[Soumil Jhanwar is a 4th year B.A. LL.B. (Hons.) student at the National Law School of India University, Bengaluru]
To establish bid rigging under section 3(3)(d) of the Competition Act, 2002 one must prove that the bidders had entered into an “agreement”, which has the effect of manipulation of bids. As per section 2(b) of the Act, an agreement need not be formal or written, and can be in the form of an understanding, arrangement, or an action in concert. Usually section 3 requires additional proof of the causation of appreciable adverse effect on competition, but any “agreement” under section 3(3) raises a presumption of such effect, which must be rebutted by the opposite parties. Thus, the main component is the proof of submission of bids in furtherance of an understanding, an arrangement, or an action in concert. The bidders are not liable if their decisions are independent of each other.
Excel Crop Care and Rajasthan Cylinders
In Excel Crop Care v. Competition Commission of India (discussed here and here), three manufacturers of aluminium phosphide tablets were alleged to have indulged in bid rigging, thus violating section 3(1) read with section 3(3)(d) of the Competition Act. The available proof against them was a pattern of identical bidding for about 10 years. The only other material proof (‘plus factor’) available was that the representatives of the companies, on one occasion, had entered the building together for submission of bids. The visitors’ register evinced that one of the representatives had made entries on behalf of all, on this occasion. Further, the parties had once collectively boycotted the applicant’s (Food Corporation of India) tender, citing unreasonable tender conditions.
The Competition Commission held that direct proof of ‘agreement’ is not always available, as parties usually conduct such business in a clandestine fashion. It held that an ‘agreement’ has to be inferred from multiple coincidences, which would make it seem likely that there was an agreement, and that the standard of proof is preponderance of probability. The identical bids had been used as the requisite coincidences in this case. Since the parties had different cost structures and geographic locations, the Commission held that it was for the opposite parties to prove how their identical bids throughout the years were rationally justifiable. The opposite parties attempted to justify the identical bids stating that the market was oligopolistic, which made it susceptible to information exchange regarding bids. They argued that their bids were thus independently determined, keeping in mind the information regarding the competitors. However, the Commission differentiated between the concepts of price parallelism (which is an infinitely-repeated game) and bid rigging (where the prices are only quoted once), to hold that in bid rigging, identical prices are not very likely unless the parties were cooperating instead of competing. In the absence of a justification, an ‘agreement’ to manipulate bids was held to be proven through circumstantial evidence.
The COMPAT upheld the decision of the Commission. Even the Supreme Court used the mere factum of identity of bids as strong proof of “agreement”. Further, the Court also outlined that the ‘price parallelism’ defence was misplaced in the scenario of bid rigging. The Court used the identity of bids and other plus factors to uphold the Commission’s decision.
In Rajasthan Cylinders v. Union of India(discussed here), the available evidence was very similar to that available in Excel Crop Care. There had been region-wise identical bids by the opposite parties. The involved parties were 44 in number, compared to merely three in Excel Crop Care. There was an association meeting of cylinder manufacturers, two days before the bids were submitted. The parties had common agents; there were six agents who had represented the 44 opposite parties. The costs of production and the locations of the bidders were different. The Competition Commission used a similar rationale to that in In Re: Aluminium Phosphide (the case which reached the Supreme Court as Excel Crop Care), to hold that there had been an agreement to conduct bid rigging. The COMPAT upheld this decision.
However, the Supreme Court struck down the decisions, holding that the parallel behavior was not a result of concerted practice. The Court held that in oligopolistic markets, the manufacturers are forced to submit bids that are close to each other to sustain themselves in the market. Since in such markets, parties easily become aware of the prices quoted by competitors, they could have independently come to the same prices without colluding. Further, it was held that an oligopsony of buyers made it impossible for the sellers to abuse the process of bidding to gain the benefit of unfair prices. Thus, there was no bid rigging. With this stark contrast between the decisions of the Supreme Court (interestingly, both decisions being authored by Justice Sikri), it is important to look at the relevance of the ‘oligopoly defence’ and the ‘oligopsony defence’ used in Rajasthan Cylinders.
The Oligopoly Defence
It is important to note the difference between bid rigging and price parallelism as highlighted by the Competition Commission in Aluminium Phosphide and mentioned in passing by the Supreme Court in Excel Crop Care. Price parallelism is a feature of cartelization, where the players in an oligopolistic market are involved in infinitely-repeated games. In such a scenario, competitors gain knowledge of the prices charged by other competitors, due to the close-knit nature of the market. Based on this knowledge, the competitors can readjust their price to match those of others, as the games are infinitely repeated. Thus, it is possible for competitors to arrive at similar/identical prices in the long run. However, tender bids do not involve infinitely repeated games. The competitors in a tender bid do not get the opportunity to alter their tenders after knowing their competitor’s prices. Thus, the oligopolistic nature of the market should not be available as a defence against evidence of an agreement in bid rigging cases.
This is the reason why identical bids are usually deemed to be extremely strong proof of agreement in India, even in the presence of oligopolistic markets. In Western Coalfield v. SSV Coal Carriers Pvt. Ltd., the Competition Commission had held that identical bids are highly unlikely with so many players in the market. It was held to be strong evidence of bid rigging, in pursuance of Excel Crop Care. Other pieces of evidence such as presence of trade association, gatherings amongst the opposite parties, and difference of costs were used as ‘plus factors’ for the proof of agreement. In the Railways Antitheftcase, the Commission again held that the agreement has to be inferred from various coincidences. In the absence of a plausible justification of these coincidences by the parties, they were held liable for bid rigging. In Delhi Jal Board v. Grasim Industries Ltd., the bids quoted were identical throughout the years. Further, the bids had gradually increased through the years with no proof of increase in costs. In the absence of any economic rationale behind the coincidence of identical prices, the Commission held that there was an ‘agreement’ amongst the parties. Similar reasoning was used in In Re: Sheth and Co; Surendra Prasad v. Maharashtra State Power Generation Co.; and India Glycols Ltd. v. Indian Sugar Mills Association; where the Commission used identical bids as strong evidence of an ‘agreement’, in the absence of a contrary explanation. All the aforementioned cases involved oligopolistic markets.
The Supreme Court in Rajasthan Cylinders had cited numerous judgements to prove that “identical” is not sufficient proof of agreement. However, the cited cases dealt with price parallelism in a scenario of infinitely repeated games, and not with bid rigging [See Brooke Group Ltd. v. Browne and Williamson Tobacco Corp.; Bell Atlantic Corp. v. Twombly]. As explained above, adjustment of prices based on the same by competitors is only possible when there are multiple/infinite games involved. The only bid-rigging case cited was Union of India v. Hindustan Development Corporation, where, ironically, the factum of identity of bids was used as material evidence for collusion, in conjunction with other plus factors.
Thus, the defence of oligopolistic nature of the market must be seen as erroneously applied in Rajasthan Cylinders. The presence of an ‘agreement’ is evidently indicated by factors like identical prices, meeting amongst parties, differing costs and a mutually beneficial outcome for the bidders. These could not have been mere coincidences. Nevertheless, for a very different reason (to be discussed in the next section), the outcome of the case was not erroneous.
Oligopsony Defence and Appreciable Adverse Effect
In Rajasthan Cylinders, Supreme Court mentioned that the market for cylinders was an oligopsony, with Indian Oil Corporation Ltd. (“IOCL”) being the most powerful player, and the only other players being Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd. It held that there was no way the parties could have strong-armed a buyer like IOCL. In fact, after the process of negotiations, the final prices at some places were lower than the expectations of IOCL itself. Thus, the prices had ended up being equitable.
In light of this, it is important to note that section 3(3) only raises a presumption of appreciable adverse effect, which may be countered. In Rajasthan Cylinders, there was sufficient proof that there was no adverse effect on competition. This is because, all the suppliers were successfully allocated tenders, the prices had ended up being fair and the buyer (intermediate consumer) was very powerful and could not have been negatively impacted by the parties. Such fair prices also ensure productive efficiency. Further, there seemed to be no barriers put in this process, with there being new entrants in the market. Such clear absence of appreciable adverse effect meant that section 3 had not been violated. The Supreme Court did not explicitly mention the absence of appreciable adverse effect, but its rationalization of the ‘oligopsony defence’ is in line with this reasoning.
The Final Test
In light of the discussion, the final test for bid rigging in case of identical bids must be as follows. The arbiter must first analyze the extent of similarity of bids, the number of parties involved, and the duration of the practice of similarity of bids. If all the aforementioned factors have a high magnitude, then the mere identity of bids is strong proof of an ‘agreement’, as such circumstances cannot arise out of mere coincidences. Further, such proof must be complemented with ‘plus factors’, to confirm the presence of an agreement. These factors can be the economic irrationality of the bids or the possibility of information exchange between the enterprises. The former entails proof of prices being excessive or being divorced from the cost-pattern (used in Excel Crop Care; Western Coalfields; Railways Antitheft; Delhi Jal Board; Sheth and Co; India Glycols). The latter entails proof of the existence of a platform or for facilitation of information exchange (used in Excel Crop Care; Western Coalfields; Railways Antitheft; Sheth and Co.).
In the presence of identical/similar prices and any of these plus factors, the agreement must be held to be conclusively proven, unless the opposite parties come up with a satisfactory justification for the same. Oligopolistic nature of market is not a valid justification in bid rigging cases. After proof of an ‘agreement’, it is upon the opposite parties to rebut the presumption of appreciable adverse effect by proving that the effect on competition is positive. In the absence of such rebuttal, section 3(3)(d) stands violated.
– Soumil Jhanwar