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.