INVESTMENT AND COMPETITION LAW

P.S.D.A.

CASE ANALYSIS

[RAJSTHAN CYLINDERS VS. CCI]

NAME: RAHUL NAIR

CLASS: 3-D

ENR. NO.: 16010303816

SUBMITTED TO: Ms. MAHIMA MAHAJAN

The Supreme Court, in its recent judgment, in Rajasthan Cylinders Containers Ltd. vs. Union of
India & Ors. on October 01, 2018, set aside the order passed by Competition Appellate Tribunal ()
wherein the Appellants/Suppliers of Liquefied Petroleum Gas (LPG) Cylinders were penalized for
indulging in cartelization, thereby influencing and rigging prices in violation of Section 3(3)(d) of the
Competition Act, 2002 (the Act). The Appellants are manufacturers of 14.2 kg LPG cylinders, which
are required by only three oil companies in India i.e. Indian Oil Corporation Ltd. (IOCL) being the
leading market player with 48% market share along with Bharat Petroleum Corporation Ltd. (BPCL)
and Hindustan Petroleum Corporation Ltd. (HPCL).

The suo-moto proceedings in the matter were started by the Competition Commission of India (CCI)
after receiving complaints about unfair conditions in a tender floated by IOCL for supply of 10.5
lakh 14.2 kg LPG cylinders. The CCI instructed investigation by the Director General (D.G.) and
subsequently CCI and both held the suppliers guilty of collusive bidding. It was alleged that the
suppliers despite varying costs had submitted identical bids. (IOCL) had indulged in cartelisation,
thereby influencing and rigging the prices, thus, violating the provisions of Section 3(3)(d) of the
Competition Act, 2002. The Competition Appellate Tribunal though upheld these findings of CCI,
but reduced the penalty. The suppliers, faced with adverse orders, approached the apex court. The
CCI had come to the conclusion that it did suggest collusive bidding. It had analyzed the bids for
each state and found that all 50 participating bidders had secured the order; that the orders were
placed on the said 50 bidders who had quoted identical rates or near to identical rates in a particular
pattern common to all the parties.

Additionally, there existed an active trade association of the appellants which had met in Mumbai
just before submission of the tenders. The products were identical with few or no substitutes and no
significant technological changes. Further, there were a small number of suppliers with few new
entrants.

The CCI arrived at its finding of collusive bidding based on factors such as, (i) market conditions; (ii)
small number of suppliers; (iii) few new entrants; (iv) active trade association; (v) repetitive bidding;
(vi) identical products; (vii) few or no substitutes; (viii) no significant technological changes; (ix)
meeting of bidders in Mumbai a few days prior to submission of the bids; (x) appointing common
agents; and (xi) identical bids despite varying cost. Further, the CCI reinforced its finding of bid
rigging with the fact that all 50 of the bidders who had quoted identical and near identical rates had
secured orders from IOCL in one State or the other and emphasised that the appellants had failed to
explain such identical behaviour by way of a business justification.

This affirmed the CCI’s findings, observing that owing to the collusion, IOCL could not get
competitive prices and as such the conduct of the appellants resulted in an appreciable adverse effect

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on competition (AAEC). They also observed that the common platform provided by the trade
association of the LPG cylinder manufacturers and fixation of bid prices ensured that no new player
could enter the relevant market and quote independent prices.

While allowing the appeal of the suppliers, the Apex Court observed that the market type and
conditions are important factors which need to taken into consideration while analyzing anti-
competitive practices and price parallelism, and strong evidence cannot, by itself, be identified as
concerted practice.

Price parallelism

Price parallelism is a term used in Competition law where the traders change their prices
simultaneously, in the same direction and proportionally. Since such practices result in monopoly
prices in goods, it is considered harmful to the consumers. This article makes an attempt to analyze
this phenomenon in light of the recent Supreme Court decision, Rajasthan Cylinders and Containers
Ltd. v Union of India and Another.

CASE ANALYSIS

GROUNDS TAKEN AGAINST THE SUPPLIERS IN THE IMPUGNED ORDER BY CCI

Identical Rates

The D.G. observed that the contract was awarded to a set of bidders with identical rates and that there
was a common pattern of quotation depending upon the state, with highest rates in North East.

LPG Cylinders Manufacturers Association

It was also found that LPG Cylinder manufacturers had formed an association in the name of LPG
Cylinders Manufacturers Association and the members interacted through this Association. The date
for submitting the bids in the tender floated by IOCL was March 03, 2010 and in the two days prior -
on March 01, 2010 and March 02, 2010 - meetings were held at Hotel Sahara Star in Mumbai for
members of this association and 19 parties took part and discussed the tender.

Entry Barrier

The D.G. also stated that this behaviour created an entry barrier and there were no accrual benefits to
consumers. The D.G. concluded that there existed cartel like behaviour on part of the bidders.

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Other Factors taken into consideration

After considering these observations and submissions of the suppliers, CCI answered the issue
against the Cylinder Manufacturers and inflicted penalties on the present appellants while taking into
account various factors such as few new entrants, identical products, few or no substitutes,
appointing of common agents, identical bids despite varying cost, active trade association, etc which
collectively suggested collusive bidding.

Based on these admitted grounds, also upheld the order of CCI and observed that as per Section 3 of
the Act once agreement is proved there is a presumption about its appreciable adverse effect on
competition and the onus shifts on the other side to prove otherwise.

PROPOSITIONS OF THE APPELLANTS BEFORE THE APEX COURT

Inherent Nature of the market of Cylinder Manufacturers

The Act prohibits anti-competitive practices which implies that there has to be a competition in the
market in the first place. However, in the present case there is no such competition. The market is an
oligopsony market with extremely limited number of buyers and in the present case a sole buyer i.e.
IOCL controls 48% of the market. IOCL thus, has tight control and regulation over the market,
leaving hardly any scope of competition at the threshold. The counsel for the Appellants also placed
reliance on a recent judgment of this Apex Court in Excel Crop Care Limited vs. Competition
Commission of India and Anr. [(2017) 8 SCC 47] to state that price parallelism is inevitable in an
oligopoly/ oligopsony market where the limited number of sellers/buyers have high degree of control
on price, quantity and even identities of awardees at its discretion. Thus, the very nature of the
industry cannot be used as a factor to presume collusion.

No collusive agreement

The Appellants also contended that the factum of meetings of an association before submitting of
bids by itself cannot lead to conclusion of collusion and stated that the said approach is contrary to
the fundamental right to form an association under Article 19 (1)(c)(g) of the Constitution. It was
further contended that the meetings on 1st and 2nd March 2010 were hosted by individual members
and the expenses for the same were not shared by all members who attended it. Further out of 45
members of the association only 12 persons representing 19 parties had attended those meetings.

No appreciable adverse effect on competition

It was contended that in an oligopoly industry, the identical quoting of price does not by itself lead to
the conclusion of a concerted price. Moreover, in the instant case, number of new entrants had

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increased as 12 new entrants submitted their bid for the year 2010-11, thus the finding of CCI that
there were barriers to new entrants was baseless.

THE SUPREME COURT’S FINDINGS

The Supreme Court looked at the flip side of the coin and noticed that there were only few suppliers
of cylinders. The buyers were also limited to three, including IOCL, Bharat Petroleum Corporation
Limited (“BPCL”) and Hindustan Petroleum Corporation Limited (“HPCL”). Due to lack of buyers,
the appellants could not sell the goods to any other entity apart from the above three. This acted as a
disincentive for other suppliers from entering into the market. Moreover, it was clear that the price of
the bids was internally regulated by IOCL and the control remained with IOCL.

Burden of Proof and Standard of Proof in a Cartel case

The Supreme Court begins the discussion by laying down the procedure to be followed in an
investigation under Section 3(3) of the Act generally and bid rigging specifically. The judgment
affirms that once the CCI has established an agreement in terms of Section 3 of the Act, it is
presumed that such an agreement leads to an AAEC. As such, the burden of proof shifts on the
opposite party to adduce evidence to dispel the presumption of an AAEC and in the event the
evidence so presented by the opposite party is unable to establish any or all of the factors mentioned
under Section 19(3) of the Act should the CCI proceed to take remedial action under the Act.

The Supreme Court while establishing the test for the standard of proof in case of a cartel relied upon
various international jurisprudence and agreed with the respondents’ submission that there may not
be direct evidence of cartelisation, as agreements contemplated under Section 3 of the Act are
entered into behind closed doors and that the standard of proof required is one of probability. It
observed that even in the absence of proof of a concluded formal agreement, when there are
indicators that there is practical cooperation between parties which knowingly substitute the risk of
competition, the same would amount to an anti-competitive practice.

Further, with reference to the possibility of such an agreement in the present case, the Supreme Court
analysed all the circumstantial evidence relied upon by the CCI in light of the market conditions.
Accordingly, the Supreme Court conducted a detailed analysis of the market for LPG cylinders and
the defining features of an oligopsony which, as concluded by the Supreme Court, precluded the
appellants from engaging in a cartel. The Supreme Court based its findings on the following
observations:

(i) Few manufacturers due to a limited number of buyers.—Given that the market is marked by the
presence of only three buyers, the market for supply of LPG cylinders has limited scope of growth. If
a particular manufacturer was not selected by the buyers for any reason, it would be driven out of the

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market, posing a major disincentive to new entrants. As such, the entry of only 12 new players was a
result of the few buyers rather than cartelisation.

(ii) Buyers control pricing.—The Supreme Court found that IOCL controlled the prices which were
arrived at based on internal estimates for the cost of cylinders. Further, IOCL did not enter into
contracts at the price quoted by the L1 bidder but at a significantly negotiated lower price.

(iii) Award of contracts to all bidders to maintain supply.—All manufacturers were awarded some
portion of the tender due to IOCL’s attempt to ensure that a larger pool of manufacturers were
available for supply of an essential commodity and no manufacturer was compelled to exit the
market. As such, the alleged pattern of market sharing was a creation of IOCL itself.

(iv) Transparency and competitive pressures leading to similar prices.—Despite different

(v) Government regulation of price.—Finally, it was also observed that the price of LPG cylinders
supplied to consumers is controlled and regulated by the Government and as such, the appellants had
little or no role to play in the pricing of the cylinders.

Placing reliance upon all the above mentioned factors, the Supreme Court upheld the test for parallel
behaviour laid down by itself in Excel Crop Care Ltd. v. Competition Commission of India and
found that that parallel behaviour was not a result of a concerted practice. It was further observed that
whenever there was a situation of oligopsony, parallel pricing simpliciter would not lead to a
conclusion of concerted practice. Instead, other credible and corroborative evidence would have to be
made available to arrive at a conclusion of cartelisation.

Monopsony and Oligopsony

The bench noted: “Monopsony consists of a market with a single buyer. When there are only few
buyers the market is described as an oligopsony. What is emphasised is that in such a situation a
manufacturer with no buyers will have to exit from the trade. Therefore, first condition of oligopsony
stands fulfilled. The other condition for the existence of oligopsony is whether the buyers have some
influence over the price of their inputs. It is also to be seen as to whether the seller has any ability to
raise prices or it stood reduced/eliminated by the aforesaid buyers.”

The Supreme Court in this regard analyzed the market conditions and noted that in an oligopsony
there existed only a few buyers. The other condition for the existence of oligopsony is whether the
buyers have some influence over the price of their inputs. It is also to be seen whether the seller has
any ability to raise prices or it stood reduced/eliminated by the aforesaid buyers.

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The Court stated that “in a situation of oligopsony, price parallelism would not lead to the
conclusion that there was a concerted practice. There has to be other credible and corroborative
evidence to show that in an oligopoly, a reduction in price would swiftly attract the customers of the
other two or three rivals, the effect upon whom would be so devastating that they would have to
react by matching the cut”. Similarly, the “theory of oligopolistic interdependence” states that an
oligopoly cannot increase its price unilaterally because it would be deserted by its customers if it did
so. Thus, the theory runs that in an oligopolistic market rivals are interdependent: they are acutely
aware of each other’s presence and are bound to match one another’s marketing strategy. The result
is that price competition between them will be minimal or non-existent; oligopoly produces non-
competitive stability.

The practice of collusive tendering flowing from price parallelism was earlier discussed by the
Supreme Court in Excel Crop Care Ltd. v. CCI, (2017) 8 SCC 47, where collusive tendering was
defined as a practice whereby firms agree amongst themselves to collaborate over their response to
invitations to tender. The main purpose for such collusive tendering is the need to concert their
bargaining power, though such a collusive tendering has other benefits apart from the fact that it can
lead to higher prices. The Court held that “in an oligopoly, parallel behaviour may not, by itself,
amount to a concerted practice”.

All the parties relied extensively on the decision and findings of the Supreme Court in Excel Crop
Care Ltd v Competition Commission of India & Ors (Excel).

The LPG cylinder manufacturers relied upon the decision in Excel to contend that the evidence in
such cases needs to be considered “not in isolation, but as a whole, account being taken of the
specific features of the product in question”. Building on market conditions (monopsony/ oligopsony
– markets in which there is only one, or very few, buyers) as examined in Excel, the LPG cylinder
manufacturers highlighted various peculiar features of the market for the “product in question” i.e.
LPG cylinders. Some of the major features highlighted were:

1. Extremely limited number of buyers. IOCL alone holds 48% market share.

2. The product is standardised and special to the extent it is highly regulated by the Government
and there are no other takers for it.

3. There are entry barriers in the market as valid approval from the Chief Controller of
Explosives and a Bureau of Indian Standards licence is necessary to submit bids.

4. The effective price has no sanctity since in addition to the L1 (the lowest bidder), contracts
are also awarded to L2 and L3.

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On the basis of the above conditions, it was contended that given the nature of the vertical
arrangement (i.e. between IOCL and the LPG cylinder manufacturers), there was no scope for
competition between the horizontal players (i.e. between the LPG cylinder manufacturers).
Alternatively, it was contended that price parallelism is inevitable where the buyer has a high degree
of control and determines price, quantities and even the identities of the awardees at its discretion. It
was further contended that even if there was a collusive agreement, as alleged, it did not have an
appreciable adverse effect on competition.

The CCI sought to rebut the above contention by relying on Excel where the Supreme Court had
accepted the CCI’s contention that price parallelism is “not applicable in bid cases and it fits in the
realm of market economy”. The CCI further sought to rely on the above-mentioned market
conditions as strong economic evidence of collusion.

The Supreme Court highlighted the purpose of the Competition Act by relying upon Excel and SAIL
and reiterated that the purpose of the Competition Act is not merely to eliminate anti-competitive
practices but also to promote and sustain competition. The Supreme Court also relied upon the
decision in Excel to explain the connotation of collusive bidding or bid rigging.

The Supreme Court held that there need not be direct evidence of cartelisation since such agreements
are entered into in secret and the standard or proof required is that of balance of probabilities.
However, the Supreme Court held that the presumption of anti-competitiveness attached to
horizontal agreements is rebuttable by parties through evidence.

While examining the market conditions prevailing in the LPG cylinders market, the Supreme Court
held that “those very factors on the basis of which the CCI has come to the conclusion that there was
cartelisation, in fact, become valid explanations to the indicators pointed out by the CCI”. The
Supreme Court noted that the above mentioned market condition led to a “situation of oligopsony
that prevailed because of limited buyers and influence of buyers in fixation of prices was all
prevalent”.

On the basis of the above factors, the Supreme Court held that the LPG cylinder manufacturers had
discharged their onus by showing that the parallel behaviour was not a result of concerted practice
but of the market conditions where IOCL was calling the shots insofar as price control is concerned.

Thus, the Supreme Court held that at this stage it was up to the CCI to inquire further in the case,
which it failed to do. The Supreme Court also took note of the fact that the CCI had failed to
summon the IOCL before it, despite the IOCL having “full control over the tendering process”.
Accordingly, the Supreme Court held that there was not “sufficient evidence” to hold the LPG
cylinder manufacturers in violation of the Competition Act and set aside the orders upholding the
LPG cylinder manufacturers in violation of the Competition Act.

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 CONCLUSION

The Supreme Court’s judgment:-

 Adds a revolutionary precedent in India’s cartel jurisprudence inasmuch as it carries out an in-depth
analysis of the market and the prevailing market conditions in order to assess the behaviour of the
players in the market. It also crystallises the tests for the burden of proof as well as the standard of
proof in cartel cases. However, most importantly, this judgment puts into perspective the evidentiary
value of parallel conduct and its relevance based on the market in question.

 May prove to be a significant milestone in competition law jurisprudence as it nuances the position
of law laid down by the Supreme Court in Excel by emphasising the importance of market
conditions. Further, given the judicial standard set by the Supreme Court in this case, the CCI will
feel the importance of obtaining stronger economic evidence to support its findings of contravention.

 Establishes the need to determine the existence of anti-competitive practices not just objectively, but
subjectively as well, cumulatively taking into account all relevant factors influencing price
parallelism including prevailing market conditions. This judgement is significant as it settles the
position of law regarding analysis of factors as circumstantial evidence of agreement under anti-trust
law. This is in line with the Competition Act’s preamble to eliminate practices having adverse effect
on the competition, as well as to promote and sustain competition in the market. Though this order
establishes high standard of proof for showing anti-competitive behaviour, it will act as a serious
deterrent for bidders taking advantage of price parallelism to just land bids/orders in their favour. 

 Will immensely contribute to the developing jurisprudence of competition law. This decision is
important as India has a huge diversity of market situations. In India, a large number of
suppliers/sellers exist in various locations who supply goods/services to a limited number of buyers.
Many such suppliers will be those who are servicing the government dominated/controlled business
such as mining and transportation of minerals, steel sector, railways etc. There are many of cases of
such suppliers having been investigated and charged for indulging in anti-competitive practices by
the Commission and their cases are pending at various forums.

This case will act as an effective test for the Appellate Tribunal, Commission and DG to decide if an
entity is indulging in above mentioned unfair practices. This case is also a guiding tool for the DG,
who now must see the entire market scenario before recording its findings against an entity.

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