Cartel is a formal or informal agreement among number of firms in an industry to restrict competition. These agreements may provide for setting minimum prices, setting limits on output or capacity, restrictions on non-price competition, division of markets between firms either geographically or in terms of type of product, or agreed measures to restrict entry to the industry to create a monopoly in a given industry. Generally, cartels operate within industries where the products are homogeneous in nature, have no substitute and consumer demand would remain more or less unaffected by the change in price of the products. For instance, in cement industry, consumers would continue to buy the product irrespective of its price as there is no substitute for cement in construction.
Some of the harm inflicted by cartels on the economy and the general public may include:
1) Consumers being forced to pay higher prices for goods or service or alternatively, consumers being unable to afford the products at all.
2) Businesses being forced to pay higher prices and they ultimately pass this cost on to their customers. Government agencies paying higher prices for goods and services pass these costs on to taxpayers.
3) Businesses involved in cartels have less incentive to innovate or operate efficiently.
Cartels are the most flagrant of all anti-competitive practice and it has been made as an offence under the Act. The Competition Commission is empowered to inquire into any cartel, and to impose upon each person or enterprise included in that cartel, a penalty of up to 3 times of its profit for each year of the continuance of such agreement or 10% of its turnover for each year of continuance of such agreement, whichever is higher.
Cartels are secret agreement and owing to the technicalities, the competition authorities need to dedicate enormous efforts to discover cartels and to deter them. Quite frequently due to lack of evidence, it’s difficult to take an action against a cartel even though the commission has its knowledge. Leniency programs are universally accepted as one of the best way to detect cartels. This is because the activity is so guarded that internal information is necessary to break such agreements.
Leniency programme is an incentive to those cartel members who choose to share information and cooperate with the Commission. It is a type of whistle-blower protection, i.e. an official system of offering lenient treatment to a cartel member who reports to the Commission about the cartel. Leniency programme is framed with an objective to encourage and incentivize various actors connected with the commission of such competition infringements to come forward and disclose such anticompetitive agreements and assist the competition authorities in lieu of immunity or lenient treatment.
Section 46 of the Competition Act, 2002, deals with leniency provision. It provides that an enterprise, which was or is a member of a cartel, may apply for reduction of penalty under Section 46 of the Act by giving information regarding the cartel to the commission. The CCI may grant the first applicant to approach it with a leniency application a reduction of penalty of up to 100%. The second applicant may be granted a reduction of penalty of up to 50%. The applicant(s) marked as third may benefit with a reduction of penalty of up to 30% of the penalty. However, lesser penalty can be imposed by the Commission only in respect of a producer, seller, distributor, etc included in the cartel, who has made the full, true and vital disclosures under this section. Further, the lesser penalty is not imposed by the Commission if the person making the disclosure does not continue to cooperate with the Commission till the completion of the proceedings before the Commission.
In Re: Cartelization in respect of tenders floated by Indian Railways for supply of Brushless DC Fans and other electrical items is the first case where CCI has granted reduction of penalty under section 46 of the Act. This shows that despite the existence of the leniency regime in India since 2009, there has been no precedent regarding the reduction of penalty but this has not deterred applicants from claiming leniency under the Act over the years. However, it also necessary that CCI should undertake advocacy activities to create a competition culture and awareness about disadvantages of cartels and the harm they cause to the economy, which could help to promote detection and prosecution of cartels in India.