CCI to cement cartel: Pay 50% of FY10 profits as penalty
RAJESH DESAI
RAJESH DESAI
The Competition Commission of India (CCI) has slapped around Rs 6,000 crore penalty on 11 cement companies for forming a cartel. The penalty accounts for 50% of their FY10 profits, say CNBC-TV18 sources. The period of investigation for the 11 companies ranges between May 20, 2009 and March 31, 2011.
The cement manufacturers upon whom the penalty has been imposed are ACC, Ambuja Cements Limited ,, Grasim Cements now merged with Ultratech Cements, JK Cements, India Cements, Madras Cements, Century Cements, Binani Cements, Lafarge India and Jaypee Cements.
While imposing penalty, the Commission has considered the parallel and coordinated behaviour of cement companies on price, dispatch and supplies in the market. The Commission has also found that the cement companies have not utilised the available capacity so as to reduce supplies and raise prices in times of higher demand.
The Commission has also observed that the act of these cement companies in limiting and controlling supplies in the market and determining prices through an anti-competitive agreement is not only detrimental to the cause of the consumers but also to the whole economy since cement is a crucial input in construction and infrastructure industry vital for economic development of the country.
The contravening cement manufacturers had been directed to deposit the penalty amount within 90 days. They have also been directed to 'cease and desist' from indulging in any activity relating to agreement, understanding or arrangement on prices, production and supply of cement in the market.
CMA has been asked to disengage and disassociate itself from collecting wholesale and retail prices through the member cement companies and also from circulating the details on production and dispatches of cement companies to its members.
It may be recaleld that last year, the Builders Association of India had moved the CCI alleging the cement manufacturers of having formed a price cartel. The Cement Manufacturers' Association had denied the charges.
India is the second biggest producer of cement after China with more than 50 companies operating around 125 large plants.
CA. Rajesh Desai
IndiNomics
India: The announcement last week that 11 Indian cement producers face a combined US$1.1bn penalty for a price-fixing cartel will cast a long shadow over the country's increasingly vulnerable-looking cement industry.
For years the Indian cement industry has been beset by suspicions of over-capacity despite a constant stream of new capacity. Now the Competition Commission of India (CCI) thinks that it has got to the heart of the paradox by accusing manufacturers of limiting production amid high demand and colluding to artificially raise prices.
The amount that the CCI has fined the companies, 50% of their net profits for the two fiscal years to 31 March 2011, is quite astonishing. If enforced in its entirety the fine effectively negates a large portion of the sector's profits for an entire fiscal year. This is clearly not a slap-on-the-wrist from the CCI.
In the 1990s and early 2000s a similar cartel case involving European (and specifically German) cement producers led to fines in the order of hundreds of thousands of US Dollars. The industry has since cleaned up its act considerably as a result. Indian producers would be foolish not to follow suit. What are the likely effects in the Indian case?
Removing the cartel that the CCI purports to have found would reduce prices, which are inflated by an oft-quoted 25% median in a cartel. This is clearly good news for consumers and potentially the development of the Indian economy in general. The obvious losers in this situation would be the producers, which would see a reduction in profitability. Some of the smaller producers would find such a situation very challenging, with the risk of going bust or being absorbed into larger companies.
Another possibility is that the accusations will spread along the value chain. Shortly after the announcement of the fine, the Builders' Association of India (BAI), announced that it wants the fine increased to accommodate compensation claims from contractors and consumers that it feels are out-of-pocket as a result of the cartel. Many will feel aggrieved now that they 'know' the cement companies were profiteering - sorting out claims from affected parties could be a long and costly exercise.
The effects of the fine could also extend to outside of India. Indian cement producers, very good customers of the Chinese and European cement plant manufacturers in recent years, will have to deal with lower revenues. This will clearly dampen their enthusiasm to contract further capacity and may cause knock-on-effects for Sinoma, KHD, Polysuis and other major suppliers. The cement industries of neighbouring countries, like Pakistan, may also be affected.
Whatever happens in the Indian cement industry as a result of the CCI's fine, the authority, only formed in 2009, has shown that it is serious about taking on corruption in India. In the long run that can only help develop the potential of the country.
"The first thing for any new competition regulator is to go out and find the cement cartel. My experience of this subject is, it is always there, somewhere," wrote Richard Whish, a Professor of Law at King's College London in 2001. "The only countries in which I had been unable to find the cement cartel is where there is a national state-owned monopoly for cement."