Blog

Abstract

This Article gives an analysis on the topic of cartel and their nature and new era cartels. It also looks into the matter of impact of cartels on the competition in a market and how Indian competition law comes in rescue of market from the impacts of cartel and lastly, we would discuss the recent amendments to the competition act regarding cartel operation.

Introduction

A cartel is a group of similar independent companies who join together to control prices and limit competition[1] for example, Oil cartels like OPEC or OPEC+, they manage and influence the prices of crude oil all around the globe.

Definition & Nature

Cartel has been defined under section 2(c) 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”[2]

The General nature of a cartel involves increase in the profitability of its members and overall increase in the strength of cartel in the market. These cartels usually undertake four forms of activities to influence the market, they are –

• Price Fixing, includes determination of Price for commodity, setting a minimum resale price etc
• Collective bidding
• Sharing of markets as per areas or sectors or products
• Controlling production

Laws on cartel

Cartel arrangement which aims at distortion of competition through controlling market conditions and determining prices are held illegal per se and violative of competition act. These arrangements are clearly violation of Section 3 of the competition act which prohibits all those agreements which causes or likely to cause AAEC[3].

Now, referring to the definition, It is quite clear that these cartels are based out off agreement and as per section 2(b) of the act as –

“agreement” includes any arrangement or understanding or action in concert[4]

Generally, these agreements are not based out in a formal setting, when it aims to control the market, they are based out in a clandestine manner usually behind the closed door so, proving its existence is usually difficult but as per the Raghavan Committee “there is no need for an agreement to be formal or written to be considered illegal. In principle any kind of agreement is illegal if it violates law.”[5]  And similar view has also been held in the case of Director General (Supplies & Disposals) v. Puja Enterprises, 2013 SCC OnLine CCI 55, “It may be observed that the definition of ‘agreement’ as given in section 2(b) of the Act requires inter alia any arrangement or understanding or action in concert whether or not formal or in writing or intended to be enforceable by legal proceedings. The definition, being inclusive and not exhaustive, is a wide one. The understanding may be tacit, and the definition covers situations where the parties act on the basis of a nod or a wink”[6].

And to prove the existence of these arrangement there is need of evidence but usually finding direct evidence in these situations is usually difficult and next to impossible as these arrangements are so clandestine in nature that many times evidences are destroyed. So, finding its whole existence is under the shades and it could only be proved trough various circumstantial evidence implicating the existence of such arrangement. As the same thing has been observed in Director General (supra) “There is rarely a direct evidence of action in concert and the Commission has to determine whether those involved in such dealings had some form of understanding and were acting in co- operation with each other. In most cases, the existence of an anti-competitive practice must be inferred from a number of co-incidences and indica which, taken together, may, in the absence of another plausible explanation, constitute evidence of the existence of an agreement.[7]” and Hon’ble SC in Rajasthan Cylinders & Containers Ltd. vs UOI (2020) 16 SCC 615 “There may not be a direct-evidence on the basis of which cartelisation or such agreement between the parties can be proved as these agreements are normally entered into in closed doors. The standard of proof which is required one of Probability,”[8]

Here, standard of probabilities is such that for a fact is said to be true when either the court believes it to be true or its existence is so probable that any prudent man, ought under the circumstances of a particular case, to act upon the supposition that it exists meaning if a prudent man would be given similar circumstances to dealt with then the analysis of the given circumstances would make him conclude about the existence of a cartel. These circumstantial evidences might include, parallel business behaviour, exchange of sensitive information etc.

The competition law in India proscribes all those arrangement which causes or likely to cause AAEC and Cartels are always presumed to AAEC, as has been held by Raghavan Committee that “The presumption is that such horizontal agreements and membership of cartels lead to unreasonable restrictions of competition and may, therefore, be presumed to have an appreciable adverse effect on competition.”[9] And also held in FICCI – Multiplex Association of India v United Producers/Distributors Forum(2009), where Commission specifically held that Cartels are most pernicious form of arrangement and they are presumed to AAEC under section 3 (3) of the act.[10]

Indian Laws on competition have provision to tackle the problems posed by Horizontal and Vertical agreement and it also has provisions to make them liable for their actions as Section 27 provides for imposition of penalty for formation of cartels which could amount to three times or ten percent of the profit in the year of agreement, whichever is higher. And Commission has powers to initiate Investigation under section 26 of the act.

It may seems like the competition act got enough teeth to bite threat to competition but that’s definitely not the case in real world as many times these cartels form indirect arrangements for collusion, commonly known as a Hub & Spoke Cartel, where a Hub provides all the necessary support for the existence and survival of cartel, its support ranges from providing sensitive information among rivals, calculating prices, organising meetings etc. and all these activities are connected to spokes which cooperatively controls the market. In this new era there is generally an involvement of an Algorithm which usually works as a hub for the enterprises and creates a cartel, these arrangements are generally tacit in nature thus forming an tacit algorithmic cartel. CCI has also explained these arrangement as “A hub and spoke arrangement generally requires the spokes to use a third-party platform (hub) for exchange of sensitive information, including information on prices which can facilitate price fixing. For a cartel to operate as a hub and spoke, there needs to be a conspiracy to fix prices, which requires existence of collusion in the first place, earlier mentioned arguments clearly indicates these circumstances which proves the existence of hub and spoke cartel. It also held that a hub-and-spoke cartel would require an agreement between all parties to set prices through the platform, or an agreement for the platform to coordinate prices between them”[11]

Prior to the amendment, Competition law only prohibits arrangement between traders at same level of production meaning it covers only Horizontal agreements but this Hub & spoke arrangement has element of both horizontal and vertical arrangement thus it lacks powers to penalise the offenders leading disruption of competition in the market. But after the competition amendment act 2023, it has amended the definition of cartel in section 3(a) of the act as –

“Provided further that an enterprise or association of enterprises or a person or association of persons though not engaged in identical or similar trade shall also be presumed to be part of the agreement under this sub-section if it participates or intends to participate in the furtherance of such agreement.”[12]

After this amendment any arrangement between enterprises aiming at disruption of competition would be prosecuted irrespective of their position in the production level, irrespective of the nature of trade or business conduct of the enterprises meaning all kinds of tacit algorithmic cartels would be prosecuted with provisions of penalty as per section 27.

Conclusion

This amendment is in right direction as the time is changing, and with more influence of technology in the business. It would eventually create new loop holes to exploit by these violators of competition, thus to maintain fairness, equity and uphold the law of natural justice, strong steps had to taken in order to tackle and empower the commission in maintaining the just level field of competition in the market.

“PRIME LEGAL is a full-service law firm that has won a National Award and has more than 20 years of experience in an array of sectors and practice areas. Prime legal fall into a category of best law firm, best lawyer, best family lawyer, best divorce lawyer, best divorce law firm, best criminal lawyer, best criminal law firm, best consumer lawyer, best civil lawyer.”

Written By – Shreyanshu Gupta

[1] https://dictionary.cambridge.org/dictionary/english/cartel

[2] Section of 2(C) of the Competition Act 2002

[3] Appreciable Adverse Effect on Competition

[4] Section 2(b) of the Competition act 2002

[5] Para 4.3.2 of the Raghavan Committee

[6] Para 25, Director General (Supplies & Disposals) v. Puja Enterprises, 2013 SCC OnLine CCI 55

[7] Para 26, Ibid

[8] Para 81, Rajasthan Cylinders & Containers Ltd. vs UOI (2020) 16 SCC 615

[9] Para 4.3.8, Raghavan Committee

[10] Para 23.6 FICCI – Multiplex Association of India v United Producers/Distributors Forum(2009)

[11] Para 18 Samir Agarwal vs ANI Technologies 2018 SCC OnLine CCI 86

[12] Section 3 (a) of the Competition amendment act 2023, https://www.cci.gov.in/images/legalframeworkact/en/the-competition-amendment-act-20231681363446.pdf