Outlook Business, March 20, 2010
By Pradeep S Mehta
Since its inception, the European Commission—Competition (EEC) has unearthed many illegal business practices, particularly of cartelisation. A look at its five biggest cartel fines.
Car Glass Cartel
Amount fined: €1,384 million
Companies: Asahi, Pilkington, Saint-Gobain
A tip off from an anonymous source led to a probe that unearthed evidence of price fixing by the three companies in response to tenders sought by car makers.
Amount fined: €992 million
Companies: Ruhrgas, Gaz de France
In 1975, Ruhrgas of Germany and Gaz de France decided to build a pipeline from Russia to their respective nations. And they agreed not to target each other’s markets. But even after the market was liberalised in 1999, both continued the arrangement for six years.
Amount fined: €791 million
Companies: F Hoffmann-La Roche, BASF, Aventis, Solvay, Merck, Daiichi, Eisai, Takeda
These eight companies had secret market-sharing and price-fixing arrangements over vitamin products for nearly a decade, until 1999.
Amount fined: €751 million
Companies: ABB, Alstom, Areva, Fuji Electric, Hitachi, Mitsubishi, Schneider, Siemens, Toshiba, VA Tech
Between 1988 and 2004, these companies rigged bids for procurement contracts, fixed prices, allocated projects to each other, shared markets and exchanged important and confidential information.
Amount fined: €676 million
Companies: Sasol, Repsol, Exxon Mobil, Tudapetrol, Hansen and Rosenthal, MOL, RWE, Total, Shell
This cartel was fined for fixing prices and sharing markets of paraffin wax, which is used in a wide range or products, over a 13-year period.
Most people don’t really know much about paraffin wax. But on October 1, 2008, many Europeans came to know how it was an integral part of their daily lives. They learned that the wax is used in a number of products, from tyres, paper cups and adhesives to chewing gum, cheese and candles. They also learned that there was a cartel that had been fixing prices of this nondescript commodity. “There is probably not a household or company in Europe that has not bought products affected by this cartel, with all that implies in terms of paying (more), higher costs and economic damage,” thundered Neelie Kroes, European Commissioner for Competition, at a press conference that day.
Together, the ten companies controlled 75% of the European market for paraffin wax, worth nearly €500 million annually, said Kroes. They were the who’s who of the business world, including the likes of Shell, Sasol, Exxon Mobil and Total. The cartel lasted for 13 years, from 1992 to 2005, and profited hugely from the mutual accommodation. However, they would pay dearly after being exposed by a European Commission—Competition (ECC) probe.
The investigation unearthed every little detail of the operation. Apparently, members first began meeting at the Blauer Salon (Blue Salon), a hotel bar in Hamburg. Later they would convene at top hotels all over Europe, including in Paris, Milan, Munich and Vienna. They had code names for their association: Sasol, the leader of the cartel, called it the ‘Blue Saloon Group’, while Shell referred to it internally as the ‘Paraffin Mafia’. At these meetings, the companies agreed on the rates they would fix for the wax and the share they would have in different markets. For their trouble, they were fined €676 million, though Shell escaped by being the first to provide information to the commission. (As a matter of policy, the ECC is lenient on whistleblowers.)
In the last 20 years, the commission, which independently investigates and prosecutes unfair business practices, has passed 614 verdicts and slapped fines in excess of €14 billion on cartels and individual companies for violations.
India has its own such agency: the Competition Commission of India (CCI). It was established in 2003, but received its enforcement powers only last year. (It replaced the Monopolies and Restrictive Trade Practices Commission—MRTPC—which was closed down last year.) But apart from the fact that its main objective is the same as that of the ECC—to fight unfair trade practices and promote competition—there is little it has in common with the European body. The CCI has few powers, a limited mandate, barely any staff, and, as a consequence, has achieved little of note. In the last 10 months, it has investigated only a handful of cases, and is yet to pronounce judgment on any of them. Some of the prominent ones are interoperability of DTH set-top boxes; a complaint by JSW Steel against SAIL over an exclusive supplier arrangement with Indian Railways; and a complaint by MCX exchange against the National Stock Exchange alleging abuse of dominance in its futures market.
“The CCI has been moving very slowly. It could have delivered much more than it has been able to do,” says Pradeep S Mehta, Secretary-General, Consumer Unity & Trust Society, a consumer protection body.
Currently, the regulator has powers to investigate anti-competitive agreements—such as cartels and price-fixing—and abuse of dominance—the sort of thing Microsoft was accused of doing during the browser war of the 1990s in the US, when it bulldozed rivals like Netscape and Opera. But the CCI can’t check unfair trade practices, such as misleading advertisements.
No Merger Control Yet
Crucially, regulations relating to mergers and acquisitions are yet to be activated, thus making India the only large economy not to have any rules in this sphere. Even China, a state-controlled economy, has enacted an anti-monopoly law. In one of the first decisions (in March 2009) under the law, the Chinese commerce ministry blocked a $2.4 billion bid by Coca-Cola to acquire Huiyuan Juice, a leading juice maker. Reason: the Chinese authorities felt the transaction would reduce competition and affect small fruit-juice makers.
Vinod Dhall, first member of the CCI and a former bureaucrat, is hopeful that the merger regulations will fill a big void once they are cleared. “All major economies have merger controls,” he says. Dhall points out that Indian industries making acquisitions abroad need permission from competition authorities there. “But if foreign companies take over an Indian company today, there is no clearance required!”
The CCI has been moving very slowly. It could have delivered much more than it has been able to do.Pradeep S Mehta, Secretary-General, Consumer Unity & Trust Society
However, India Inc has expressed some concerns over the CCI’s proposals in this area. One of them relates to the duration (210 days) for the commission to clear a merger. “That’s a long time,” admits Dhall. “But, in the draft regulations, we have inserted a provision to fast-track in 30 days.” Under this, the commission has to approve a merger or raise objections within 30 days. If not it will be deemed to be approved. “Around 80-90% of mergers will be approved this way,” says Dhall.
Another concern among corporates was over mergers that had nothing to do with the Indian market. Here, the CCI has recommended that the company should report a merger only if the turnover of both entities in India is more than Rs 600 crore, or they both have assets worth more than Rs 200 crore in India. For example, if Bharti had taken over MTN, the transaction would not have been reported, as MTN has no presence in India.
The third concern was over routine transactions that do not affect competition. “So, we proposed a de minimis provision,” says Dhall. Under this, any acquisition of shares up to 15% without taking control is not required to be reported, in sync with SEBI regulations. “It will be the same for creeping acquisition up to 5%. Also transactions within the same group are excluded.”
But all of these are only recommendations and the government is unlikely to approve them in a hurry. The CCI doesn’t mind that. A senior official said the body would not want the M&A regulations notified until it has enough people to handle the workload.
Clearly, the Indian competition regulator is a toothless body until the government widens its mandate and empowers it. If its European and American counterparts have been able to pursue unfair trade practice cases to their logical end, it is because of the powers they have been given. They can seek information from companies, which are, by law, compelled to provide the same. They also have the authority to conduct raids on companies to collect information and seize documents.
CCI needs to appoint people who want to make a career. Now it’s got bureaucrats on deputation.Dhiraj Mathur, Executive Director, PricewaterhouseCoopers
Despite there being ample evidence to indicate cartelisation in several sectors, the CCI has not been able to do the same. For instance, some cement companies have for years been accused of operating as a cartel. They are alleged to have raised prices of the commodity in concert. In December 2007, the MRTPC, in fact, had accused industry body Cement Manufacturers Association of being instrumental in fixing prices in the sector. But it was able to do little, except for warning companies to cease and desist from such activities.
There are pointers at such questionable business practices taking place in many sectors. For instance, airlines are suspected of price fixing, given how they often uniformly raise fares.
It’s not as if the commission does not have the will to investigate such cases. However, its limited enforcement powers hamper it from undertaking any sort of meaningful investigation. The CCI’s investigative arm, the Director General of Investigation, does not have any search-and-seizure powers—a must if incriminating documents are to be seized before they are destroyed. It can seek information, but companies can be choosy about what they share, since there is no threat of a raid.
Dhall defends the absence of search-and-seizure powers. “It has to get clearance from a metropolitan magistrate to raid premises. I think that’s a useful precaution, at least in the Indian context.” Contrast this with an ECC investigation of price-fixing against glass makers in 2008. It conducted co-coordinated “unannounced inspections” on the premises of three firms (Pilkington, Glaverbel and Saint-Gobain), in three countries, over two days.
The evidence revealed several meetings between officials of Asahi, Pilkington, Saint-Gobain and Soliver, at airports and hotels in various European cities. At these meetings, they discussed allocations on car glass to be supplied for forthcoming car models and renegotiation of ongoing contracts. “They also exchanged commercially lucrative and confidential information,” added the ECC report. In the end, it levied a fine of €1,384 million on the four glass makers for price rigging.
One of the reasons the ECC has been so successful is because of the people who make up its staff. Though the chairman of the European body is a political appointee, the remaining seven members are experts in economics and legal matters, and specialists in anti-trust legislation. The Indian body has seven members, of whom only one is an economist. The rest are former bureaucrats who lack the level of expertise of their counterparts in Europe and the US in competition laws and economic principles.
I think the absence of search and seizure powers is a useful precaution, at least in the Indian context.Vinod Dhall, Member, Competition Commission of India
Let alone specialists, the CCI faces an acute shortage of manpower itself. In 2006, a study by Professors Abhoy K Ojha, Subhashish Gupta, Deepak Sinha and Amit Gupta, all from the Indian Institute of Management, Bangalore (IIMB), recommended that the CCI build a staff strength of 480 people over a period of five years. The Dons suggested that economists and lawyers make up 40% each of the staff, with the rest being financial analysts. However, after nearly four years, the government has only approved a staff strength of 185. Of this, only 36 positions have been filled. If the current composition is any indication, government officials on deputation would make up an overwhelming majority of the CCI. The IIMB professors had, in fact, failed to consider the staff requirements of the Director General of Investigation’s office, which plays a crucial role in unearthing illegal practices. Currently, it has just four officers, and only an acting chief.
Even if it did try to recruit specialists, the CCI would find it hard to attract talent because of the low pay (Rs 4.5 lakh to 8 lakh a year). An economist working in a private firm would earn much more. For instance, a post-graduate in economics from the Delhi School of Economics (DSE) could earn as much as Rs 12 lakh a year in a research firm. “They will find it hard to recruit people from the private sector,” feels Sandeep Baldava, Partner, Advisory Services, Ernst & Young. “Maybe they should rope in people with 20-30 years experience who want to give something back to society.”
“CCI needs to appoint people who want to make a career of it,” says Dhiraj Mathur, a former IAS official himself and Executive Director with PricewaterhouseCoopers. “Now, it’s largely made up of people on deputation, and that’s not a very good idea.”
Interestingly, there are a few voices calling for an overhaul of the CCI’s structure. They believe it could become an autocratic agency if it is given more authority because of flaws in its current structure. As it is, all powers, from sanctioning an investigation to passing judgment, vest with the commission’s seven-member governing council. The Director General of Investigation’s office is completely subordinate to the council. If the CCI receives a complaint, the probe agency can begin investigations only if the apex team is convinced that a case exists and gives it the go ahead. It’s a bit like the police being unable to investigate a crime without getting prior permission from a judge.
“The independence of the Director General of Investigation is lost under CCI,” says a senior Ministry of Company Affairs official, who had worked for many years in the MRTPC’s investigative body. MRTPC’s investigative wing functioned independent of the commission and could even appeal against a verdict of the commission. All its members were appointed by the government. In more than three decades of existence, it appealed six times against MRTPC verdicts in the Supreme Court. “The fact such powers existed gave us independence,” says the official.
Companies can appeal against Competition Commission rulings before the Competition Appellate Tribunal (CAT), which is headed by a judge. But the investigative body doesn’t have powers to appeal if the CCI decides against its findings. And all the officials in the investigative wing other than its chief are appointed by CCI.
“The investigative officers may not be able to function with full independence, especially when they know that their annual appraisals (which they do not get to see) will be conducted by the commission’s officials. Then, they will be subservient to the CCI,” says Mathur of PricewaterhouseCoopers.
In effect, the seven members of CCI retain all authority under India’s anti-competition act. “These seven CCI members will be the demigods of the corporate world,” says the former MRTPC official.
Adds Baldava: “The CCI needs to build credibility. It remains to be seen if it will be impartial in a dispute between a private sector and public sector company.”
But violators will derive some hope from the CCI’s decision-making process. According to the rules, all seven members need to be in unanimity on any verdict—it doesn’t count unless it’s a 7-0 decision. That may prove difficult to achieve. The body could have been more powerful if majority verdicts were allowed.
But Dhall feels the requirement for unanimity will prevent misuse. “We have to have faith in their experience,” he says.
For that faith to be placed, the council members need to speedily probe cases and pronounce verdicts. But only a few cases have been prosecuted, and not a single decision has been taken thus far. If the CCI hopes to be as successful as its anti-trust counterparts in other large economies, it needs to have the same power and independence. Until it gets that, it will be like many other regulators in India: a paper tiger.
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