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BW Businessworld

Hard-hitting Statement

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Eleven cement companies and industry body Cement Manufacturers Association (CMA) have been slapped with a humongous fine of Rs 6,307 crore by the Competition Commission of India (CCI) for alleged cartelisation — collusive price fixing and pre-determined production levels that amounted to manipulating the price of cement.

The CCI's order says that collecting data on cement production and dispatches and sharing it amongst its members allowed the information to be used by companies as a basis for setting their prices higher, even as they kept production low in the face of high demand.

The CCI's order details a scrutiny of companies' actions over three years since 2008. According to the CCI, capacity utilisation averaged about 63 per cent.

The companies have denied being part of any cartel; by CCI's own admission, it has been unable to determine whether any of the manufacturers has a dominant market share, and thereby in a position to influence prices on their own.

63% The average capacity utilisation of cement firms, according to CCI

Predictably, the order has attracted a fair amount of criticism. "The order seems to proceed on the belief that an industry body is doing something wrong when it shares information among its members," says Ramesh Vaidyanathan, of Advaya Legal, a Mumbai-based law firm. Lawyers say this case could set a precedent on how the regulator will arrive at a conclusion on whether there is cartelisation, abuse of market position, and how penalties will be determined; the findings do not bode well for industry as a whole.

Since the CCI order seems place so much importance on data sharing, other industry associations such as steel, textiles, tyres and telecom that meet on a regular basis to discuss issues like expected demand, additional capacities and in some cases, even price movements, could also fall under similar scrutiny.

That puts the onus on the associations to visibly distance themselves from such deliberations. "Associations will have to take specific measures like excluding such activities in their charter document as well as maintaining detailed minutes of meeting discussions," says Balbir Singh, senior partner at DSK Legal.

There also seems to be a broad view that something analogous to cartelisation exists, especially in the southern states, perhaps based on the large supply-demand gap and limited production capacity gap. But most company officials assert that it's a far cry from price manipulation.

The CMA may have to drastically change the way it currently operates. For the companies, too, the penalty could not only severely hit their financials, but as analysts say if pricing is depressed, future business and margins could take a hit as well, specially with the new additional capacity that many companies have added.

The companies, on their part, appear to be readying to challenge the order at the Appellate Tribunal. Most hope that even if the findings are not reversed, the penalty could be substantially reduced. But this much is true: after this episode, everyone will sit up and notice the CCI.

(This story was published in Businessworld Issue Dated 02-07-2012)