Cartelisation is considered one of most pernicious wrongs under competition law and contravening entities might be imposed with a fine of 10% of annual turnover or three times the profit earned, whichever is higher.

Introduction

The Indian Competition Act was enacted in 2002 in order to ensure fair play in the market and promote the consumer welfare standard. The law has four substantive provisions, i.e. anti-competitive agreements, abuse of dominance, merger control and competition advocacy. The anti-competitive agreements could further be classified under two headers, i.e. horizontal agreements (‘cartels’) and vertical agreements. Out of all the violations, cartels are held to be the most pernicious ones given the underlying economic damage. As per the punitive provisions under the Act, cartelising entities could be fined with 10% of their annual average turnover or three times the profit earned during the time of cartelisation, whichever is higher.

What are ‘cartel raids’?

Sometimes referred to as ‘dawn raids’, cartel raids are conducted by the Competition Commission of India to bust horizontal agreements. The net economic damage is that horizontally placed entities, which are otherwise expected to compete on merits, collude to fix prices and distribution of the commodity. This results in lowering of the consumer welfare, accrual of ‘deadweight loss’ and increase of profits for the cartelists. Cartelisation as an offence is mostly laced with secrecy and therefore, detection of the same becomes a prime public policy concern. The objective of such raids is to ultimately collect evidence so that a case of contravention could be proved at the CCI.

Context

The Competition Commission of India recently conducted ‘cartel raids’ at some of the major advertising agencies in India. In an undisclosed executive action, the CCI is investigating the probable cartelists and would use the evidence collected at the prosecution stage. There is no official word available from the Commission so nothing could be said with certainty. However, as a decisional practice, if the parties did actually exchange commercially sensitive information amongst each other, they are more likely to cooperate with the CCI in the investigation than not. The reason for the same is that the legal bar to establish ‘agreement' between entities is kept low as per the definitional clause. The CCI has, time and again, reiterated that even a ‘nod or a wink’ could be sufficient to establish a case of cartel given that parties often use indirect modes to communicate with each other to avoid detection.

There is an equal possibility that despite conduct of the raids, the CCI might not be able to find direct evidence of ‘agreement' to nip the parties. In such a case, the prosecution may have to first prove ‘price parallelism’ between the conduct and then look for additional ‘plus factors’ to return a finding of contravention. These ‘plus factors’ could include a wide array of circumstances such as timing of the price increase, fluctuation in the inventory and algorithmic decision making among others.

Procedural fairness

The Director General’s (DG) Office which is the enforcement wing of the Commission, is guided by Section 41 of the Act when it comes to conduct of such dawn raids. The said provision was recently amended by the Competition (Amendment) Act, 2023 in order to ensure clarity and certainty in the process. The DG may require the party under scrutiny to furnish information available in records which is considered relevant for the purposes of the investigation. The DG may keep such information in its custody for a period of 180 days extendable by an equal time on a need-basis. The Director General may further examine any officer or agent of the party on oath which could be used as evidence against it. Wherever there is a reason to believe that any information or record might be tampered by the party, the DG could make an application to the Chief Metropolitan Magistrate (CMM) requiring entry, search and seizure of such property and documents. For the purposes of clarity, even auditors and in-house legal counsels of the parties could be examined by the DG on oath.

Way forward

The matter is likely to remain under the wraps unless the evidence is finalised in the matter. There is no information available as to whether the matter was taken suo moto, an information being filed by a third-party or a whistleblower application was filed by one of the cartelising entities at the CCI. This aspect is important as the law provides for filing of a ‘leniency application’ where the first-priority status could ensure a 100% penalty waiver for the filing company. If there is a leniency applicant, the Commission is able to identify the modus operandi of a cartel. Such is the importance that the CCI has introduced a ‘leniency plus’ regime under amended guidelines where an already cooperating party might be given a +30% waiver in the first cartel over and above the priority status, provided it assists the Commission in busting a second cartel. The issue of algorithmic collusion might also come in this case which has been relatively untouched by the CCI till date. Conversely, there is a possibility that there isn't a cartel in the first place. In such a case, the matter would be closed without any punitive action being taken against the parties.