Indian Competition Law: a Comprehensive Analysis of MSMEs and Bid Rigging

Gagan Anand 

Legacy Law Offices, New Delhi

anand@legacylawoffices.com

Shivani Anand

Legacy Law Offices, New Delhi

shivani.anand@legacylawoffices.com

Introduction

Competition law in India is the embodiment of the archaic Monopolies and Restrictive Trade Practices Act of 1969 (‘MRTP Act’), the subsequent liberalisation in 1991 that mandated laws that were responsive to economic realities and, ultimately, the Competition Act of 2002 (‘Competition Act’), a legislation drafted with the end objective of ensuring regulation of business practices in the country. The aim of the Competition Act (as amended) is to prevent practices that can have an appreciable adverse effect on competition (AAEC) in India. The Competition Act primarily seeks to regulate three types of conduct: anti-competitive agreements, abuse of a dominant position, and combinations (ie, mergers, acquisitions and amalgamations).[1]

By the virtue of the provisions of the Competition Act, the Competition Commission of India (CCI) was established, solely responsible for the enforcement and administration of the Competition Act. The enforcing authority comprises of two to six members and a chairperson to be appointed by the Government of India and can initiate an inquiry on its own accord or based on information in its possession. The investigative wing of the CCI is the office of the Director-General (DG), which is responsible for investigating anti-competitive practices with its powers extending up to summoning, examination, enforcing the attendance of any person, among other similar provisions. One of the interesting things about the Competition Act is the doctrine it is based on, called the ‘effects doctrine’. This essentially grants the CCI extra-territorial jurisdiction over any agreement that might even be outside of India, as long as such an agreement is likely to have an AAEC in India.

The Competition Act considers any agreement that is likely to have an AAEC in the market to be void. An agreement may be horizontal (ie, between enterprises, persons or associations, engaged in identical or similar trade of goods or provision of services), or it may be vertical (ie, amongst enterprises or persons at different stages or levels of the production chain in different markets).[2] Bid rigging or collusive bidding is one of the horizontal agreements that come under the ambit of section 3 of the Competition Act. Section 3[3] covers anti-competitive agreements, both horizontal and vertical, that may have an AAEC in India. Bid rigging is common among micro, small and medium enterprises (MSMEs) as MSMEs sometimes feel the need to compensate or catch up with the big giants in the market having a dominant position. Given the potential of MSMEs in contributing to equitable growth in the economy, it is critical that their interests are protected, and they are made aware of the legal and institutional mechanisms that are available to protect their interests.[4] This article covers the interaction between the MSMEs and the competition law in India, bid rigging, its kinds and effects.

MSMEs and Competition Law: prey or predators?

The question that arises every time you hear MSMEs and competition law together is do they get any special treatment with respect to their size? The answer is a deliberate no. MSMEs are not exempted from any of the provisions of the Competition Act. The Competition Law in India is size and type neutral and provides no special provisions for safeguarding MSMEs. However, due to lack of awareness and the intimidation by the big competitors, there are certain risk areas MSMEs need to be aware of. Among MSMEs, very often an association of enterprises involved in same trade or business provides an effective and reliable platform for enterprises to interact with each other and enforce cartel rules.[5] Therefore, it is crucial to demarcate the thin line that exists between trade associations and cartel formations under section 2[6] of the Competition Act.

Trade associations are not illegal per se but are frowned on while enquiring cartel behaviour. Trade associations do have some pro-competitive effects but, owing to their very nature, they are susceptible to anti-competitive behaviour. Although the Competition Act does not deal with trade associations differently, it certainly views it as an impetus to anti-competitive behaviour by enterprises. As these associations get a chance to meet frequently and exchange business discussions, it is likely that they exchange strategy, take collective decisions on boycotts, pricing, discounts or other commercially sensitive matters. The CCI, through its rulings, has made it amply clear that it shall rely on direct proof when it comes to trade associations and allegations of cartel behaviour. In certain cases, even when the charter documents of the association revealed no such restrictions, circumstantial evidence revealed that the members were engaging in acts of market restriction and boycott. A trend assessment shows that the practice of CCI, in terms of standard of evidence, has remained largely consistent over the years.[7]

The Competition Act also prohibits the abuse of dominant positions in the market,[8] although having a dominant position is not prohibited. A dominant position (dominance) is a position of strength enjoyed by an enterprise, in the relevant market in India, which enables it to operate independently of the competitive forces prevailing in the relevant market, or affect its competitors or consumers or the relevant market in its favour.[9] The dominant player in the market can abuse its position in different ways, such as through price discrimination, margin squeezing, predatory pricing, inter alia. It is vital to establish a position of dominance in the market to come under the purview of scrutiny by the CCI. Therefore, it is rare to encounter an incident where MSMEs are in a dominant position and are found guilty of its abuse. However, where MSMEs form associations, the association in its entirety can be collectively dominant and subsequently abuse its dominant position.

The environment for small players in the market is quite stiff and MSMEs face constant competition and challenges from the big players. The survival of MSMEs becomes necessary when big players abuse their dominant position.

In a famous case relating to Auto Parts,[10] 14 car companies were found to be indulging in restrictive trade practices by not providing their original spare parts on the open market, which led to the denial of market access to the independent repairers, who were operating in the open market of servicing and spare parts. The CCI held all the 14 car companies liable for abusing their dominant position and imposed a hefty fine of INR 2,544.65 crores.

In Faridabad Industries Association (FIA) v M/s Adani Gas Limited,[11] due to the monopoly gained by Adani Gas Limited oversupply of natural gas in a certain geographical area, the FIA had to enter into a one-sided agreement that contained conditions heavily favourable to Adani Gas Limited. This case is a classic example of small players being compelled to accept adversarial offers only because of the dominant player’s position. Sometimes dominant players in the upstream market may compel the downstream market players to follow their recommended resale price and to ensure compliance by the small player, the dominant player may impose certain punitive measures.[12]

These cases reveal how small players are compelled to undergo unreasonable conditions in contracts and are subjected to unreasonable punitive measures by dominant players. On the other hand, a few examples of MSMEs showcasing predatory behaviour help understand the position of MSMEs in the market.

When it comes to MSMEs exploiting the market, it is possible only when certain players collectively create a dominant presence. Many sectors, such as film production and distribution, drug distribution, among others, have been frequently reported to have been affected by cartel activity in India.

In the case of Kerala Cine Exhibitor’s Association (Informant) vs Kerala Film Exhibitors Federation and Others,[13] the informant was an association of 171 cinema theatre owners in Kerala with its members engaged in running theatres and exhibition of cinema under licences. The member theatres of the informant were not getting new film releases due to anti-competitive practices adopted by Kerala Film Exhibitors Federation, Film Distributors Association and Kerala Film Producers Association. The three formed a cartel and were denying members of the Kerala Cine Exhibitor’s Association release of new films in their theatres. It was held by the CCI that the associations had transgressed their legal contours and indulged in collective decision making to limit and control the exhibition of films in the theatres other than the ones owned by the members of the opposition and that there is no rational justification for the same.

Thus, associations of SMEs formed with an objective of promoting the sector or improving the bargaining power of the enterprises have been found to abuse their power. Associations of SMEs in the informal sector helped to run a cartel effectively among hundreds of enterprises as it provides a cost-effective and robust platform to monitor defection and bring together non-defecting enterprises to penalise the defecting enterprise(s). Without association, though not impossible, it would have been very costly for enterprises to monitor behaviour of other enterprises taking part in a cartel.[14]

Bid rigging

Another anti-competitive practice that is popular among MSMEs is bid rigging or collusive bidding. As defined in section 3(3),[15] bid rigging takes place when bidders connive and predetermine the bid amount to reduce competition and to ensure manipulation of the bidding process.

Some of the instances of big rigging are listed below:

• lowest bid by the agreed winner and inflated/no bids by others;
• agreements to submit identical bids, common prices, etc;
• designation of bid winners on a rotational or geographical or customer allocation basis; and
• squeezing out of outside bidders.

All such agreements have a compensation system wherein unsuccessful bidders are indemnified of all losses and the profits, if any, are divided among the players.

Types of bid rigging

Bid suppression:

In this kind of bid rigging, usual bidders refrain from submitting their bids to give the designated winning competitor the chance to be accepted.

Bid rotation:

In bid rotation schemes, all conspirators submit bids but take turns to be the lowest bidder. The terms of the rotation may vary; for example, competitors may take turns on contracts according to the size of the contract, allocating equal amounts to each conspirator or allocating volumes that correspond to the size of each conspirator. A strict bid rotation pattern defies the law of chance and suggests that collusion is taking place.[16]

Complementary Bidding

Also known as cover or courtesy bidding, this kind of bid rigging takes place when competitors agree to submit a very high bid or submit a conditional bid so that they are not accepted, giving the false appearance of genuine competitive bidding. Complementary bidding schemes are very frequently resorted to, creating the hoax of competitive bidding and concealing inflated prices in order to secure the desired bid for the designated winner.

Subcontracting

Subcontracting is when competitors who agree to steer clear of the bidding process receive subcontracts in exchange from the successful bidder. In some schemes, a low bidder will agree to withdraw its bid in favour of the next low bidder in exchange for a lucrative subcontract that divides the illegally obtained higher price between them.[17]

Bid rigging and MSMEs

Bid rigging is something that can’t be detected very easily. However, careful examination of suspicious behaviour can reveal collusion. Instances such as similar errors or irregularities (spelling, grammatical, formatting and calculation),[18] bringing in multiple bids to find out the competitors before submitting, cover bids, pricing discussions, similar corrections, alterations indicating minute changes, bidding from common computers, payment from a common source and frequent gathering between bidders indicate that the bidding process is hindered by anti-competitive agreements between bidders. Section 19[19] of the Competition Act confers the power on the CCI to enquire into an alleged contravention of section 3 (3)[20] that prescribes bid rigging and section 27[21] gives the Commission the power to take action or impose a penalty as it deems fit.

The epicentre of bid rigging is in government departments that procure goods or services from non-state enterprises. The seriousness of the contravention of section 3(3) can be found in many CCI rulings and they make no exceptions or accept no justification for bid rigging.

The CCI, in Re: Cartelisation in respect of tenders floated by Indian Railways for supply of Brushless DC Fans and other electrical items,[22] examined documentary (bid documents), oral (recorded statements) and forensic (call data records and emails) evidence. A cease and desist order was passed by the CCI, along with hefty monetary penalties. One of the parties’ penalty was reduced from Rs 62 lakhs to Rs 16 lakhs as it was the first to make full disclosure and cooperate with the enquiry.

The small size of MSMEs does make them vulnerable and are often subjected to unreasonable conditions of business. However, a few cases reveal the cartel-like tendencies that they possess wherein trade associations give them the power to do so. Laws relating to anti-trust and competition are relatively young in India; awareness and understanding of these laws need to reach every business that has been following such practices as an everyday practice. The CCI is determined to ensure competition laws are taken seriously, giving no scope for exceptions. The developing competition laws, coupled with CCI’s focus and outreach will, without doubt, change the mind-set of MSMEs and enhance compliance.