Last Updated : Sep 22, 2020 09:26 AM IST | Source: Moneycontrol.com

Citing COVID-19 pain, CCI lets off cartel that rigged Railway tenders with a warning

India’s fair-trade regulator had the option of heavily penalising a 10-member cartel that includes units of Escorts and TVS because it had conclusive proof of them rigging Railways bids of roughly Rs 2,000 crore. Instead, they were let go with only a warning.

Representative Image (Image: AP)
Representative Image (Image: AP)

Two months ago, the Competition Commission of India (CCI) passed an order, which despite its stunning twist, went largely unnoticed.  It concerned no less than 10 companies that were found guilty of cartelisation and duping an enterprise no less than the Indian Railways for nearly a decade.

The CCI is the country’s fair-trade regulator and forming a cartel to do business, unencumbered by competition laws, is the ultimate sin in its eyes—as grave as a murder is in a criminal court. There was no doubt about the offences of the companies, which make composite brake blocks (CBBs) used in locomotives, coaches, wagons and other railway units.

These companies colluded and conspired to defraud the Railways by rigging lucrative tenders of roughly Rs 2,000 crore, acts that were proved conclusively by a painstaking two-year probe by the Director General’s office of the CCI. The CCI order actually revealed a “smoking gun” in the case—the exchange of emails and WhatsApp messages between company officials to decide the prices and quantities quoted in the CBB tenders.


Some of the members of the cartel are offshoots of well-known corporates, such as the railway equipment division of Escorts Group, the engineering company, and Sundaram Brake Linings of TVS Group. Others such as Hindustan Composites, Rane Brake Lining and Masu Brake Pads are lesser known. The rest — Om Besco Super Friction and Industrial Laminates (India), among others — operate in near obscurity, some without even a website.

COVID-19 Vaccine

Frequently Asked Questions

View more
How does a vaccine work?

A vaccine works by mimicking a natural infection. A vaccine not only induces immune response to protect people from any future COVID-19 infection, but also helps quickly build herd immunity to put an end to the pandemic. Herd immunity occurs when a sufficient percentage of a population becomes immune to a disease, making the spread of disease from person to person unlikely. The good news is that SARS-CoV-2 virus has been fairly stable, which increases the viability of a vaccine.

How many types of vaccines are there?

There are broadly four types of vaccine — one, a vaccine based on the whole virus (this could be either inactivated, or an attenuated [weakened] virus vaccine); two, a non-replicating viral vector vaccine that uses a benign virus as vector that carries the antigen of SARS-CoV; three, nucleic-acid vaccines that have genetic material like DNA and RNA of antigens like spike protein given to a person, helping human cells decode genetic material and produce the vaccine; and four, protein subunit vaccine wherein the recombinant proteins of SARS-COV-2 along with an adjuvant (booster) is given as a vaccine.

What does it take to develop a vaccine of this kind?

Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.

View more

Senior officials, including CEO, managing directors and vice-presidents of these companies, (see Finances of The CBB Cartel for full list) rigged the tenders and influenced the prices of the brakes, which are used to reduce noise and for safety in wagons, the CCI investigation found. They did so from 2009 to 2017 through a secret understanding with senior Railways officers, according to the investigation.

The CCI has the discretion to impose penalties of up to 10 percent of turnover, or up to three times the profit of companies during the period they operated as a cartel, whichever is higher. While imposing such penalties for cartels in the past, the regulator used both these thresholds.

An Unusual Decision

On July 10, 2020, when the CCI order was due, if the companies expected the worst, it didn’t happen. Instead, they were let off with a warning.

In its order, the CCI cited two reasons to back its decision. One, the continued cooperation of the companies during the investigation and two, the prevailing economic hardships due to the COVID-19 pandemic.

railways scam

The decision surprised, shocked even, some competition law experts.

MM Sharma, who heads competition law and policy at New Delhi-based Vaish Associates, observed that by not imposing even a token penalty on the cartel participants, the CCI has set a wrong precedent. “Such repeated lenient treatment will rather encourage numerous such cartels to continue to flourish,” he wrote in a note.

Another competition lawyer said the CCI has sent a wrong message to duplicitous companies and government departments at the receiving end of such companies. “This may trigger more such violations by companies,” he said, asking not to be named.

Officials of the CCI, Railways and members of the cartel did not comment for this article.

What the CCI should have done, according to competition law experts that Moneycontrol spoke to, was push the companies to pay the fine later, say after six months, when the economy would have recovered from the crushing blows of the pandemic. Another option was insist the companies make staggered payments, or at the very least cough up a token penalty, said the competition lawyer cited above who wanted anonymity.

Waiving off the penalty for a serious breach of competition laws isn’t the only odd thing about the CCI order.

The CCI noted that that some members of the cartel were Micro Small and Medium Enterprises (MSMEs). That’s true but four companies in the list — the Escorts unit, Rane Brake Lining, Bony Polymer and Hindustan Composites—are anything but (See Finances of The CBB Cartel). The rail equipment division of Escorts reported a turnover of nearly Rs 6,000 crore in FY19.

This isn’t the first time that Escorts has got the stick from CCI. The company along with two others was found guilty of cartelisation and rigging — wait for it — a railways tender in 2014.

On that occasion, the CCI penalised Escorts Rs 54.7 crore.  That case though was overturned by the Competition Appellate Tribunal, the dissolved predecessor of National Company Law Appellate Tribunal (NCLAT).

How The Case Came To Light

The latest case against Escorts and nine other companies was launched after CCI received four different complaints by railway divisions. That makes the case distinctly different from another instance of a reprieve that a cartel received from the CCI, which the lawyer Sharma referred to, despite overwhelming evidence.

The CCI received no complaint in that case. Five automotive bearings companies teamed up to pass on the increase in steel prices to their customers from time to time, but with their knowledge, according to the CCI investigation.

Like most enterprises, Railways allots tenders to the lowest bidders. In the CBB cartel case, companies colluded to determine not only the price but also the quantity for tenders floated by railway zones.

Members of the cartel regularly exchanged screenshots of their financial bids to ensure that all of them stuck to their promise of quoting pre-decided prices. They also met at different locations to decide the strategy and the modus operandi as well as resolve differences amongst them, the CCI investigation found.

Careful Rigging Of Bids

The CCI order highlights one such example. Even after the price negotiation meeting called by a Railways panel, Escorts Railway Equipment Division, Rane Brake Linings and Masu Brake Pads still quoted the identical price of Rs 468 apiece for the CBBs, it said.

The Railways usually issues roughly 70 tenders a year and their annual value is estimated to be around Rs 150-175 crore. The CBB cartel is approximated to have influenced bids of around Rs 1,750-2,000 crore over 9 years.

When confronted with such irrefutable evidence, companies file a leniency application with CCI to reduce the gravity of the fine. Though the CCI order makes no mention of it, it is possible one or more companies in the cartel would have filed for such an application.

But leniency pleas typically earn a deduction in fine and not a free ticket, according to competition law experts. “Remember in this case, companies made supernormal profits,” said a third competition lawyer, who did not want to be named for fear of inviting the CCI’s wrath.

Big Ramifications For Competition Law

Last year, finance minister Nirmal Sitharaman coddled the regulator to ensure healthy competition “by staying pro-actively alert”. The CCI action in the CBB cartel case not only disregards that call but also has the potential to significantly upend the power of competition law in India, according to legal experts.

Competition law experts fear that the CCI order has a despairing effect on the Indian Railways and rigging of bids in India. The Indian Railways has long been a procurement behemoth as well as a sitting duck for shady contracts.

“This ruling could potentially have a huge bearing on the other cases of cartelisation that are due for hearing in CCI,” said the third lawyer quoted above. “Will the CCI let off all the errant companies citing the pandemic?”

The CCI order has also raised eyebrows because enforcing competition laws in bids and preventing rigging have long been a priority for the regulator. Several government bodies, besides the Railways, regularly complain to the CCI about suspected mischief in public tenders.

The finances of the Railways are hardly shipshape. The Railways spent nearly as much it earned in 2019-20, according to the revised estimates of Budget 2020.

The Railways can appeal against the CCI order at the NCLAT. But it is not clear if it will, given that its own officials are complicit in the case.
First Published on Sep 22, 2020 09:26 am