Builder Association of India V Cement Manufacturers Association

Cement Cartelisation Case

FACTS

An information was filed under S. 19(1)(a) of the Act by the Builder's Association of India
(the "Informant") against Cement Manufacturers Association ("CMA") and 11 cement
manufacturing companies, for alleged violation of S. 3 (anti-competitive agreement) and S. 4
(abuse of dominant position) of the Act. On June 20, 2012, the CCI found the parties in
contravention of S. 3(3)(a) and S. 3(3)(b) read with S. 3(1) and imposed monetary penalty
along with directions to cease and desist from indulging in any anticompetitive activity. It
further prohibited CMA to engage and associate itself from collecting and circulating
information about wholesale and retail prices and details on production and dispatches of
cement companies to its members. According to BAI’s submissions to the CCI, major cement
producers along with CMA divided the whole market into five zones, which enabled them to
control the supply and fix prices by forming a cartel. According to DG’s investigation report,
CMA formed a high power committee and the prices of cement were discussed in its
meetings. Even companies like ACC and Ambuja Cements, which had resigned from CMA,
continued to participate in such meetings. The CMA apparently nominated different
companies in 34 different centres to collect and disseminate the retail as well as the wholesale
price. This information is either collected on phone or through e-mails. Though CMA argued
that it did so for the Department of Industrial Policy and Promotion, the DG maintains the
common platform of CMA was used for entering into anti-competitive agreements by
companies.

Oligopolistic Nature of Cement Industry

A common theme of argument from the cement companies was about the structure of the
cement industry. It was argued that since the cement industry was oligopolistic in nature, the
prices of cement companies would always move in tandem. Since every region has a market
leader, the cement companies would price the cement according to the price of the market
leader. They argued that due to the homogenous nature of the product, the cost of inputs
across the country are more or less the same and price parallelism was a consequence of
common inputs and costs and not due to collusion. They also contested the DG's finding as to
the reduced capacity utilization by producing data from certain states where the capacity
utilization was high. Cement manufacturing market is highly concentrated and oligopolistic
in nature (thereby making it ordinary for each party to know what the other is doing)
meetings held by the manufacturers did not amount to cartelisation under Section 3(3) of the
Act. It is settled law in a variety of jurisdictions, including India, that price
parallelism between parties is not enough to prove a claim for cartelisation. Indian law, like
the law of the European Union and the United States, requires “plus factors” in addition to
just similarity in pricing to be punishable for cartelisation under Section 3(3) of the Act. A
meeting of CMA cannot be solely considered as a plus factor in this case.1

The OECD Report and Circumstantial Evidence

The Organisation for Economic Co-Operation and Development (“OECD”) has published a
paper in 2006, which argues that, in the likely event that direct evidence is not available, a
better practise is to use circumstantial evidence: “holistically, giving its cumulative effect,
rather than on an item-by-item basis.” The Report observes, however, that the risk associated
with the subjective application of circumstantial evidence - such as mere proof of information
exchange - is not in itself enough to prove “agreement” between parties. Circumstantial
evidence may be relied on, but has to conclusively exclude the possibility that the acts were
independent decisions of competitors.

Remarkably, the Commission cites this Report in both the Cement Cartel case, but seems to
apply its recommendations selectively. An analysis of the reasoning in these cases suggests
that the Commission has failed to set a uniform threshold to establish cartelisation 2. The
difficulty or inability to accurately measure whether market forces of demand and supply
caused companies to respond in prices in similar ways cannot directly lead to the inference
that such market forces did not facilitate the determination of price. Communication evidence
is evidence that cartel operators met or otherwise communicated, but does not describe the
substance of their communications. Providing pricing information to a third party trade

1
A. C. Matthews, The Case of Mixed Signals (December 24, 2012), available
at http://www.businessworld.in/en/storypage/-/bw/the-case-of-mixed-signals/693187.37489/page/-1
2
R. Singh, Analysing the Impact of CCI’s Order Against Cement Companies (June 29, 2012), available
at http://indiacorplaw.blogspot.in/2012/06/analyzing-impact-of-ccis-order-against.html.
association is often inadequate circumstantial evidence3. Yet, in the Cement case, the
Commission found that examples of such communication were sufficient, in spite of signs
explaining that the conduct of Cement manufacturers was consistent with their self-interests.
Moreover, the oligopolistic market type and similarity in demand and pricing of almost
identical products was seen as a sufficient justification in the Tyre case4, but discarded in
the Cement case. In another case, All India Distillers’ Association v. Haldyn Glass Gujarat
and Other5s, the Commission did not even send the matter for further investigation by the DG
in circumstances nearly identical to the facts in the Cement case. The allegation in this case
was also of simultaneous price increase by glass bottle manufacturers, which could not prima
facie be explained by price fluctuations of raw materials, and where the market was
homogeneous and oligopolistic in nature.

Improper Investigation by CCI

CCI ruling sets norms for further collusion probes though the cement firms, and their
association, accused of collusive behaviour by the Competition Commission of India (CCI),
26 are certain to contest the Rs 6,307 crore fine levied on them—this equals half their profits
for FY10 and FY11—the order sets important precedents and indicates how the CCI plans to
approach future investigations into collusive behaviour. CCI passed four major orders in
which fine was imposed on industries for anti competitive practices , two on abuse of
dominance and two on collusive behaviour—while DLF was fined R630 crore and NSE
R55.5 crore for abuse of dominance, three suppliers of aluminium phosphide which is used
for preserving foodgrain were fined R318 crore for collusive behaviour similar to the cement
firms. The difference between the aluminium phosphide case and the cement one, however,
lies in the manner in which it has been investigated. In the first case, the CCI showed how the
three companies were charging the Food Corporation of India the same price even though
they had different cost structures and were located in different parts of the country, but in the
cement case, there is no such clear-cut evidence. What the CCI’s investigation wing did, in
the absence of such data, was to examine the movement of prices of each cement firm—it
found prices were moving in the same direction and were going up in a broadly similar range;
indeed, the correlation between them was very high, leading the CCI to talk of ‘price

3
Z. Mody, The Competition Commission of India’s Approach to Penalties: The Need for Guidelines (October 3,
2012), available at http://xbma.org/forum/indian-update-the-competition-commission-of-indias-approach-to-
penalties-the-need-for-guidelines/.
4
All India Tyre Dealers’ Federation v/s Tyre Manufacturers
Citation No: 2013 COMP LR 92 (CCI)
5
CCI, 30(146)/2008.
parallelism’. The fact that industry’s capacity utilization was falling steadily, even in years of
high demand, has also been cited as proof of collusion. Given there are other industries where
tariffs of market leaders move in the same direction and are of roughly similar magnitudes,
the ruling should set off alarm bells. Similarly, the CCI report talks of how, the prices of
cement rose after various cement association meetings where top cement firms’
representatives were present—given the plethora of industry associations where information
on industry conditions are routinely discussed, this suggests CCI could find a lot of
interesting material for future investigations.6.

Unreasonable Fines

The 2002 Act empowers the Commission, upon the discovery of a contravention of Section,
to pass “cease and desist” orders, impose civil penalties, modify agreements or pass any other
order as it may deem fit. For contraventions by cartels the Commission may impose a
maximum penalty of three times the profit or 10% of the turnover, whichever is higher, for
every year of such contravention. In this context, the imposition of a Rs. 6,300 Crore fine in
the Cement case has raised its own concerns, namely, the appropriateness of imposing a
uniform penalty on all stakeholders, the lack of guidelines or regulations for such imposition,
and the absence of a speaking order. Some analysts have argued, for example, that the
benchmark of the 3 times of profit under the legislative mandate indicates that the ceiling of
the penalty on the basis of profits is 300%. Yet, in the Cement case, the Commission has
imposed 0.5 times or 50% of the profit as penalty, which is way below the ceiling. Curiously,
however, for the benchmark of penalty related to turnover, the Commission has mistakenly
interpreted the absence of discretion and computed the imposition of penalty on the basis of
turnover to be at the rate of 10% and not lesser. Yet, in other cases such as Film and
Television Producers Guild of India v. Multiplex Association of India 7, the Commission
found that since the contravention was “not extreme”, a symbolic Rs. 1 Lac penalty was
imposed on each of the multiplex owners. Similarly, weighing the mitigating factors, a
comparable decision was arrived at by the Commission in FICCI Multiplex Association v.
United Producers/Distributers Forum8. Considering the number of cases in which the
Commission has imposed penalties in itself suggests the need for the Commission to
formulate guidelines.

6
The Financial Express, 22.6.2012
7
CCI, 37/2011.
8
CCI, 2011CompLR0079
Ultimately, recognizing the nascent stage of the development of competition law that India is
in, the inconsistencies in the Cement case raise larger questions about the role of the
Commission, and the foundations required to arrive at its decisions. In the absence of direct
proof in the investigation of cartels, going forward, the Commission needs to address issues
of uniformity and clarity in the application of a relatively new law. Poor investigation by the
DG, coupled with uncertainty in the appreciation of evidence and imposition of penalty by
the Commission has left industry leaders and legal experts confused.

Logistic involved in Cement Industry

Cement is basically is made by heating limestone (calcium carbonate) with small quantities
of other materials to 1450°C in a kiln. The resultant hard material which is recovered after
heating limestone and chemicals is called ‘Clinker’. Clinker looks like small lumps. These
lumps are crushed with a small amount of gypsum into a powdery form – which gives the
final product – ‘OPC Cement’. However with time, people figured out that limestone can be
substituted with other materials namely Flyash or Slag, which will still provide the strength
but to a lesser extent. The threshold limit of mixing Flyash is maximum 33% Thus, there are
various varieties of Cement depending on the composition of materials, namely OPC
(Ordinary Portland Cement), PPC (Portland Pozzolana Cement) and PSC (Portland Slag
Cement (PSC). Flyash is a by-product of Thermal Power Production. Most power producers
want to dispose of fly-ash and one of the ways is by selling it to cement manufacturers who
can substitute it for lime-stone in the cement making process. Similarly slag is a by-product
of Steel making process and is often sold to cement makers as a substitute for lime-stone in
the cement making process. Cement manufacturers often try to keep their plant near to a
power plant, because neither slag nor flyash can be transported across long distance. You
have to be near to a steel or power plant to use Flyash or Slag in the production process.

Cement is a push market industry so whoever is able to push its product first to the customer,
will be able to successfully sell it. The reason being at the end Cement is a commodity. So it
is important for a manufacturer that he is able to successfully push his product on the shelf of
shopkeeper (ship it on time) and incentivise the shopkeeper enough (discount and
commission) so that he sells your product.

 Sales Price is determined based on demand and supply. It’s a dynamic pricing market.
  Cement is a bulky material – hence handling this bulky material takes a lot of effort. It
occupies a lot of space and carries a lot of weight. Hence higher the distance a cement bag
travels, higher is the freight and handling cost involved and lower is the profit a
manufacturer makes. Around 18 to 25 Per cent of cost of cement constitutes the freight.
Compared to other industries, Cement has the highest logistics cost as a percentage of
sales. All freight cost is highly dependent on the cost of transportation which relates
directly to fuel prices. The cost rises high when the material is unloaded and carried on
road for further distance and if the material is brought from or taken to hinterlands,
transportation cost by road increases. The industry depends heavily on road transport for
movement of clinker to cement. The transportation cost by truck transport over a period
of last 10 years has increased by nearly 50%. Moreover, the transportation cost to most of
the big consumer centres, tier 2 and tier 3 cities and villages have been affected by rising
railway transportation cost, both for input materials like coal and gypsum and more
glaringly for clinker and cement.

SOURCES
i. ‘Competition Commission’s Landmark Rulings’ Article by M. S. Ananth and Pratibha

Jain

ii. ‘Recent Orders by CCI against Anti Competetive Practices’ by MrinaliMudoi

iii. http://www.mondaq.com/article.asp?article_id=530452&signup=true

iv. ‘Cement Cartel Cases: Lessons For India's Competition Law Regime’ by Sakshi Seth

v. http://www.mondaq.com/india/x/349476/Antitrust+Competition/Competition+Commi

ssions+Landmark+Ruling+Cracks+The+Whip+On+Auto+Industry

vi. https://corporatelaws.taxmann.com/topstories/105010000000013723/cci%E2%80%99

s-order-in-the-cement-cartel-case-analysis-and-important-takeaways.aspx#fn2

vii. http://www.mondaq.com/article.asp?article_id=530452&signup=true

viii. https://indiankanoon.org/search/?formInput=competition%20act%20cases

ix. http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Compe

tition_Law_in_India.pdf
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xi. http://dsklegal.com/pdf/2010/DSK%20Legal%20Knowledge%20Center%20Update%

20Vol%.pdf

xii. http://indiacorplaw.blogspot.in/2012/06/summary-of-ccis-order-against-cement.html

xiii. http://www.cci.gov.in/sites/default/files/292011_0.pdf