On a complaint filed by the Food Corporation of India (‘FCI’), an investigation into a bid rigging allegation was made and it was found by the Commission that three companies namely Excel Crop Care Limited, United Phosphorous Limited and Sandhya Organic Chemicals Pvt. Ltd. had indulged in bid rigging in regard to tenders for Aluminium Phosphide Tablets (‘ALP’). The three companies had participated in the tender process floated by FCI in 2009 and quoted identical bid prices. It was found that the companies had been quoting similar prices since 2007. Also, the three companies boycotted the tenders floated in 2011 for the purchase of ALP by FCI. The Competition Commission had imposed hefty penalties on the said three companies. The matter was appealed by the said companies to the Competition Appellate Tribunal (‘COMPAT’). The COMPAT upheld that the companies had acted as a bid rigging cartel till 2011. However, the penalties levied by the Commission were drastically reduced by COMPAT. In this blog entry, we shall be discussing the reduction in penalty, the arguments put forward by the appellants regarding the penalty levied and the reasoning of COMPAT.
The Commission had imposed a penalty of 9% of the average turnover of the last three years of the aforesaid companies, The lawyers of the said companies brought the penalty guidelines followed by the European Commission and the Office of Fair Trading to the attention of the COMPAT. They argued that as a starting point the Commission should have taken into account only the relevant turnover and not the total turnover, The same became an issue as two of the aforesaid companies were multi-product manufacturers and that the turnover of ALP constituted only a small part of the total turnover. Relevant turnover implies the turnover of only those products and services which are directly or indirectly related to the competition law infringement. COMPAT took the guidelines of the European Commission and OFT into consideration and held that it is the relevant turnover which needs to be analysed. COMPAT thereafter decreased the penalty from 9% of the total turnover to 9% of the relevant turnover, which was a drastic reduction. This gives the inference that COMPAT presumed that the 10% penalty ceiling is applicable to the relevant turnover and not the total turnover of the enterprise.
What is the problem with the aforesaid reduction?
As per the penalty guidelines of the European Commission and the OFT, the relevant turnover is taken as a starting point in the calculation of the penalty to be levied and not the end. A percentage of the relevant turnover upto 30% is deemed as the basic fine which is thereafter multiplied by the number of years the cartel was in existence. The percentage of the relevant turnover to be taken as the basic fine depends upon the gravity of the violation. It is usually at the higher end i.e. 30% for serious competition law infringements by cartels. The same is thereafter increased or decreased on account of mitigating, aggravating, recidivism, deterrent etc. factors. The said amount thus received should be less than 10% of the total/worldwide group (not relevant turnover) turnover of the company.
Ideally, the COMPAT should have decided on a penalty of 30% of the relevant turnover and not 9% as it did so. The reason as to probably why the same was not done may be because COMPAT assumed that it is the 10% ceiling of the relevant turnover which should not be crossed. The penalty guidelines followed by the European Commission and the Office of Fair Trading clearly specify that the 10% ceiling is in regard to the total turnover, The relevant turnover is only taken into account as a starting point and not the final assessment.
No increase on account of duration of Cartel
COMPAT noted that the cartel had been running from the year 2007 till 2011. However, the penalty could only be levied for the duration starting from 2009 as the relevant sections i,e. Section 3 & 4 were only notified in the year 2009. The proviso to Section 27(b) of the Competition Act, 2002 provides that in case of cartels the penalty levied shall be multiplied by the number of years of the cartel. Therefore, the penalty levied should have been doubled as it was found that the last act of bid rigging i.e. boycott of tender was in the year 2011. However, COMPAT only took into account the infringement for the 2009 tender and did not increase on account of the duration of the cartel.
Another peculiarity in the judgment of COMPAT is further reduction for M/s. Sandhya Organic Chemicals (P) Ltd. The penalty that was levied on the said company was further reduced to 1/10th of its original amount on account of the reasoning that they did not participate in the 2011 tender. I think that the reduction could have been avoided as it was proved that the said company was part of the bid rigging in the 2009 tender and also the reasoning provided for boycotting the 2011 tender by Sandhya Organic Chemicals was not adequate enough for such a reduction. Further, such reductions should not be easily made by COMPAT as the same may reduce the deterrent nature of the fines and also would be unfair to other companies as well.
Firstly, the Commission should come out with guidelines for calculating the penalties to be levied for competition law violations. The same would increase legal transparency and certainty. Secondly, it needs to be adjudicated whether the 10% ceiling is for the relevant turnover or the total turnover. As mentioned above in regard to the penalty guidelines of the European Commission and the Office of Fair Trading, the relevant turnover is taken into account as a starting figure while calculating the basic fine but the upper ceiling is 10% of the total turnover. COMPAT should have taken 30% of the relevant turnover as the starting amount as cartelization is a serious competition law infringement, Thirdly, reductions in penalties should be sparingly made only in rare circumstances. The reason for the same being that it reduces the deterrent effect of the high penalties and may even encourage companies to indulge in anti-competitive practices after doing a cost-benefit analysis.