Competition Commission of India again delivers on its mandate. If only older regulators had as much spine as CCI

Sucheta Dalal 

By imposing a stunning penalty of Rs6,200 crore on 11 cement companies for price fixing and cartelisation, the Competition Commission of India (CCI) has once again shown that it will not hesitate to use its powers against market abuses. The penalty is calculated at 50% of their profit for the years FY09-10 and FY10-11 and covers some of the biggest and most powerful names in the cement sector such as Ambuja Cements, ACC, Grasim (now merged in UltraTech), Madras Cements, India Cements, Jaypee Cement, Lafarge India, JK Cement, Madras Cements, Century Cement and Binani Cement. The industry body Cement Manufacturers Association (CMA) has also been fined and they have all been asked to deposit the money within 90 days. 

There will, of course, be a backlash from industry.  Anil Singhvi, former managing director, Ambuja Cements, has already been quoted as calling the penalty ‘highly excessive and draconian’ and that it reminded him of the VP Singh government when the bureaucrats went after industry almost on a witch-hunt. 

Mr Singhvi’s comment is significant, because after a lifetime of working in the corporate sector and presiding over a controversial acquisition of ACC by Ambuja Cements (which eventually sold out to Holcim) that seemed to leave minority shareholders’ frowning, he has now started a proxy advisory firm. Institutional Investors Advisory sends out media releases on the smallest deviation from good governance norms by even our most respected listed companies. 

Then there is the pro-industry business channel, which is working overtime to assuage panicky investors by pointing out that the Order can be challenged at the appellate tribunal and, if necessary, at the Supreme Court. It has also been arguing that it is not possible for 40-odd companies to form a cartel. Really? But isn’t it a fact that cement cartels have existed, been written about and have gone unpunished for decades? And that two of the largest—ACC and Ambuja Cements—are controlled by the same Holcim? 

When ordinary consumers are affected by price cartels, CCI is mandated to look at business-to-business issues only. This time, its action was triggered by a complaint from the Builders Association of India which alleged that companies were deliberately operating at 70% of their capacity to create artificial scarcity and keep prices high. Is the CCI’s Rs6,200 crore penalty much too steep? Probably; but that is precisely the logic of financial penalties—they are supposed to be large enough to act as a deterrent—a fact that our regulators, courts and policy-makers have all ignored for over 60 years. 

The CCI Order is especially commendable because the Commission is still awaiting some significant statutory amendments that will give it jurisdiction over merger and acquisition (M&A) in several sectors which already have independent regulators. Chairman Ashok Chawla, as a seasoned bureaucrat, surely knows that a display of power, like the cement Order, is more likely increase pressure to keep CCI out of the turf of ‘more manageable’ regulators. After all, the debate about whether CCI should have any jurisdiction over sectors like telecom, electricity, banking or shipping is far from settled and some have raised specific objections to its oversight of M&A activity. 

The action against cement cartelisation is the CCI’s third path-breaking Order. One was its Rs630-crore fine on the politically-connected DLF’s Gurgaon project which sent shock waves through the real-estate sector and is bound to make other developers a lot more cautious. Ironically, while potential turf wars with sectoral regulators are being hotly debated, the CCI’s recommendation to set up a separate realty regulator has, of course, been ignored by the government. This means that complaints about anti-competition actions in the realty sector will continue to go to the CCI, as has happened with the Builder Association’s complaint againstthe cement cartel. 

The second Order (actually the first major CCI Order) about the National Stock Exchange’s (NSE) refusal to levy transaction charges in the forexderivatives market segment also raised turf issues. The CCI ruled that NSE’s action was anti-competitive and agreed with the MCX-SX complaintthat it was bleeding its rival exchanges. Here, too, the CCI action corrected a wrong that ought to have been rectified by the Securities & Exchange Board of India and the Reserve Bank of India who are joint regulators but were persuaded to ignore the issue. 
It drove home the point that sector-specific regulators may not always protect a new player in a situation of regulatory capture and when thecomplaint is against an entrenched, near-monopoly, entity. The NSE has also challenged the Rs55-crore fine levied by the CCI. Yet, not only did it fall in line and began charging transaction fees but also worked at settling several other, anti-competition actions that it had initiated. On the other hand, look at what happened in the forex derivatives market. Four new exchanges were set up to trade forex derivatives, of which one shut down in just over a month (the Bombay Stock Exchange) and a second is under serious investigation with no clarity about its survival. 

The NSE’s case should end the debate over whether CCI should be allowed to step on the turf of sectoral regulators, especially the Reserve Bank of India’s. It is clear that CCI has a role beyond M&A and there may be anti-competitive situations where the sectoral regulator simply fails to act. CCI obviously has a role there. The ministry of corporate affairs must be commended for its determination to give the CCI more teeth, despite objections. Minister M Veerappa Moily is quoted as saying that “CCI will work in coordination with other sector regulators, but it will have the power to intervene, if required” and this would work well in most cases. 

As CCI chairman Ashok Chawla correctly said in a recent interview, his mandate cuts across sectors and is “to foster competition and protect the markets from sundry anti-competitive practices.” So, when the sectoral regulators ignored the fact that four exchanges were making losses (subsidised by other market segments) because the monopoly player would not impose transaction charges, CCI stepped in. 

The same is true of sectors such as telecom and aviation. The sectoral regulator may be the most competent to deal with licensing and other technical issues, but had they not failed to protect the consumers, had they ensured healthy competition without reckless price-fixing or price-cutting to acquire customers, both industries would have been in much better health. 

The NSE-MCX-SX case raises another important issue. Who will hold sectoral regulators (in this case the powerful RBI and SEBI) accountable when they fail to act? Or is the CCI enough of a balancing force? The conflict, if any, will arise, if the CCI meddles when a sector regulator is already dealing with an issue. More often than not, the problem in India is not about over-zealous watchdogs, but ones that only bark or bite at the instance of their political masters. CCI, barely a couple of years old, sets a great example in this regard and puts much older, better-funded regulators to shame.

Sucheta Dalal is the managing editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached at [email protected]