Cartel

What is a Cartel?

A cartel, in economic sense, is a collusion by commercial entities that work together mainly for profit maximisation via collectively reducing the competition in that market. This is typically done by agreements to control the market via price manipulation, controlling supply and the like.

Such collusion can happen either explicitly or implicitly. In explicit collusions the members of the cartel actually enter into agreements to make the decisions as a cartel. However, when this is done tacitly, or simply by collusion by practicing methods to aid each-other, it becomes implicit cartelisation. Cartelisation is seen as anti-competitive because of it's ability to affect entry into the market by new businesses, or to stop innovation in the field by controlling product supply as well as prices which affect consumers unfairly.

Official definition

Cartels are explicitly defined in the Competion Act, 2002. Section 2(c). defines it as "an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services;"

This definition is substantiated further in section 3(3):

"Any agreement entered into between enterprises or associations of enterprises or persons or associations of persons or between any person and enterprise or practice carried on, or decision taken by, any association of enterprises or association of persons, including cartels, engaged in identical or similar trade of goods or provision of services, which— (a) directly or indirectly determines purchase or sale prices; (b) limits or controls production, supply, markets, technical development, investment or provision of services; (c) shares the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way; (d) directly or indirectly results in bid rigging or collusive bidding, shall be presumed to have an appreciable adverse effect on competition.

There was no legislative definition of cartel explicitly given in the Monopolies and Restrictive Trade Practices Act, 1969, which preceded the Competition Act of 2002. Section 2(o) of the act broadly defined restrictive trade practices and subsumed a wide variety of anti-competitive practices under the term making it severely ambiguous.

Flashlight Case

The Competition Commission of India, took suo motu cognizance of alleged cartelisation in the Flashlight market based on a leniency application. The Commission however could not find any evidence of the same since they noted that although information had been exchanged it did not result in any effect on price setting of the companies. That information from a leniency application alone cannot account as unquestionable evidence of a cartel. Therefore, for agreements or communication to constitute cartelisation, would require the parties to act on it and influence the market.

Earlier orders by the commission did consider exchange of information related to the production, price parallelism, even where there is no direct evidence of this being done with the purpose of price-fixing or affecting supply. The Flashlight case brings a stricter definition of what constitutes a cartel.

Types of Cartel

Types of cartels based on the purpose they are made for:

Quota Fixing Cartels

These are cartels formed to restrict the supply of a product in the market. All members have a fixed quota of production beyond which they cannot produce more. This limit on the supply causes prices to increase.

Price fixing cartels

Price cartels restrict the prices at which the products are sold, by setting a minimum price a member must charge.

Term fixing cartels

These cartels fix the terms of trade the businesses will operate under, which all the members adhere to. These terms may be ragarding payments, methods of providing the goods or services etc.

Customer assigning cartels

Customer cartels are essentially an agreement to divide the consumers among the members. They are then limited to and cannot beyond the alloted numbers for sales. The consumers may be devided on the basis of type of number of consumers.

Zonal Cartels

Zonal cartels divided members by geographical area, or territory from the entire market. The members operate in and are not allowed to venture outside of their alloted territories.

Super Cartels

These are agreement between cartels, or Cartel of cartels. Generally international in nature.

Syndicate

Syndicates are cartels where the members come together to conduct sales. All members sell via the syndicate at an 'accounting price' which covers profits and production costs. A syndicate aims to sell at the highest possible price according to the market. While all sales happen through the syndicate, the members share the profits according to set criteria like contributions in terms of output.

Bid Rigging

This form of cartelisation involves entities backing off in tender agreements via previous agreements to not enter into a tender. Also known as collusive tendering. It has been held by the CCI that identical prices by bidders does not automatically insinuate rigging, there has be evidence of collusion for the same.

Legal Framework

Cartelization in India is a civil offence. It is strictly prohibited under Section 3 of the Competition Act, 2002, which prohibits all anti-competitive business practices. Sub-section 1 and 3 of section 3 read together renders any agreement between businesses or persons, which can cause adverse effects on competition in the market. The conditions of the agreement include the following types: 1) determination of sale of goods, 2) control of production and services, 3) control geographical market allocation, 4) collusive bidding, and they are void agreements.

The Competition Commission of India is empowered to inquire into markets to weed out anti-competitive practices, and this includes cartels. The Commission, under Section 32 of the Competition Act, is also empowered to investigate cartels in other jurisdictions which affect the market in India. Thus, international cartels are well within the purview of the commission.

But anti-competitive practices that do not strictly fall under S 3 of the Competition Act are not exempt from the provision. In Madhya Pradesh Chemists and Distributors Federation case, the CCI held that regardless of the parties being from different markets, they were influencing the supply chains through the agreements, which was anti-competitive.

Penalisation

Engaging in cartelisation attracts Section 27 of the Competition Act, 2002. The Competition Commission of India can on violation of Section 3, either impose heavy penalty upon offenders, or order them to stop or modify their agreements according to the act. It may also order payment of costs.

The penalty is limited to either of these penalties, maximum of which is applied: 1) three times the profit that is gained each year from the agreement or 2) 10% of turnover for those years. All the enterprises who are involved in the formation of the cartel would get penalized with a fine of up to three times the stipulated collected profits or ten percent of the total turnover, whichever is higher. The commission has discretion to order a lesser penalty in circumstances where the offending enterprise or person(s) has disclosed particulars to the commission in aid of investigation. Non-compliance with the orders of the commission also attracts penalty under the act.

Leniency

While the companies or individuals involved in acts constituting cartels are penalised, there is a provision for imposing lesser punishment on those who aid and comply in investigation or disclose information regarding the cartel. Section 46 allows the commission to impose lesser penalties on compliant parties. This is however conditional.

The persons must comply with the commission till the end of the investigation, along with any other conditions imposed, give true information, i.e. must not have committed fraud, must not further participate in the cartel, and the information so provided must actually be unknown to the commission before and be vital for the investigation. The actual imposition of penalty depends on these factors such as extent of compliance, quality of information, and whether they were the first to offer compliance or information.

The Lesser Penalty Regulations, 2024 regulations were introduced as an amendment to the equivalent 2009 regulations. to further incentivise disclosures about cartels.

Appeal

The appeal against orders by the commission go to the National Company Law Appellate Tribunal (NCLAT). Further appeals against NCLAT order is made to the Supreme Court. The appeals must be filed withing 60 days of the order against which the appeal lies.

Research engaging with Cartels

Crisis Cartels

Crisis cartels are agreements made by industrialists to avert economic crises. Manjushree RM in two articles discusses the legal framework and conditions of neccessity of crisis cartels, which is a response to over capapcity in a market. In the first article they discuss its role in the light of the Covid-19 pandemic which resulted in over-capacity, under which circumstances, companies should be allowed to cooperate to regulate and mitigate the industry's crises. In the second article, in light of the same circumstances, they discuss the existing framework's limitations and argue for legalisation of crisis-cartels.

Report Of Competition Law Review Committee, Ministry of Corporate Affairs

The comprehensive report on competition law is meant to analyse shortcomings and propose improvements to the anti-trust enforcement in India. In this light it discusses the CCI's role in regulating against cartelisation. However, it also recognises buyer's cartels, and proposes its inclusion in the definition provided in the Act.

The genesis and ailments of cartel regime in India: a critical analysis

This article analyses the working of the CCI with respect to cartels. The role of CCI in developing the antitrust legal framework in India has affected various sectors of industry, and this includes issues of cartelisation. The role of CCI here becomes imposition of penalties, and ensuring compliance with competitive market practices. It uses the standards by CCI and other principles used to achieve the same in Indian market. It further discusses the hindrances to effective investigation.

Anti-cartel enforcement in India

The article reviews the law regarding anti-cartel enforcement in India. It analyses the Monopolies and Restrictive Trade Practices Act, then its successor, the Competition Act, 2002, and in consideration of both, the case law that has developed in India jurisprudence, in light of principles of natural justice, and evidence. The observation made is a trend of prioritising evidence of cartelisation and ignoring roles of government policies that enable such collusive practices.

Scope for Intersection between Antitrust Laws and Corporate Governance Principles vis-a-vis Cartels Deterrence in India

The paper is an exploration of intersection between the realm of competition law and corporate governance in light of cartels. The adopted perspective of shareholders shed new light on antitrust policy, which the authors use to argue for an overhaul of the policy. The suggestion is to impose individual liability, administrative sanctions, and making leniency easier and predictable to individuals. They also argue for shifting focus on corporate culture's role in facilitating cartels, and adopting international practices and positive response to effective compliance, and protecting parties that come forward with hopes for leniency to reduce backlash to the individuals towards effective deterrence.

Cartel leniency programme in India—why no race here?

This article evaluates the leniency program of CCI over a period of 12 years, since the inception of CCI, through the data on its decisions. It observes no increase in leniency applications after the fact of prima facie discovery of cartels, a clear adversary to the deterrent objectives of the commission. Inconsistencies in the provisions result in aggravated circumstances affecting the deterrent effect of penalties. This includes the criteria on which the penalties have been imposed, especially in cases of collusive bidding. The authors go into the workings of the leniency program to pinpoint the shortcomings that affect the objectives of CCI against cartelisation. They argue for transparent and consistent penalties in leniency.

International context

India's membership in international organisations

(a) International Competition Network (ICN)

The Competition Commission of India is a member of the International Competition Network (ICN) which is an international network of authorities on competition. It has conducted conferences, workshops, research reports on cartelisation and also publishes policy recommendations and best practices regarding enforcement. The ICN has done a thorough analysis, legal and statistical on the working of the CCI in cases of cartels.

(b) BRICS Competition Authorities

Being part of BRICS, India also cooperates as a part of BRICS Competition Authorities. The organisation has produced multiple studies on cross-border cartels, helping with jurisdictional issues, enforcement, and policy and practice recommendations.

(c) Organisation for Economic Co-operation and Development (OECD)

The CCI is an observer to the proceedings of OECD, and contributes to and adopts practices from the organisation. OECD has a series of policy papers related to cartels, such as cartels of intermediate goods, platform parity agreements, crisis cartels, exclusion of small and medium enterprises, leniency programs, sanctioning individuals and the like, which highlight best practices in anti-cartel enforcement.

Anti-trust enforcement against cartels in US

In U.S., the Sherman Act outlaws restraint of trade and monopolization or conspiracy that goes against healthy competitive practices. It covers the law on most antitrust practices. This prohibition applies to cartels as well. However the U.S. Supreme Court has understood this to mean only unreasonable practices. The other enforcing act is the Federal Trade Commission Act which bans "unfair methods of competition and deceptive acts or practices." U.S. also has leniency provisions which enable the Department of Justice to investigate the cartels, since there is a limit to how much surveillance can be done by the government. Private parties can bring suits against cartels. The punishment for violating is similar to India: Fines with a legislative cap, provisions for seeking damages by the aggrieved parties, as well as criminal sanctions under certain conditions.

Anti-trust enforcement against cartels in Germany

Germany also has a robust antitrust system that deals with cartelisation. The statute governing competition is called the Gesetz gegen Wettbewerbsbeschränkungen (Act against Restraints of Competition, or “ARC”), also known as the “ARC Digitalization Act.” It enables the Federal Cartel Office (FTO) to undertake action against cartels. It has the authority to investigate and impose fines and prohibitions on offenders negligent or otherwise. It also has a leniency program since 2021. While the legislation constitutes it as a administrative offence, bid rigging specifically is a criminal offence.

Further Research

The Competition Commission of India publishes its annual reports on the official website, which contains the details of the cases of cartels it has investigated. It also publishes all the orders passed by the commission, according to the provision under which it has been passed, along with its status. In its Advocacy series, the commission has also published a booklet on bid rigging. It also conducts annual National Conference on Economics of Competition Law the papers of which it publishes on its website. CCI conducts market research on specific markets to analyze the economic and competitive practices. Further reference may be made to the journal published by the commission.

The International Competition Network has multiple publications on cartelisation, and anti-trust enforcement, including research reports, guides and advocacy papers.