CASE SYNOPSIS Suo-Moto Case No.

03/2011 (In Re: Suo-Moto case against LPG cylinder manufacturers) Order dated 24/02/2012
Maanas Vibhu Main Order: How Suo-moto cognizance? In an investigation report1, the Director General (DG) stated that certain manufacturers of LPG cylinders had manipulated bids and quoted identical rates in a tender for the supply of LPG cylinders2. Thereafter, the Competition Commission of India, under Section 19(1) of the Competition Act, 2002, took suo-moto cognizance of the case. Facts of the Case: The tender was for the supply of 105 lakh, 14.2 KG capacity LPG cylinders with SC valves for the year 2010-2011 and manufactures having valid approvals3 were the only ones who were allowed to bid by submitting technical and price bids4. Out of 63 bidders in total, 50 were eligible to submit price bids and on the analysis of the said bids, the DG had noted a similarity of pattern by all the 50 bidders - thereby raising the presumption of the presence of some agreement/understanding between the bidders. In exercise of its suo-moto powers and after its meeting5, the Commission, after forming its opinion under Section 26(1) of the Act held that there exists a prima facie case and hence, referred the matter to the DG for investigation. Investigation by the Director General: In his Investigation Report6, the DG made the following findings: Statements of the bidders were recorded on oath and they were given the opportunity to fill up a questionnaire and explain their position. Indian Oil Corporation Ltd. (IOCL) is a leading market player in the LPG industry having a market share of 48.2%7.

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In the case of M/s. Pankaj Gas Cylinders Ltd. v. Indian Oil Corporation Ltd. (Case No. 10 of 2010). Tender No. LPG-0/M/PT-03/09-10 floated by Indian Oil Corporation Ltd. 3 Approval from the Chief Controller of Explosives and Bureau of Indian Standards for the manufacture of 14.2 KG LPG cylinders as per IS 3196. 4 New vendors were not required to submit price bids and had to submit only a technical bid; Para 2.2, p. 2. 5 The Competition Commission met on 9 March, 2011 to discuss the said case. 6 Dated 13 May 2011 and submitted to the Competition Commission; Para 2.6, p. 3. 7 As per the given specification in Schedule II of the Notification issued by the Ministry of Petroleum and Natural Gas, Government of India, dated 26 April, 2000 only PSU Oil Companies can supply LPG in 14.2 KG cylinders.

Bidders could quote for a maximum of eight states and after negotiations, L-1 bids (lowest price bids) were given the bid and L-2, L-3 bids etc. would get the bid only in the event that L-1 could not supply the required number of cylinders8. This is to ensure that the supply of LPG cylinders to domestic consumers is not interrupted. The DG arrived at the conclusion that the rates of entities (not just belonging to group

concerns9) are identical/near identical in different states10 thereby, prompting questions of the unusualness of such bidding. Moreover, except in the case of the Andaman-Nicobar islands, the bidders quoted identical rates and have bagged the contracts together. Various factors like entry barriers11, non-substitutability of products, territorial allocation of bids12, existence of a LPG Cylinders Manufacturers Association (as a common platform) and possible cartelization13 are all factors that prompted the DG to make observations on the manipulation of price by bidders and thereby their violation of Section 3 (3) (d) of the Act. Replies of 44 Opposites Parties: 44 parties made certain common submissions, which are as follows: Every part of the LPG cylinder is regulated by law and the prices of steel14 and paint fluctuates and taxes vary from state to state - these factors determine the bid price. As 6 agents were submitting the bids on behalf of these 44 parties, it is extremely possible that the bids were copied/matched based on the close watch that the bidders keep on their competitors therefore, the cutting/overwriting of bids took place. Being an oligopolistic market, it is likely that the actions of one bidder are known to the other bidders. Also, price parallelism is a common feature in an oligopoly. Parallelism is to be supplemented with additional factors15 for it to hold water. Only few of these parties are members of the LPG Gas Cylinders Association and most of them were either unaware / did not participate in the Mumbai meeting16.
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New bidders (who had not submitted a price bid) were expected to match the price bid of the L-1 bidder. 37 of the 50 entities cannot be said to be belonging to any single group and independently controlled. Only 13 entities belong to group concerns. 10 Factories and offices of these bidders are located in different states and supplies are to be made to different states nevertheless, the prices quoted seem to be the same. 11 Para 3.15, p. 11 Appreciable Adverse Effect on Competition, Section 19(3) entry of a new player is made extremely difficult 12 Para 3.14, p. 11 13 Para 3.16, p. 11 Few players therefore high concentration, homogeneous products and unused excess production capacity by the manufacturers 14 Steel constitutes 50% of the LPG cylinder 15 Such factors may include evidence demonstrating that: (i) defendants act contrary to their economic interests, and (ii) are motivated to enter into price fixing conspiracy; Paras 5.2.8-5.2.10, pp. 16-17; MRTP Commission in Alkali and Chemical Corporation of India Ltd. Calcutta v. Bayer (India) Ltd., Bombay {1984 3 Comp LJ 268 (MRTPC)}; Baby Food Antitrust Litigation, In Re, 166 F. 3d 112 (3rd Cir. 1999), Blomkest Fertilizer, Inc v. Potash Corp. of Saskatchewan, Inc. (2000).

Moreover, the price of the LPG cylinder is indirectly determined by the oil marketing companies17 and hence, their aim is to keep the suppliers profit at its lowest possible level therefore, cartelization is virtually impossible.

Unlike in the case of Monsanto Co. v. Spray Rite Service Corporation, there was no evidence pointing to concerted action / meeting of minds of the bidders.

Individual Submissions of the 19 parties who attended the meeting: 19 parties filed individual submissions in relation to the reasons they were present at the said meeting and the price bids submitted by them. Due to membership in the Association18, business coincidence19 or mere convenience20, the parties submitted that they had attended the meeting. They also made submissions negating the presence of any agreement with the other bidders21, that no discussion of price / allocation of market took place22 and that there are no entry barriers to the LPG manufacturing market23. Individual submissions by 24 parties who claimed to have not attended the meeting: These 24 parties claimed that they have not attended the said meeting that took place at Hotel Sahara Star on 1-2 March 2010 in Mumbai. They made submissions refuting claims of working through common agents24, the existence of an independent monitoring agency to monitor the bidding process25, the acceptance of lesser rates26 than those that were offered to HPCL and BPCL during the same period27, similar input costs28, financial backing, local

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Paras 5.2.5-5.2.6, pp. 15-16; Para 3.13, p. 10 The DG concluded that the manufacturers met in Hotel Sahara Star in Mumbai on 1-2 March, 2010 just before the submission of the bids. 17 Para 5.2.5, pp. 15 Forced negotiations between the suppliers and the oil marketing companies determine the price. 18 Submission of M/s Bhiwadi Cylinders Pvt. Ltd. (Para 5.6, p. 20); Submission of M/s Surya Shakti Vessels Pvt. Ltd. (Para 5.7, pp. 20-21); Submission of M/s Tirupati LPG Industries Ltd., M/s Tirupati Cylinders and M/s International Cylinders (P) Ltd. (Para 5.8, pp. 21-22); M/s Om Containers Pvt. Ltd., M/s Super Industries, M/s Tee Kay Metals Pvt. Ltd., M/s Krishna Cylinders, M/s Shri Ram Cylinders, M/s Him Cylinders Ltd., M/s Omid Engineering Pvt. Ltd., M/s Lite Containers Pvt. Ltd., M/s Rajasthan Cylinders & Containers Ltd., M/s S.M. Cylinders and M/s Sahuwala Cylinders Pvt. Ltd. (Para 5.9, p. 22). 19 Submission of M/s Haldia Precision Engineering Pvt. Ltd. and M/s North India Wires Ltd. (Para 5.4, pp. 1819; Submission of M/c Carbac Holdings (Para 5.5, p. 19); Submission of M/s Tirupati LPG Industries Ltd., M/s Tirupati Cylinders and M/s International Cylinders (P) Ltd. (Para 5.8, pp. 21-22). 20 Supra No. 18. 21 Supra No. 19; Submission of M/s Surya Shakti Vessels Pvt. Ltd. (Para 5.7, pp. 20-21). 22 Supra No. 18. 23 Ibid. 24 Submission of M/s Khara Gas Equipment Pvt. Ltd., M/s Confidence Petroleum India Ltd., M/s Andhra Cylinders and M/s Hans Gas Appliances Pvt. Ltd. (Para 5.10, pp. 23-24) 25 Ibid. 26 Submission of M/s ECP Industries (Para 5.12.3, p. 25) 27 Submission of M/s Khara Gas Equipment Pvt. Ltd., M/s Confidence Petroleum India Ltd., M/s Andhra Cylinders and M/s Hans Gas Appliances Pvt. Ltd. (Para 5.10, pp. 23-24) 28 Submission of M/s Punjab Gas Cylinder Ltd. (Para 5.14.2, p. 27); M/s Konark Cylinders and Containers (Para 5.15.2, p. 28)

conditions and same age plants29, non-existence of entry barriers30, dissimilarity of rates offered31 and that the DG had violated the principles of natural justice while filing his report32. Submission of 6 other parties: Six other parties33 submitted that there was no meeting of minds, no membership in the said Association, different price bids quoted for different states, non-use of common agents and all in all, these parties have out rightly rejected all the averments made in the DGs report. The oral arguments made by the parties were similar to their written submissions and hence, have not been discussed herein. Issue for Determination: Whether there was any collusive agreement between participating bidders which directly or indirectly resulted in bid rigging of the tender floated by IOCL in March 2010 for procurement of 14.2 KG LPG cylinders in contravention of Section 3 (3) (d) read with Section 3(1) of the Competition Act, 2002? Determination of Issue: Bid Rigging as per the Competition Act: As defined under the Act34, bid rigging35 shall be presumed36 to have an appreciable adverse effect on competition37. The Act prohibits38 and makes void39 all agreements entered into in this regard. Once the agreement40 between the parties has been established, it is for the parties to rebut the charge. Cartels41 are specifically included under Section 3(3) as a
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Submission of M/s ECP Industries (Para 5.12.2, p. 25) Submission of Mahaveer Cylinder (Para 5.13.1, p. 26) 31 Submission of M/s Punjab Gas Cylinder Ltd. (Para 5.14.1, p. 27) 32 Submission of M/s Hyderabad Cylinders Pvt. Ltd. (Para 5.18.1, p. 30) 33 M/s Allampally Brothers (Para 5.19, pp. 31-32), Mauria Udyog Ltd. (Para 5.20, pp. 32-33), M/s Supreme Technofabs Pvt. Ltd. (Para 5.21, p. 33), M/s Shri Shakti Cylinders P Ltd. (Para 5.22, pp. 33-35), M/s Vidhya Cylinders Pvt. Ltd. (Para 5.23, pp. 35-36), M/s Balaji Pressure Vessels Ltd. (Para 5.24, pp. 36-39). 34 Explanation to Section 3(3) reads as An agreement, between enterprises or persons referred to in sub section 3 engaged in identical or similar production or trading of goods or provision of services, which has the effect of eliminating or reducing competition for bids or adversely affecting or manipulating the process for bidding. 35 The Act refers to bid rigging and collusive bidding terms used interchangeably to describe many forms of illegal anti-competitive bidding i.e. agreements / informal arrangements among bidders, that limits competition. 36 Para 14.5, pp. 51-52. 37 Section 3(3), Competition Act, 2002. 38 Ibid, Section 3(1). 39 Ibid, Section 3(2). 40 Defined in Section 2(b), Competition Act, 2002; Paras 14.8-14.9, pp. 52-53 The legislative intent is to encompass both overt and tacit forms of agreements and hence, need not be in writing or be legally enforceable; Per Lord Denning, RRTA v. W.H. Smith and Sons Ltd. (Para 14.11, p. 53). 41 Defined in Section 2(c), Competition Act, 2002.

category of agreement under which an appreciable adverse effect on competition is presumed. Therefore, the need to demand direct evidence is not absolute while finding contraventions to section 3 of the Act42. Factors in support of the inference of collusive agreement: Some sectors are more prone to bid rigging as compared to others due to the particular features of the industry or the products involved43. The probability also gets higher if the following supporting factors are present in the product market market conditions44, small number of suppliers45, few new entrants46, active trade association47, repetitive bidding48, identical products, few or no substitutes or no significant technological changes. In this case, it was found that all the above mentioned factors were present49. The meeting of bidders in Mumbai was to discuss pre-bid issues and took place before the bids for BPCL and HPCL as well50 - thereby unmistakably suggesting the meeting of minds between the bidders. Furthermore, 44 bidders had appointed common agents, who were directed to keep a close watch on other bidders rates thereby fortifying the claim of collusive tendering51. Also, identical price bids were submitted despite the varying costs involved in supplying the required number of LPG cylinders in various states52. There seems to be no economic rationale behind the price bids submitted by the manufacturers53. In spite of the evidence produced, no merit was found in the arguments advanced by the counsels appearing on behalf of the manufacturers. The supply of cylinders was much above the supply price in the previous year and the cost price for different manufacturers varied from Rs. 870 to Rs. 1095.8954. Since cartelization is not a criminal offence, the standards of balance of probability and liaison of intention were adopted through the use of circumstantial evidence and there was no need for direct evidence to be considered55.
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Para 14.12, p. 54 Para 14.14, p. 54; Fighting Cartels in Public Procurement Policy Brief, OECD, October 2008. 44 Constant predictable flow of demand from the public sector increases the risk of collusion. 45 Concentrated markets have an increased risk of collusion. 46 If few firms have recently entered or are likely to enter the said market, it increases the risk of collusion. 47 Only 7 out of the 50 bidders are not members of the said Association; Read Para 14.14.4, pp. 56-57 for a detailed analysis. 48 Para 14.14.5, pp. 57-58. 49 Para 14.15, p. 59. 50 Statement of Mr. Dinesh Goyal, Director of Tirupati Cylinders Ltd., to the DG recorded on 08.09.2010; Question 10, p. 63 (Extract of Mr. Dinesh Goyals statement. 51 Paras 14.26-14.27, p. 71. 52 Paras 14.28-14.33, pp. 71-73. 53 Absence of business justification Para 14.61, pp. 82-83. 54 Ibid. 55 Para 14.65, pp. 84-85.

Though not required, the Commission also considered the factors laid down in Section 19(3) of the Act to prove that there was an appreciable adverse effect by the actions of the manufacturers. The Commission was of the view that all pro-competitive effects were absent and the actions of the manufacturers were only anti-competitive in nature56. To confirm this, the Commission analyzed the creation of barriers to new entrants in the market, driving existing competitors out of the market, foreclosure of competition by hindering entry into the market, accrual of benefits to consumers, improvements in production or distribution of goods or provision of services and the promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services57. Order under Section 27 of the Competition Act, 2002: After giving a salient summary of the arguments advanced by the manufacturers, the Commission went on to pass an order under Section 27. The order held that the acts of the manufacturers would be condemned by anti-trust authorities across the world as they harm both the economy as well as the interests of consumers. It also held that all the bidders had violated section 3(3) and were responsible in equal measure and hence, a penalty of 7% of the average turnover of the company was imposed on each of the contravening companies. Dissenting Order As per R. Prasad: IOCL negotiated rates with L1 bidders to be lower than the rates negotiated by BP and HP58 and incidentally, BP and HP had handled their tenders through e-bidding. Quoting of the same price bid in spite of not attending the Association meeting and the submission of bids through common agents59 shows a meeting of minds and a case of price-fixing60. It was opined that JBM Industries and Punjab Cylinders Ltd. are to be treated on the same footing as the other bidders who were punished for disclosing identical prices61. Price fixing has an adverse effect on the entire bidding process as the correct price of the product remains unknown thereby defeating the whole purpose of a bidding process. The onus cast by law has not been discharged by the cylinder manufacturers. And hence, apart from the presence of bid rigging, there was also a case of price fixing in the present case.

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Para 14.66, p. 85. While the first three factors exist in the given case, the last three factors are absent and there is no material on record to prove the existence of the pro-competition effects of the said collusion; Para 14.66 (i) (vi), pp. 85-86. 58 As per R. Prasad (separate order), Para 1, p. 1. 59 Ibid, Para 2, p. 3. 60 Ibid, Para 1, p. 1. 61 Ibid, Para 3, p. 4.