amount upward of three times the profit or 10% of the average turnover for each year the cartel continues its operations. There is no clear definition or list of mitigating or aggravating factors specified by the Act, but the CCI has taken the discretion to take into account any and all aggravating or mitigating factors in deciding the quantum of penalty.
There is also the scenario of leniency in the decision of the quantum of penalty to be imposed. Section 46 of the Act r/w. the Competition Commission of India (Lesser Penalty) Regulations, 2009 constitutes a regime to allow for leniency in deciding the quantum of penalty for the contravening parties to the Act. The main goal of these regulations r/w. Section 46 of the Act is the encouragement of the violating members of the cartel to come up and disclose the names of business entities working in other cartel arrangements. This allows for the violating members of the cartel to disclose vital information and evidence relating to other undisclosed cartels to be investigated by the CCI and the DG in exchange for a lesser penalty imposition by way of the final decision of the CCI. This application of leniency can only be filed before the DG submits its investigation report to the CCI. The reduction of a penalty for crucial exposing information regarding other cartel operations can go up to a 100% reduction in penalty, in other words, complete immunity is granted in some occasions where the information so disclosed is of very high priority in the investigation to be conducted by the CCI or the DG.
The Act also allows the aggrieved parties to appeal against the decisions of the CCI or the National Company Law Tribunal (NCLT) to the National Company Law Appellate Tribunal (NCLAT), which can be further appealed to the Supreme Court of India.
Amendments (The Competition Amendment Bill of 2022)
The Competition Amendment Bill of 2022 was passed by the Lok Sabha on the 29th of March, 2023. It has made a variety of new improvements to the procedure of investigation and penalty. It proposes to introduce a new penalty mechanism, in which the monetary fine would be calculated on the global turnover of the violating parties. This will have a positive impact on the companies or businesses which operate in the global business sector as anti-competitive behavior is to be seemingly curbed from the multinational business sector. This amendment Bill of 2022 would also bring in an alternative form of lenient penalty to the businesses which give up the names of the businesses which are part of another undisclosed cartel operation. Along with that, the Bill also proposes the allowance of a withdrawal application with the exception that the CCI/DG, by their discretionary powers, may use the information obtained by way of the leniency application to carry out further investigations, exempting the admissions of the leniency applicant(s). The Amendment Bill also widens the scope of businesses participating in the practice of cartelization by including the business entities which might not be competing entities but support the facilitation of the cartel arrangement. This is done by way of authorizing the CCI to proceed against any entity that participates or intends to participate or acts or intends to act in the furtherance of a horizontal agreement, in whichever capacity. The amendment bill also requires the CCI to publish guidelines in relation to an appropriate amount of penalty to be issued for the contravention of the provisions of the Act.
References
Cartels 2023 (azbpartners.com)
Cartels & Leniency Laws and Regulations Report 2023 India (iclg.com)the-competition-act-20021652103427.pdf (cci.gov.in)