Cartels and Bid Rigging: Concept, Inquiry and Penalty

The article gives an insight into the basic concepts, such as cartels and bid rigging under the Competition Law in India. The article also highlights the powers granted to the Commission to deal with all such cases and the punishment prescribed by the Act.

I. Cartel

The first term which needs to be understood is cartel. The Act provides the definition of the cartel as an association of service providers, traders, distributors, sellers or producers who went to form an agreement among themselves to control, limit or attempt to control the trade, price, sale, distribution or production of goods or provisions of service. Cartel has been classified under the category of those anti-competitive agreements with the help of which the producers, sellers or manufacturers had agreed to control the prices, supply, production and so on of the goods in the market so that they can derive maximum profits and exercise control over the market.

The cartel creates agreements that are anti-competitive in nature, and horizontal agreements especially lead to the formation of cartels. When a person comes into an agreement with other person(s) that deals with a business transaction which is of the nature that can result in negative competition in a certain market or which provides an undue benefit that causes benefit to a particular person or market while causing loss to others, such agreements fall under the scope of anti-competitive agreements, which are done away by the Act of 2002.

The Act also defines the term agreement as it is not required by the parties to execute a formal document to form an agreement between themselves.[1] The parties are free to come into either an oral agreement or a written agreement. The scope of the definition is very wide and is of inclusive nature instead of being an exhaustive definition.

The agreement relating to the competition that operates at a similar level of the economy falls under the ambit of the Horizontal Agreement and they mostly lead to the formation of cartels. Such agreements are between the levels that deal with the same type of products, such as producers and producers, sellers and sellers, retailers and retailers and so on and so forth. These agreements are considered anti-competitive agreements. These are the agreements that are strictly governed by the rules as they create an adverse impact on the competition in the market.

Any agreement that has been entered into amongst the association of individuals or individuals or association of enterprises or enterprises or individual and enterprise, along with the cartels that are involved in similar or identical trade or services such as:

1. Indirectly or directly affects the selling or buying price
2. Puts a limit on services, investment, technical development, markets, supply or production
3. Indirectly or directly leads to big rigging[2] or a presumption arises that collusive bidding have an adverse impact on the competition.[3]

On the other hand, there are various kinds of exemptions provided to joint ventures that promote efficient distribution, supply, production etc., along with the reasonable restriction and export arrangement that form part of the exploitation or protection of intellectual property rights.[4]

It becomes essential for the enterprises to show action of their concern to form an agreement. Even if the parties to the agreement do not want to create any mutual duties and obligations for each other, all such arrangements will fall under the ambit of the agreement under the Competition Act, 2002. Moreover, it is not necessary to have written proof of any such arrangement and thus, if any oral arrangement has a similar impact, it will fall under the ambit of the agreement.

In the matter of Registrar of Restrictive Trade Agreements v. W. H Smith and sons,[5] it was observed by the Court that those people who come together to keep the prices up, do not scream from the top of their houses. They remain silent and make their arrangement where no one can see them, maybe in the cellar. They do not intend to put anything in writing, and only words work for them. For instance, a wink or a nod is sufficient. Thus, the Parliament has covered both written and oral agreements.

II. Bid Rigging

When the bids are conducted in order to provide a contract for some business, the bidders show coordination which creates some ill effects on not only the bidding process but also the free and fair market competition, and this is why bid rigging is considered illegal.[6] There can be many forms of bid-rigging, but the most commonly noticed form of bid-rigging is when the result of a bid is already decided by the players of the market. The forms of bid rigging can be seen, such as the agreement of the bidders to not take part in a bidding round or to provide such bids that are unacceptable or to take low turns, and so on.

Other forms of bid rigging can be subcontracting the main bidding contract to the one, which has agreed to lose the bid, or when two or more competitors come together to form a single bid. Then comes bid suppression whereby the enterprises, who have either participated in the bid previously or are expected to take part in the bid, come into agreement by virtue of which they have withdrawn a bid that was previously submitted or refrain from taking part in the bid so that the bid of the already decided winner can be accepted.

Another form of bid rigging is complementary bidding which is also known as courtesy bidding or cover bidding. This takes place when the bid submitted by the bidders either contains some provision or some other term which is not acceptable to the buyer or is high to get accepted. Such bids are designed in a way that gives the reflection of a genuine bid and are not created with the intention of securing the acceptance of the buyers. This is a form of bid rigging that occurs very frequently, and they intend to commit fraud with the buyers by showing them there is the presence of genuine competition in the market.

The anti-trust laws are violated by bid rigging, and such phenomena are usually found in horizontal agreements. Bid rigging requires the enterprises of the market to bid competitively on business contracts. Bid rigging is a very common phenomenon that can be seen frequently in education and government whereby the agencies are expected to accept the lowest bid. Similar to price-fixing, it is difficult to expose bid rigging and it takes place in the market very rampantly. The only clue that bid rigging has taken place can be identified when there is some error in the bid.

The bid rigging was made punishable by the US law known as the Sherman Anti-trust Act, 1890. Bid rigging is an offence for which imprisonment, fine or both as the punishment. This is harmful not only to the consumers but also to the taxpayers, who are under a pressure to bear the procurement costs and the cost of higher prices.

III. Inquiry

The Competition Commission of India is empowered to proceed with inquiry[7] in all those matters that are contrary to the provision prescribing for bid rigging. When a prima facie case of bid rigging can be made as per the satisfaction of the Commission, it is empowered to give directions to the Director-General to investigate the matter and submit the report.

The Commission is granted powers that are equivalent to that of the civil court prescribed under the Civil Procedure Code. Some of the powers can be enlisted as receiving evidence on affidavit, production and requirement of documents on oath, enforcing or summoning attendance of any person on oath and so on.

IV. Powers of Commission

The Commission is empowered to pass orders by virtue of Section 27 of the Competition Act, 2002. It may give directions to the parties to discontinue the existing agreement or not to re-enter into any such agreement ever or may give directions to do modifications in the agreements or may give directions to the concerned enterprises to follow all the orders that are passed by the Commission or abide all the directions passed by it, along with the payment of costs. Further, the Commission is also empowered to pass any other order as required.

V. Penalty

The Commission is also empowered to levy penalties on the offenders. The amount of penalty can range up to 10 per cent of the average turnover of the company during the last three financial years upon all those enterprises or the individuals that are parties to such offences of bid rigging.

There can be other situations where the enterprises have entered into such offences with the help of cartels, the Commission is empowered to provide them with a penalty of around three times the profit for all those years during which the agreement was continued or ten per cent of the turnover for all those years during which the agreement was continued, whichever is higher between them to all those who are parties to the agreement may be service producers, traders, distributors, sellers or producers. This indicates that the penalty imposed by the Commission can be severe and can lead to high financial losses to the offenders.

However, if a company makes a full, true and vital disclosure pursuant to which such cartels can be busted out, the Commission is empowered to show some mercy to such enterprises and reduce the amount of their penalty.[8] If it is found that the party made partial disclosure or furnished false evidence or if the disclosure is not vital in nature, the Commission may opt not to show any of such leniency.

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[1] Section 2 (b) of the Competition Act, 2002

[2] Explanation to Section 3 (3) of the Competition Act, 2002

[3] Section 3 (3) and 3 (4) of the Competition Act, 2002

[4] Section 3 (1) of the Competition Act, 2002

[5] (1960) BAI l EK 721

[6] Section 3 (3) of the Competition Act, 2002

[7] Section 19 of the Competition Act, 2002

[8] Section 46 of the Competition Act, 2002

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1. Anti-Competitive Agreements: A Comparative Analysis of EU, US and UK
2. Competition Law