CCI - GNASHING ITS TEETH AND SHARPENING ITS CLAWS
By Ruma Dubey
Cement stocks have cracked up today and suddenly, after a long time, one Govt agency has shown its teeth – the Competition Commission of India (CCI). And it comes as a pleasant surprise for many (those not affiliated to the stock markets) to see that companies can actually be penalized for cartelization. It is ironic; we today appreciate people and agencies that actually do their job! And CCI has been always doing its job.
What exactly did CCI find? As we had mentioned in one of our Cover Features, cement companies have been charging abnormally high prices for the past few months, going as high as Rs.280-2250/bag and this at a time when the realty sector is in doldrums and construction is also at a standstill. How was this feat possible? More than increase in demand, the rise in price was due to reduction in utilisation level, being labeled by manufacturers as ‘production discipline’. Like in the South, despite fall in demand, price remains steady at Rs.260-270/bag, the same methodology is now being adopted across the country. Thus production disciplines dictates cement prices and not demand.
And this is exactly what CCI has stated in its report. Reducing production and creating an artificial shortage, leading to a price rise is what some of the big cement companies have been accused of doing by the CCI. The agency probed into the supply shortage issue, to discern that cement companies were running at less than 70% capacity utilization. We may have noticed this runaway price of cement only in second half of FY12 but the realtors' body - Builders Association of India (BAI) had filed a case way back in 2007-08, alleging that retail prices fixed by 11 members of cement manufacturers association (CMA) were almost similar. The case was first shunted to the Serious Fraud Investigation Office (SFIO) and later to CCI, thankfully which did its job!
39 companies were investigated by CCI and of that, news is that 11 cement companies will be penalized to the tune of about Rs.3,000 crore. The companies rumoured to be slapped with a fine are – ACC, UltraTech, India Cements, Ambuja Cements, Madras Cement and Jaypee Cement. India’s total cement manufacturing capacity stands at 300 million tonnes and ACC, Ambuja and UltraTech control almost 35% of the total production.
CCI has always been doing its job. Previously too the agency has probed and fined companies form various industries on cartelization. In August 2011, CCI slapped a fine of Rs.630 crore on DLF for abusing its dominant position and issued a 'cease and desist' order against imposing unfair conditions on the buyers of its flats. This had worked out to 7% of the average of turnover for last three preceding financial years.
In June 2011, the National Stock Exchange was fined Rs.55.5 crore for abusing its dominant position in the currency derivatives space. This had worked out to 5% of its average annual turnover for last three years.
In Feb 2012, a fine of Rs.165 crore was imposed by CCI on 48 LPG cylinder makers for forming a cartel while bidding during the tenders floated by Indian Oil in 2010-11. The agency found them guilty of manipulating the bids and quoting "identical rates in groups through an understanding and collusion action". 37 large players out of 48 entities control the supply and thus CCI found them colluding to manipulate the price. This fine had worked out to 7% of the last 3 years annual turnover.
In March 2012, CCI had imposed a penalty of Rs.60 crore on 10 explosives manufacturers following a Coal India complaint that they had formed a cartel. Companies which were found guilty included Gulf Oil Corp, Ideal Industrial Explosives, Solar Industries, Blastec India, Indian Explosives, Emul Tek, Regenesis Industries, Techno Blasts India, Black Diamond Explosives, and Keltech Energies.
In April 2012, CCI slapped a penalty of Rs.317 crore on three companies - United Phosphorus, Excel Crop Care, and Sandhya Organics for collusive bidding to supply ALP tablets to Food Corporation of India (FCI). ALP tablets are used by the FCI for preserving its central pool of foodgrains. The price of the tablets had nearly doubled during 2007 to 2009. This fine had worked out to 9% of the last 3 years annual turnover.
And CCI is currently probing allegations of cartelization by tyre manufacturers. Five major tyre companies which control 95% of the sector - Apollo Tyres, MRF, JK Tyre, Birla Tyres and CEAT are being probed and news is that fines are likely to be smaller than the penalties imposed in the cement sector. In early Jan in 2012, Apollo Tyres was fined Rs.30 crore for indulging in cartelisation in South Africa. Report by CCI on this is expected any time soon.