Competition Commission fine on Cement industry - Not so fine!

The Competition Commission of India (CCI) has imposed a fine of more than Rs 6,000 crore on 11 cement makers alleging cartelisation and price fixing from May 2009 to March 2011.

It is a record penalty and is seen as an attempt by the ant-trust regulator to assert itself. But the last word has not been said on the issue, yet. The cement makers can go on appeal to the Competition Appellate Tribunal (COMPAT), and even to the Supreme Court.

Legal experts think the CCI is on slippery ground here. Cement companies say the CCI rules require the commission to establish the existence of a cartel only if there is a written agreement among the parties involved. That is not the case here and the commission has based its findings on circumstantial evidence.

Fact is, despite all the arguments about lower utilization at cement plants and higher prices that informants in the case -- the Builders Association of India -- has brought against the cement companies, it would be tough to prove that cement prices rose because of cartelisation. As the Cement Manufacturers Association (CMA) submitted before the commission, the report is based on surmises and conjecture.

The CCI ruling said its director general has submitted that the cement companies have enough scope to reduce the price of cement but have tried to earn better margins on sales instead of utilizing more capacity. The argument flies in the face of the very system of free market economics. The shareholders of cement companies want the managements to bring them the best possible returns. If cement demand has been going up despite rising prices, that means optimum pricing for the commodity has not been discovered and the managements did the right thing by raising prices further. If the builders thought the prices were too high to make their business unviable, then they would have stopped buying cement, and the prices would have come down naturally. That is how market economics works.

That it never happened possibly points to another interesting aspect -- by bringing the case to the CCI, the builders may have been trying to protect the fat margins that they had commanded at the height of the housing boom. As the CMA said, the third-parties from whom information was collected in this case by the CCI are builders and cement dealers, who all have their own vested interests. The CCI's very enquiry rests on thin ice here.

Another interesting observation made by the CCI was that the common platform of CMA was used for collection and dissemination of the information on prices of different companies. The CMA countered that it never collected prices by brand but only average prices for passing on to the Department of Industrial Policy and Promotion. Furthermore, it had been asked by the ministry of commerce and industry to collect the data on a monthly basis to calculate the Wholesale Price Index.

It is akin to penalizing an organization for following the orders of a government department. Besides, as the association said, the information is available publicly!

The CMA also said mere price parallelisms cannot be used to infer cartelization and it is bound to occur in cases where a homologous product is sold in the same market.

Overall, despite all the headlines the CCI made, it looks like the findings have not strong legal base and could be thrown out by higher legal institutions. Till then, however, the CCI’s action has introduced an element of uncertainty into the cement industry at a time of weak demand and slowing economy. The action will have the opposite effect to what the CCI intended under the current economic circumstances.

Indian Cement COs gear up to defend against CCI penalty

Opinion - BNK

The Competition Commission of India (CCI) has imposed a fine of more than Rs 6,000 crore on 11 cement makers alleging cartelisation and price fixing from May 2009 to March 2011.

It is a record penalty and is seen as an attempt by the ant-trust regulator to assert itself. But the last word has not been said on the issue, yet. The cement makers can go on appeal to the Competition Appellate Tribunal (COMPAT), and even to the Supreme Court.

Legal experts think the CCI is on slippery ground here. Cement companies say the CCI rules require the commission to establish the existence of a cartel only if there is a written agreement among the parties involved. That is not the case here and the commission has based its findings on circumstantial evidence. There are around 47 cement players and any sort of agreement or understanding is next to impossible. That too, when the industry has added around 100 million tons capacity in the last three years.

Cement factory: A representative Pic

Fact is, despite all the arguments about lower capacity utilization at cement plants and higher prices that informants in the case -- the Builders Association of India -- has brought against the cement companies, it would be tough to prove that cement prices rose because of cartelisation. As the Cement Manufacturers Association (CMA) submitted before the commission, that the capacity utilization is bound to be lower on account of higher capacity growth rate as compared to cement demand growth rate and that the report is based on surmises and conjecture.

The CCI ruling said its director general has submitted that the cement companies have enough scope to reduce the price of cement but have tried to earn better margins on sales instead of utilizing more capacity. The argument flies in the face of the very system of free market economics where the price of cement is determined by demand and supply in the market. Interestingly CCI has totally ignored the submission of the cement industry that cement manufacturers cost is more than the increase in the Wholesale Price Index as well as the cement price increase in the market.

 The shareholders of cement companies want the managements to bring them the best possible returns. But in fact, it is the government which wants to earn more from the cement sector, as government levies have gone up from Rs 49 per bag in FY07 to Rs 72 per bag in FY 12.  This adds to the cement price increase. The result is that despite increase in cement prices, costs, and government levies, PAT margins of companies have come down in FY 11.  

There is another interesting aspect -- by bringing the case to the CCI, the builders may have been trying to protect the fat margins that they had commanded at the height of the housing boom. As the CMA said, the third-parties from whom information was collected in this case by the CCI are builders and cement dealers, who all have their own vested interests. The CCI's very enquiry rests on thin ice here.

Cement factory: A representative pic

Another interesting observation made by the CCI was that the common platform of CMA was used for collection and dissemination of the information on prices of different companies. The CMA countered that it never collected prices by brand but only average prices for passing on to the Department of Industrial Policy and Promotion. Furthermore, it had been asked by the ministry of commerce and industry to collect the data on a monthly basis to calculate the Wholesale Price Index.

It is akin to penalizing an organization for following the orders of a government department. Besides, as the association said, the information is available publicly!

The CMA also said mere price parallelisms cannot be used to infer cartelization and it is bound to occur in cases where a homologous product is sold in the same market.

Overall, despite all the headlines the CCI made, it looks like the findings have not strong legal base and could be thrown out by higher legal institutions. Till then, however, the CCI’s action has introduced an element of uncertainty into the cement industry at a time of weak demand and slowing economy. The action will have the opposite effect to what the CCI intended under the current economic circumstances.

Sikkim’s Teesta-III hydel project to get Rs 8.5 K cr funding

Sikkim’s prestigious 1200 MW Teesta-III hydel project is all set to move ahead in full swing with lenders agreeing to infuse Rs 8,500 crore toward revised project cost.

A decision to this effect was taken at a meeting of lenders called by REC in Delhi.

“We have approved in principle for the revised project cost of about 8,500 Crores,” a top official confirmed. 

All equity investors, including a group of six private equity partners, have also expressed their full support and commitment to bring in equity for the revised costs. 

The Sikkim state government has also agreed to bring in its equity share of equity. It is significant that Sikkim Power Secretary Mr A K Giri attended the REC meeting.

The project cost was originally estimated to be Rs 5,700 crores, but it has gone up due to delay in implementation partly because of a massive earthquake – which the project survived.

Teesta-III is expected to be back on track soon and the first unit is expected to begin to produce power by June next year.

Teesta-III, the largest of the six hydel projects on the Teesta river, is being executed by an SPV called Teesta Urja in which the Sikkim Government has a 26% stake.

About 15% of the power produced by Teesta-III will go to Sikkim while the rest 85% supplied to four northern States – Delhi, UP, Haryana and Rajasthan - which reel under chronic power shortages.

REC and PTC are among the big lenders to the project while a consortium of six PE players led by Morgan Stanley have pumped in Rs 750 crores signaling the FDI into country’s hydro power projects.

This was considered to be the largest PE transaction in the country’s power sector. Besides Morgan Stanley, the group of investors includes Everstone Capital, General Atlantic, Goldman Sachs Investment Management and Norwest Venture Partners.

Pipavav Defence scotches market rumours, says All is Well!

MUMBAI; Pipavav Defence and Offshore Engineering Company Limited today scotched market rumours leading to unusual volatile movements of its Stock Price, along with scrips of several other listed companies. 

"The Company would like to state that its business is as usual and that operations of the Company are in absolute order. No new development has occurred that can have impact on the Company’s operations or business," Pipavav Defence and Offshore Enginering said in its filing with BSE.

"The Company requests its investors to ignore market rumours that are speculative and mischievous, " it added.

Teesta-III dispute over Sikkim share ends; Power to flow from June 2013

GANGTOK: The stage is now set for resumption of work on the 1200 MW Teesta-III hydro power project in Sikkim with the Teesta Urja Limited ending a long standing dispute with Sikkim Government over allocation of shares to the latter.

“The Board of Directors of Teesta Urja Limited today passed a resolution to transfer 29,64,00,000 shares to SPICL,” a Teesta Urja top official confirmed.

The managing committee of Teesta Board has earlier approved the proposal to allocate the shares to SPICL and the company informed Sikkim Power Secretary Mr A K Giri.

“Now that the issue is settled amicably by the SPV partners and the Government, we expect the work on Teesta-III to be back on track and the first unit will begin to produce power by June next year,” the official said.

The work has been stalled a year ago following a dispute between the Sikkim Government and Teesta Urja over the share allocation issue. The state government had moved a Sikkim court seeking the share allocation. Teesta Urja’s argument was the SPV patners were more than willing to allocate the shares to Sikkim Government, but it was the latter that was dragging its feet in taking the stake. The dispute has led to the project being delayed by over a year.

Now, with the Teesta Board approving the share transfer to SPICL, the long standing dispute has ended. The Sikkim Government, through Sikkim Power Investment Corporation Limited,  gets 26% share holding in the SPV that is executing the 1200 MW Teesta-III hydro power project – the largest in the six cascade projects on the Teesta river run, a person associated with the development said.

Over 75% of work on Teesta-III has already been completed.

REC and PTC are among the big lenders to the project while a consortium of six PE players led by Morgan Stanley have pumped in Rs 750 crores signaling the FDI into country’s hydro power projects.

This was considered to be the largest PE transaction in the country’s power sector. Besides Morgan Stanley, the group of investors includes Everstone Capital, General Atlantic, Goldman Sachs Investment Management and Norwest Venture Partners.

The Teesta-III project will not only give power virtually free to Sikkim but supply electricity to four northern States – Delhi, UP, Haryana and Rajasthan - which reel under chronic power shortages.

Experts say Sikkim sets the new trend for developing hydel projects as the country is blessed with bounty of rivers flowing from Himalayan glaciers during summer when the power consumption is at its peak. Development of hydro power projects along the Himalayan river course, thus, could be a win-win situation for the people and the governments.

Leading analyst Mr. Sudip  Bandyopadhyay, MD and CEO of Destimony Securities, said: “With potential FDI availability, including possible World Bank support, many similar projects can be successfully established along the Himalayan rivers.”

Mr. Nilesh H Karani, Head of Research at Magnum Equity Broking, pointed out: “Himalayan glaciers melt in summer and the rivers supply adequate water for hydel projects in the region. Teesta stands out as good example of harnessing the hydro power.”

Mr Bandyopadhyay explained that “Hydro-electricity is one of the leading sources of clean energy.  For an energy starved nation like India which has been blessed with enough rivers, the potential of generating hydro-electricity in a cost effective manner is significant.

“At present with only 40% of Hydel power potential being tapped, India as a country has a huge scope of exponentially increasing hydel power capacity and reduce pollution through this clean and green power, he pointed out

Power produced to be transmitted till Kishenganj through 400 KV DC line to be constructed by Teesta valley Power Transmission, a JV between Teesta Urja Ltd and Power grid Corporation of India Limited (PGCIL). PGCIL is to wheel the power to the beneficiary states in the northern region beyond Kishenganj.

A World Bank report notes that severe power shortage is one of the greatest obstacles to India’s development.

Over 40 percent of the people -- most living in the rural areas -- do not have access to electricity and one-third of Indian businesses cite expensive and unreliable power as one of their main business constraints, it says.

Poor electricity supply thus stifles economic growth by increasing the costs of doing business in India, reducing productivity, and hampering the development of industry and commerce which are the major creators of employment in the country, it says.

Power sector analysts say hydro power projects are zero pollutant, as compared to thermal projects which reportedly contribute to half of global carbon emissions and India relies on thermal power to the extent of 60% of its consumption today. Even the cost of raw material – water – is nil.

Some may even call it Water Gold! Look at this HSBC Global Research that says increasing hydro power generation capacity would help in strengthening India's energy security. "Given India's tight domestic coal supply and increasing reliance on imported coal, hydro capacity provides the country with greater energy security,” the report says.

The government admits India’s failure to tap hydel power. In a written reply to a question in Lok Sabha, the Minister of State for Power Mr K.C. Venugopal said out of the identified capacity, 33320.8 MW i.e. 22.93% has so far been developed and another 15130 MW i.e.10.41% of is under development. He said that about 66.66% of the identified potential is yet to be developed

CCI order on cement: punishes performers, say analysts

MUMBAI, July 08, 2012: The Competition Commission of India’s recent order on eleven Indian cement companies imposing a whopping Rs 6,000 crore penalty for alleged cartelization is bound to have a crippling the industry – the world’s second largest after China - leading analysts said.

"It's a classic case of performers being punished,” said Mr Sudip Bandyopadhyay, MD and CEO of Destimony Securities. 

“In some cases the penalty imposed is higher than a year’s earning for many players and this could negatively affect the health of the company jeopardizing shareholder interest,” Mr Bandyopadhyay said and wondered: “Penalty seems to have been imposed on circumstantial evidence and not on the basis of concrete proof of cartelization.”

“As it is, the Indian economy is already suffering from negative developments on account of retrospective amendment in the Income Tax laws and the reverberations of the 2G scam. Further, penalties on core sectors like cement will weaken the FII confidence, as well as that of the domestic investor which will go on to hamper growth and destabilize the economy even further," he added.

The Competition Commission of India had imposed penalty of over Rs 6,000 crores on 11 cement manufacturers based on a complaint filed by Builders Association of India. The Commission has also imposed penalty on the Cement Manufacturers Association

In its report titled "CCI bites hard; Industry ready to fight back", Anand Rathi Share and Stock Brokers Limited says the order is largely based on “circumstantial evidence and less concrete or direct evidence” for an industry with a relatively large number of players.

Emkay Global Financial Services Ltd said in its report after analysing the CCI order that “Though some of the evidence presented by CCI could be strong, we believe they may not be strong enough to prove the charge of cartelization.”

“Collection and circulation of data by CMA has been considered as anti-competitive practice. However CMA has argued it collects data under instructions from DIPP for computation of wholesale price index and, hence, no adverse inference can be drawn from this. Further, data collection and dissemination activities of CMA mentioned by CCI are pretty much the activities carried by any trade/business association,” Emkay said.

“We also observe that CCI has provided strong circumstantial and statistical evidence like date and venue of CMA’s ‘High Power Committee’ meeting and subsequent movement in cement prices indicative of coordinate price actions by cement manufactures. However the limited period and price analysis of such meetings and that too for specific season (particularly construction season when cement prices usually witness seasonal up tick) could lead to lot of subjective inference and weakens statistical assessment. For eg .Commission gave instances of CMA meeting held on Jan-11, Feb-11 and April-11 and no specific explanation of why only these three meetings have been referred to when meetings of its High Power Committee take place periodically,” it added.

According to BRIC Data, an emerging markets intelligence company, India is ranked as the second-largest producer of cement in the world, only behind China. The Indian cement industry increased in value at a compound annual growth rate (CAGR) of 13.14% during the review period (2007–2011), and is projected to grow at a CAGR of 10.64% over the forecast period (2012–2016). This growth is primarily attributed to the government’s high level of infrastructure spending, and the country’s increasing number of residential and commercial construction activities, BRIC Data says.

The Indian government invested US$500 billion on infrastructure during the Eleventh Five-Year Plan (2007–2012) and revealed plans to invest a further US$1 trillion on infrastructure during the Twelfth Five-Year Plan (2012–2017).

The large-scale investment on various infrastructure projects, including roads, railways, bridges and ports, will generate a huge demand for cement over the forecast period, BRIC Data says.

Credit rating agency CRISIL said the penalty on the four CRISIL-rated cement companies is unlikely to impact their credit quality. “CRISIL believes that the financial risk profiles of these cement manufacturers are strong enough to offset the impact of the penalty. The penalty is sizeable at 75 per cent of the aggregate net profits of the four rated cement players for 2011-12 (refers to financial year, April 1 to March 31),” the agency said.

CRISIL, however, said robust liquidity and low gearing will cushion the credit risk profiles of these companies against the impact of the penalty. Moreover, cash outflows on account of the order are unlikely immediately, given that the players may appeal against it at the Competition Appellate Tribunal.

“The credit risk profiles of these companies are, therefore, expected to remain unchanged in the near term,” it said.

Indian cement industry makes rapid strides

Emerges 2nd largest globally

MUMBAI, July 02, 2012 (BusinessNewsbank): The Indian cement industry has registered a phenomenal growth contributing handsomely to the exchequer.

Starting with a mere 1.47 million tonne capacity s at the time of the independence, the Indian Cement industry is now globally competitive in technology, quality and cost of production, with a capacity of 320 million tonnes, emerging as the world’s largest cement producer after China.

It is the fourth largest contributor to the Union Excise duties and employs 10 million people directly or indirectly.

India has a cement capacity of about 320 million tonnes distributed amongst 47 players, not including mini cement plants.

In the last three years, around 100 million tonne of capacity has been added. It is pertinent to note that for every new plant, it takes at least three years to ramp up the capacity to 100% percent.

In the first two years, new plants could typically operate at about 45% and 65 % of their capacity. Hence capacity utilization numbers could be misleading unless read with the age of the plant.

So if 20 million ton capacity is added in one year, it could mean that only 45 per cent of that, i.e. 9 million tonnes can actually be produced in that year.