Supreme Court Lays Down the Law on Price Parallelism in Oligopolies

The Supreme Court of India (Supreme Court) in its seminal judgment in Rajasthan Cylinders and Containers Ltd. v. Union of India[1] has conclusively held that parallel pricing alone is not sufficient for a finding of bid rigging and that market conditions can be responsible for such parallel behaviour. This decision clarifies the standard of proof required to establish bid rigging in an “oligopsony” i.e. a market with only a few buyers. Since such a situation is prevalent in most markets involving large-scale competitive bidding in India (for instance, those involving the Railways and various natural resources), this decision is of particular significance for companies operating in such markets with public sector undertakings as buyers.

Background

The appeal to the Supreme Court in the case arose out of the Competition Appellate Tribunal’s (Compat) decision[2], which upheld the findings of the Competition Commission of India (CCI), wherein the appellants, who were suppliers of liquefied petroleum gas (LPG) cylinders to Indian Oil Corporation Limited (IOCL) were found to be engaged in bid rigging by quoting near identical prices in a tender floated by IOCL in violation of Section 3(3)(d) of the Competition Act, 2002 (the “Act”).

At the outset, it is pertinent to appreciate that the product in question i.e. LPG cylinders having a capacity of 14.2 kg, has only three buyers, namely, IOCL, Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL), which are public sector companies. The proceedings were started suo motu by the CCI, based on remarks in the Director General’s (DG’s) report in Pankaj Gas Cylinders Ltd. v. Indian Oil Corpn. Ltd.[3], stating that there were strong indications of some sort of agreement and understanding amongst the bidders to manipulate the bidding process in relation to the supply of LPG cylinders.

The CCI arrived at its finding of collusive bidding based on factors such as, (i) market conditions; (ii) small number of suppliers; (iii) few new entrants; (iv) active trade association; (v) repetitive bidding; (vi) identical products; (vii) few or no substitutes; (viii) no significant technological changes; (ix) meeting of bidders in Mumbai a few days prior to submission of the bids; (x) appointing common agents; and (xi) identical bids despite varying cost. Further, the CCI reinforced its finding of bid rigging with the fact that all 50 of the bidders who had quoted identical and near identical rates had secured orders from IOCL in one State or the other and emphasised that the appellants had failed to explain such identical behaviour by way of a business justification.

The Compat affirmed the CCI’s findings, observing that owing to the collusion, IOCL could not get competitive prices and as such the conduct of the appellants resulted in an appreciable adverse effect on competition (AAEC). The Compat also observed that the common platform provided by the trade association of the LPG cylinder manufacturers and fixation of bid prices ensured that no new player could enter the relevant market and quote independent prices.

The Supreme Court’s Findings

The present appeal was premised on three major grounds, namely:

  1. the inherent nature of the market of LPG cylinder manufacturers itself precludes competition;
  2. alternatively, there was no collusive agreement or bid rigging; and
  3. alternatively, even if the above existed, there was no AAEC.

The respondents, on the other hand focused on strong economic evidence of collusion, including near identical bidding; the awarding of some portion of the tender to all bidders i.e. market sharing arrangement; lack of rationale for identical bids despite differences in cost, input costs and location; lack of new entrants; and an overall increase in procurement price over previous years in support of their case.

Burden of Proof and Standard of Proof in a Cartel case

The Supreme Court begins the discussion by laying down the procedure to be followed in an investigation under Section 3(3) of the Act generally and bid rigging specifically. The judgment affirms that once the CCI has established an agreement in terms of Section 3 of the Act, it is presumed that such an agreement leads to an AAEC. As such, the burden of proof shifts on the opposite party to adduce evidence to dispel the presumption of an AAEC and in the event the evidence so presented by the opposite party is unable to establish any or all of the factors mentioned under Section 19(3) of the Act should the CCI proceed to take remedial action under the Act.

The Supreme Court while establishing the test for the standard of proof in case of a cartel relied upon various international jurisprudence and agreed with the respondents’ submission that there may not be direct evidence of cartelisation, as agreements contemplated under Section 3 of the Act are entered into behind closed doors and that the standard of proof required is one of probability. It observed that even in the absence of proof of a concluded formal agreement, when there are indicators that there is practical cooperation between parties which knowingly substitute the risk of competition, the same would amount to an anti-competitive practice.

Further, with reference to the possibility of such an agreement in the present case, the Supreme Court analysed all the circumstantial evidence relied upon by the CCI in light of the market conditions. Accordingly, the Supreme Court conducted a detailed analysis of the market for LPG cylinders and the defining features of an oligopsony which, as concluded by the Supreme Court, precluded the appellants from engaging in a cartel. The Supreme Court based its findings on the following observations:

(i) Few manufacturers due to a limited number of buyers.—Given that the market is marked by the presence of only three buyers, the market for supply of LPG cylinders has limited scope of growth. If a particular manufacturer was not selected by the buyers for any reason, it would be driven out of the market, posing a major disincentive to new entrants. As such, the entry of only 12 new players was a result of the few buyers rather than cartelisation.

(ii) Buyers control pricing.—The Supreme Court found that IOCL controlled the prices which were arrived at based on internal estimates for the cost of cylinders. Further, IOCL did not enter into contracts at the price quoted by the L1 bidder but at a significantly negotiated lower price.

(iii) Award of contracts to all bidders to maintain supply.—All manufacturers were awarded some portion of the tender due to IOCL’s attempt to ensure that a larger pool of manufacturers were available for supply of an essential commodity and no manufacturer was compelled to exit the market. As such, the alleged pattern of market sharing was a creation of IOCL itself.

(iv) Transparency and competitive pressures leading to similar prices.—Despite different manufacturing costs, identical products, limited buyers and repetitive bidding in the tenders floated by the three buyers resulted in transparency in pricing and near identical bids.

(v) Government regulation of price.—Finally, it was also observed that the price of LPG cylinders supplied to consumers is controlled and regulated by the Government and as such, the appellants had little or no role to play in the pricing of the cylinders.

Placing reliance upon all the abovementioned factors, the Supreme Court upheld the test for parallel behaviour laid down by itself in Excel Crop Care Ltd. v. Competition Commission of India[4] and found that that parallel behaviour was not a result of a concerted practice. It was further observed that whenever there was a situation of oligopsony, parallel pricing simpliciter would not lead to a conclusion of concerted practice. Instead, other credible and corroborative evidence would have to be made available to arrive at a conclusion of cartelisation. As such, the Supreme Court held that the appellants had successfully discharged their burden of rebutting the inference of bid rigging by the CCI and accordingly, set aside the Compat’s order and the penalty levied upon the appellants.

Conclusion

The Supreme Court’s judgment[5] adds a revolutionary precedent in India’s cartel jurisprudence
inasmuch as it carries out an in-depth analysis of the market and the prevailing market conditions in order to assess the behaviour of the players in the market. It also crystallises the tests for the burden of proof as well as the standard of proof in cartel cases. However, most importantly, this judgment puts into perspective the evidentiary value of parallel conduct and its relevance based on the market in question.

Anshuman Sakle is a Partner  with the Competition Law Practice at Cyril Amarchand Mangaldas and can be contacted at
anshuman.sakle@cyrilshroff.com. Neelambera Sandeepan is a Senior Associate  with the Competition Law Practice at Cyril Amarchand Mangaldas.

[1] 2018 SCC OnLine SC 1718.

[2] International Cylinder (P) Ltd. v. Competition Commission of India, 2013 SCC OnLine Comp AT 169.

[3] 2011 SCC OnLine CCI 48.

[4] (2017) 8 SCC 47.

[5] Rajasthan Cylinders and Containers Ltd. v. Union of India, 2018 SCC OnLine SC 1718.

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