CCI order: Fine soft at 50%; defies Act levy of 300%: Trilegal

In an analysis of the CCI order penalising cement companies, Rahul Singh, counsel, Trilegal explains to CNBC-TV18 that while the CCI has the discretion according to Section 27 (b) of the Competition Act to levy a penalty upto 300% of the profits, it has reduced it to 50%.

Below is an edited transcript of the analysis on CNBC-TV18. Also watch the accompanying video Q: According to the final order, 11 companies have been slapped with the penalty of 50% of FY10 profits which amounts to Rs 6,300 crore. Was this in line with market expectations and by when do you anticipate the companies will have to pay up this penalty?
A: Under the Competition Act, an appeal is to be filed within 60 days with the Competition Tribunal. So if an appeal is filed, then the Appellate Tribunal may grant a stay.
However, the penalty need not be paid to receive a demand notice from the Competition Commission of India which typically sends a demand notice after 30 days of the order received by the parties.
So the companies will have 30 days from now to receive the demand notice from CCI and once they receive the demand notice, they will have 30 days to pay the penalty. Q: Do you expect the CCI to direct the guilty companies to initiate measures such as cuts in prices and increase in utilization in the future?
A: According to the Act, the commission has discretion to compute either three times the profit made for the number of years that the cartel existed or on their turnover for those years where the cartel had existed.
So my sense is that even while it is 50%, there must have been a cartel for five years and the CCI has broadly taken 10% of the profit from each of the years. That must have been the calculation, but that’s just guesswork because I have not seen the order yet. Q: So you are guessing that the CCI has found the cement companies guilty for five years which has just been clubbed together for one year of their profits.
A: This is what must have happened. But let's wait and see the decision because there will be an analysis of how the penalty has been imposed. Q: The other surprise is that the CCI is only talking about a penalty of 50% of profits. According to the Section 27 (b) of the Competition Act, the penalty is imposed on either the revenue or the bottom-line, whichever is higher. In this case, I assume the bottom-line must have been found to be higher.
A: Yes that is what must have happened, but let’s wait and see what the order says. You are right, the CCI has the discretion under Section 27 (b) of Competition Act to compute and impose a penalty on whichever is higher. The rationale is one of deterrence. So a heavier penalty is supposed to deter the parties in the future. Q: Is this still the biggest penalty ever imposed by CCI?
A: Yes, in monetary terms. According to the PIB release, under Section 27 (d) of the Competition Act, the Competition Commission can levy a penalty upto three times the profit.
This time the penalty is 0.5 times the profit for the 2010-11. This implies that the CCI has the discretion to levy a penalty upto 300% of the profits, but they have reduced it only to 50% of the profit for 2009.
This is well within the framework of Section 27 (b) of Competition Act. So the Competition Commission has decided not to impose the heaviest of the penalty according to the Act. Q: Did the market fear the order would also contain directions regarding prices and utilisation?
A: Under the Competition Act, the Competition Commission does not have the mandate to order companies regarding capacity as it an independent business decision. Q: How is the CCI's order to cease-and-desist going to be implemented?
A: Under Monopolies and Restrictive Trade Practices Act (MRTP) 1969, the only power that the MRTP Commission was to actually impose a cease-and-desist order.
Under the Competition Act, any agreement construed to form a cartel is prohibited. However, the Act has no power on production capacity as it an independent business decision. Q: The CCI has stated that it can review the situation suo moto in five-to-six months and levy heftier penalties on violation of the law. Is that how things always work?
A: The CCI’s suo moto power is not confined to any particular sector in India, but it has used its suo moto powers very sparingly.