Cartelization, the act of creating cartels to influence the market, has a big impact on economies, industries, and customers. Cartels impede innovation and undermine free and open competition, hiking up costs and limiting customer options. Businesses, customers, and governing authorities are among the groups affected by this. Understanding cartelization’s effects is essential for identifying its negative effects and putting preventative measures in place to stop this anti-competitive behaviour. In this discussion, we will explore cartelization’s key impacts and the consequences it has on different aspects of the economy.
What is Cartelization?
Section 2 of the Competition Act, 2002, subsection (c), defines a cartel as:
“An organisation of manufacturers, sellers, distributors, dealers, or service providers if it has an agreement to restrict, control, or attempt to restrict the production, distribution, sale, or price of goods, or the trade in them, or the provision of services;”
For the purpose of controlling and manipulating market circumstances and in order to maximise their own profits, independent enterprises or organisations join together to form cartels, which are referred to as cartelization. Cartels often operate in sectors with little or no competition or high entry barriers.
By coordinating their actions, the members of the cartel can reduce or eradicate competition with one another. This may involve a variety of anti-competitive behaviours, including price fixing, market sharing, bid-rigging, supply limitations, and customer or territory allocation.
Cartelization hinders free and fair competition, limits customer choice, and can result in higher pricing and less innovation. As a result, it is typically prohibited in many nations. The majority of nations have competition laws and enforcement agencies to stop and punish cartel activity. These laws carry stiff penalties, legal action, and reputational harm for violators.
Antitrust laws must be strictly enforced, leniency programmes are in place to encourage cartel members to come forward and cooperate with authorities in exchange for lighter punishments, and competition agencies must work together internationally to investigate and prosecute cartels that operate internationally.
In general, cartelization is a strategy used to reduce competition and foster an environment that is advantageous for the participants, frequently at the expense of customers and other firms in the market.
Laws Regulating Cartels In India
The Competition Act, 2002 and its later revisions are the main pieces of law in India that control cartelization and anti-competitive conduct. The Act aims to defend consumer interests, curb anti-competitive conduct, and encourage and preserve competition in the Indian market.
The following clauses of the Competition Act apply to cartelization and these clauses define how cartelization can happen.
1. Anti-competitive Agreements:
Agreements that have or are likely to have a significant negative impact on competition within India are prohibited by Section 3 of the Competition Act, 2002. It involves both vertical agreements (between businesses at various levels of the manufacturing or distribution chain) and horizontal agreements (between rival businesses) which can be made by cartels while being involved in these unlawful practices.
The section specifically discusses a few different forms of agreements that are thought to significantly harm competition. These include contracts pertaining to:
- Price fixing: Any arrangement that directly or indirectly establishes purchase or sale prices or restricts price competition is referred to as price-fixing.
- Bid-rigging: Agreements that manipulate the procurement of goods or services through collusive bidding or non-bidding pacts.
- Output constraints: Contracts that place restrictions on how much is produced, supplied, distributed, or how services are rendered with the intention of limiting competition.
- Market Sharing: Market-sharing agreements reduce competition by dividing markets among competitors by dividing up customers, operating areas, or territorial allocations.
- Joint ventures: Contracts between businesses involved in the same or comparable types of commerce in goods or services that impose restrictions on competition, such as the sharing of markets, production, or technical know-how, as well as the restriction of spending on the research and development of new items or technologies.
Anti-competitive agreements can be avoided and discouraged with the help of Section 3 of the Competition Act. It enables the Competition Commission of India (CCI) to look into such agreements and take appropriate legal action if necessary. If an agreement is determined to be anti-competitive, the CCI may impose fines on the parties concerned, issue cease and desist orders, and invalidate the agreement.
The existence of an agreement, the degree to which it is anti-competitive, and how it affects competition must all be established by the CCI in order to prove a breach of Section 3. The provisions of Section 3 may, however, not apply to specific agreements if they improve production or distribution, foster technological or economic advancement, or benefit consumers.
2. Abuse of Dominant Position:
In order to encourage fair competition and safeguard the interests of consumers, Section 4 of the Competition Act of 2002, which deals with the misuse of dominant position by businesses, is an essential measure.
Businesses are not allowed to abuse their monopolistic positions in the market, according to Section 4 of the Competition Act. It seeks to stop practises that are harmful to competition, limit consumer choice, and discourage innovation.
A company is deemed to have a dominating position under Section 4 if it holds a strong position in the relevant market that allows it to operate independently from competitive pressures or to influence rivals or customers in its favour.
The section lists specific behaviours that are regarded as abuses of dominant position, such as:
- Imposing terms or conditions that are unjust or discriminatory in nature on the sale or purchase of goods or services is referred to as imposing unfair or discriminatory conditions, which distorts competition.
- Overcharging: It may be deemed an abuse of a dominating position when a dominant firm sets prices that are much higher than those in the market and that are also exploitative of consumers.
- Predatory pricing: This refers to intentionally lowering prices below cost to drive out rivals or discourage new entrants with the aim of preserving or enhancing the enterprise’s dominance.
- Limiting supply: It might be argued that a dominating firm is abusing its position if it restricts the supply of goods or services in an effort to manipulate prices or create a false scarcity.
3. Combinations (mergers and acquisitions):
Combinations, which include mergers, amalgamations, acquisitions, and any other type of business restructuring, are governed by Section 5 of the Competition Act of 2002. This section’s goal is to stop anti-competitive combinations that could harm India’s market for goods and services.
A combination must meet certain criteria in order to be reported to the Competition Commission of India (CCI) under Section 5. Based on the combined assets or turnover of the businesses engaged in the combination, certain thresholds were established. The combination must be reported to the CCI for prior approval if the thresholds are exceeded.
Market share, market concentration, entry barriers, and the likelihood that significant competition will be eliminated or diminished as a result of the combination are all considerations taken into account by the CCI. If the CCI finds that the merger does not materially impair competition, it may accept it; otherwise, it may seek changes to resolve any competition-related issues.
Penalties in Cartelization
According to the Section 27 of Competition Act, each cartel member faces a monetary penalty of up to three times its annual profit for engaging in anti-competitive behaviour, or 10% of its annual revenue, whichever is higher. However, in the event of a leniency petition, the CCI may decide to waive the penalties based on the promptness and utility of the disclosure as well as the full cooperation in the investigation.
The Supreme Court of India emphasised in Excel Crop Care Limited v. CCI & Anr., that the “relevant turnover” rather than the “total turnover” of a company ought to be taken into account when enforcing penalties on corporations that violate the law. In addition, the Supreme Court made it clear that “relevant turnover” refers to an entity’s sales of goods and services that have been impacted by the violation.
The directors and officials of the violating entity who were in control of its business at the time the claimed infringements were committed may also be subject to monetary sanctions in addition to the violating companies.
The CCI also has broad authority to issue non-monetary sanctions including cease and desist orders or to issue any other orders or directives it sees fit.
Section 48(1) of the Act presupposes guilt only on the relevant individuals who were in charge and responsible for the conduct of the company at the time of the contravention of the Act. Section 48(1) also permits this presumption to be rebutted if relevant individual(s) can demonstrate that the infringing act was committed without their knowledge or they had exercised due diligence to prevent such contravention. In contrast, under Section 48(2), the consent, connivance or neglect of the relevant individuals is established by their de facto involvement and is therefore not rebuttable.
Additionally, Section 48(2) extends to any individual or person who has been involved with the company’s contravention and is not limited to persons in charge of the company at the time of such contravention.
For each year that the corporation engages in such conduct, the maximum penalty that may be imposed on those connected to it is 10% of their annual income under Section 27. In reality, the CCI has calculated penalties by applying a rate of 10% to the persons’ average income for the three prior financial years on the majority of occasions.
Cartelization has a negative effect on the Indian economy. It hinders competition, drives up prices, distorts markets, decreases efficiency, undermines small enterprises, deters foreign investment, and creates regulatory and legal issues. Fair and competitive markets, economic progress, and the protection of consumer interests all depend on actions to prevent and break up cartels as well as strict enforcement of competition laws.
This article is written and submitted by Arpita Gupta during her course of internship at B&B Associates LLP. Arpita is a BBA. LLB 4th year student at Chandigarh University.