India is becoming an even more important player on the world stage, including as a country with a strong competition enforcement agency.  Avinash Amarnath is a member of the competition team at Vinod Dhall and tt&a, New Delhi.  Avinash regularly keeps us informed of developments in India and offers the insights of a seasoned  “on the ground” competition lawyer.   Here is his most recent post.

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Hello from India to all readers. The CCI has come out with two interesting decisions on the cartel front recently and these are analysed below.

Insurance cartel

The CCI recently issued an order imposing a penalty of USD 105.7 million (approx.) on 4 public sector (owned by the Government of India) insurance companies for indulging in bid rigging. The case was initiated by the CCI on its own motion based on an anonymous letter alleging that the 4 public sector insurance companies (National Insurance Co, New India Assurance Co, Oriental Insurance Co and United India Insurance Co) had indulged in bid rigging in a tender floated by the government of the State of Kerala for selecting the insurance provider for a welfare scheme (health insurance for below poverty line families) in 2010-11.

The evidence found by the CCI showed a relatively straightforward case. The representatives of the 4 companies had met a day before the bid was to be submitted specifically to discuss the bid. Minutes of the meeting were prepared and the minutes showed that it was decided that United India Insurance Co would quote the lowest premium and if it was successful, the business would be shared with the other 3 companies. The minutes were admitted to be authentic by all 4 companies. On further investigation, the CCI found that the decision was actually implemented i.e United India Insurance Co quoted the lowest premium and ended up winning the bid; pursuant to which a business sharing arrangement was entered into with the other 3 companies.

The CCI also found that this arrangement was repeated year after year. The initial tender for 2010-11 was supposed to continue for 3 years. However, at the end of the 1^st year, United India Insurance Co asked the state government for an upward revision of the premium citing losses. When the state government turned down the request, United India Insurance Co invoked the exit clause in its contract forcing the government to issue a fresh tender. This was repeated year after year till 2013-14 when a private company (Reliance) was able to win the tender. Each year, the same pattern was followed with United India Insurance Co winning the tender and then entering into business sharing agreements with the other 3 companies. Further, the premiums quoted by the 4 companies steadily increased in each tender. The CCI found that the behaviour of the companies in the subsequent years was also due to a pre-determined arrangement. The CCI found internal notes of the companies in subsequent years referring to meetings between them and joint decision making.

The CCI found no rational business justification for this behaviour particularly as Reliance who won the tender for 2013-14 had quoted a much lower premium than what the 4 companies had been quoting for the past 3 years and the same price was continued for 2014-15. Reliance had stated during the investigation that it was not incurring any losses at this premium level.

The 4 companies amongst other arguments argued that they constituted a single economic entity as they were all 100% owned by the Government of India and their management and affairs were controlled by the Ministry of Finance. Therefore, there was no question of a cartel between them. The CCI examined the regulatory history of the insurance sector and found that the Government had intended for these 4 companies to act independently. Further, despite being under overall supervision of the Government each company had placed a separate bid in the tender. Finally, the companies themselves had admitted during the investigation that all decisions relating to submission of bids, determination of bid amounts, business sharing arrangements, etc. were taken internally at the company level without any ex ante approval/ directions from the Ministry of Finance. Therefore, the CCI concluded that the 4 companies operated as independent economic entities and the Ministry of Finance exercises no de jure or de facto control over them.

While deciding on the penalty, the CCI considered the fact that the tender related to a welfare scheme for the poor as an aggravating factor and the peculiarities of the insurance sector particularly the importance of an insurer’s solvency for consumers as a mitigating factor. Keeping these factors in mind, the CCI decided to impose a penalty at the rate of 2% of the average turnover.

Whilst on the merits, this case appears to be reasonably straightforward it does highlight a very important issue for Indian competition law i.e. whether public sector enterprises constitute a single economic entity. Despite the liberalisation and privatisation drive post 1991, government owned enterprises continue to operate and compete with private enterprises in several sectors of the Indian economy. In many sectors such as insurance (as discussed above) and oil and natural gas, there are more than one government enterprises operating and competing with private enterprises. Whilst these government enterprises have a reasonable amount of autonomy granted to them in day to day operations, they are under the overall supervision of the government and the level of autonomy varies from sector to sector. There is no denying that the determination of this issue would have to take place on a case by case basis. The CCI’s reasoning in this case appears to be quite sound. It remains to be seen how the CCI would deal with a similar question in other sectors of the economy.

The full decision of the CCI can be accessed here.

Film association case

In another decision, the CCI has imposed penalties on the Kerala Film Exhibitors’ Association (KFEA) and the Film Distributors Association, Kerala (FDAK) for collective boycott. The KFEA is an association of cinema hall owners in the state of Kerala. The FDAK is an association of film distributors. The complaint was brought by the Kerala Cine Exhibitors Association (Informant), a rival cinema hall owner association alleging that their member cinema halls were not being given any fresh releases of movies due to an anti-competitive agreement between KFEA, FDAK and the Kerala Film Producers Association (KFPA), an association of film producers in the state of Kerala.

The CCI found that there had been a written agreement between KFEA, FDAK and KFPA to limit the number of cinema halls where fresh releases would be allowed to 70 based on certain specified infrastructure criteria. If any other cinema halls satisfied these infrastructure criteria, a joint decision would be taken by the 3 associations on whether to allow fresh releases in these cinema halls. This agreement had been applied in a discriminatory fashion and several cinema halls of the Informant association had not been given fresh releases despite satisfying the infrastructure criteria. The CCI found that KFEA and FDAK had each violated the cartel prohibition by implementing this agreement in a discriminatory manner resulting in the denial of fresh releases to the members of the Informant association. FDAK attempted to argue that it had been under pressure from KFEA to deny fresh releases to the members of the Informant association. The CCI found that this did not absolve FDAK of liability and could at best, constitute a mitigating factor while deciding on penalty. The KFPA was exonerated even though it had signed the agreement as it had not been actively involved in implementing the agreement to the detriment of the Informant. In fact, KFPA, in its submissions before the CCI had claimed that it was opposed to the practices of the FDAK and KFEA in denying fresh releases to the members of the Informant association.

This case raises an interesting fact pattern whereby two trade associations were found to have violated the cartel prohibition by implementing a tripartite agreement among trade associations at different levels of the market. The tripartite agreement itself was not held to be a violation. This was presumably because of two reasons: a) the tripartite agreement was signed before the Competition Act came into force; and b) it would not have constituted a horizontal agreement between competitors. Rather, the implementation of this agreement by each trade association was held to be a horizontal agreement to collectively boycott the members of the Informant association.

The CCI also made some observations on the role of trade associations in general which are worth noting. The CCI observed:

“Undoubtedly, the trade associations are for building consensus among the members on policy/ other issues affecting the industry and to promote these policy interests with the government and with other public/ private players. The activities of any Association(s) should not be intended to restrain competition or to harm consumers. Neither the Association nor any of its committees or activities should be used for the purpose of bringing about or attempting to bring about any understanding or agreement, written or oral, formal or informal, express or implied, between and among competitors with regard to practices of limiting or controlling production, supply, markets etc. The trade associations provide a forum for entities working in the same industry to meet and to discuss common issues. They carry out many valuable and lawful functions which provide a public benefit e.g., setting common technical standards for products or interfaces; setting the standards for admission to membership of a profession; arranging education and training for those wishing to join the industry; paying for and encouraging research into new techniques or developing a common response to changing government policy. However, when these trade associations transgress their legal contours and facilitate collusive or collective decision making, with the intention of limiting or controlling the production, distribution, sale or price of or trade in goods or provision of services by its members, it amounts to violation of the provisions of the Act. This has happened in the instant case.”

The full decision of the CCI can be accessed here.

Thank you for reading,

Avinash

[email protected]