Criminalisation of Cartel Conduct: A Desirable Change?

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Adam Smith

When competing business firms form organization, by way of collusion, to indulge in anti-competitive practices aimed at illicitly maximising their profits, then they are said to be involved in cartel conduct. Cartels are defined in Section 2(c) of the Competition Act, 2002 (the Act), to include “an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services.” Section 3(3) talks about anti-competitive horizontal trade agreements and includes within itself cartels which determine prices and/or control outputs, share or allocate markets, and rig bids. They are presumed to have an appreciable adverse effect on competition and are thus held to be void.

Cartels are extremely detrimental to competition in the market, and, as a result, to the interests of the consumers. By causing monopoly-like conditions in the market, cartels raise prices, reduce output and distribution, allocate markets, and stifle innovation. Hard-core cartels have been described by the OECD as “the most egregious of violations of competition laws.” In Excel Crop Care v CCI, the Supreme Court (SC) observed that while competition has a number of benefits, anti-competitive agreements and cartels harm consumers by fixing prices, capping output, and allocating markets. The court said that effective enforcement against cartels has resulted in decreased prices, which can be supported by empirical evidence.

Competition laws aim at facilitating unhindered competition in the market, and cartels aim at exactly the opposite––restricting competition. Deterring cartel conduct is, thus, among the prime aims of competition authorities across the world. Deterrence of cartels, to a significant extent, depends on the sanctions imposed for such conduct. Presently, under the Act, the Competition Commission of India (CCI) can impose only financial penalties in the form of fines. But, it is argued that mere financial penalties may be inadequate in deterring cartel conduct, and that there is need of harsher penalties of criminal nature.

Sanctions Under the Present Competition Regime

Presently, the Act allows for levying of administrative fines only. According to Section 27, the CCI can impose on the firm involved, a penalty of up to three times the profit for each year of the continuance of the agreement or 10% of its turnover for each year of the continuance of the agreement, whichever is higher.

The CCI can also, under Section 48, impose penalties on individuals involved in the cartel. The maximum penalty that can be imposed, under Section 27, on the individuals, like directors or management, for participating in the cartel is 10% of their income for each year of the existence of the cartel, or 10% of their average income for three preceding financial years. For example, in the Dry Cell Batteries Case(Case No. 2 of 2016), the CCI imposed, on the involved individuals, a penalty of 10% of their average income for the three preceding financial years.

However, these penalties are only civil in nature. The CCI cannot enforce criminal sanctions against the firms or individuals involved in the cartel conduct.

Case for Criminal Sanctions

Criminalisation of cartel conduct has been a widely debated topic for a while now. It is well recognised that successful deterrence of cartels can be ensured to a greater degree by imposing harsher penalties. In this context, there is a strong case for criminalisation of cartel conduct. Several countries have introduced criminal sanctions against cartels, the most prominent among which are the US, the UK, Canada, New Zealand and Australia. The case in its favour is buttressed by the limitations of monetary sanctions, and the advantages of criminal penalties.

To deter formation of cartels, the sanctions should be such that their risk would outweigh the potential benefits that would be derived from participation in the cartel conduct. It has been recognised by the International Competition Network (ICN) that where fines are the only sanction, they need to be very high to optimally deter cartels.However, such high fines may have an adverse impact on the viability of the business. The elimination of a competitor from the market may have a rather anti-competitive effect. The firm may be unable to pay fines, and such inability may decrease the deterrent effect. Furthermore, bankruptcy of the firm may adversely affect the interests of the employees, shareholders and, most importantly, the consumers. These effects can be removed by limiting the amount of fine, but that would end up compromising on deterrence.

Another argument against monetary fines is that they are dominantly borne by the firm rather than the individuals indulging in cartel conduct. It is inequitable that the whole firm has to bear the burden for the involvement of a few individuals. The fines are borne by the shareholders who are not actually involved in the daily running of the firm. Even if individuals can be fined, as available under the Act, the fine may be viewed as an acceptable risk with limited effect on their livelihood. In this context, fines have no retributive effect. Those actually responsible are rarely sanctioned adequately for their participation in the cartel. This, in turn, would have a limited deterrent effect.

Both these limitations of monetary sanctions can be bypassed by criminal sanctions. Firstly, criminalisation would bypass the problems related to the optimal level of fines and the solvency of the business. Secondly, criminal sanctions in the form of imprisonment have attached with them a ‘personal price’ which the individuals are required to pay. It is only those actually involved in the conduction of the cartel who would suffer the consequences of successful prosecution. There would be no adverse impact on the interests of the shareholders. There is a retributive principle attached to it where the blameworthy are meted out the sanctions that they deserve. As described by the ICN, the primary aim of introducing criminal sanctions in the jurisdictions that did introduce them was to increase deterrence by inducing individuals to pay attention to the “extreme personal consequences” of their participation. As against fines only, imprisonment would involve a heftier personal price to be paid in the form of loss of freedom.  Criminalisation would thus have an increased deterrent effect. A prime example of successful deterrence of cartels by criminalising them is that of the US. The statistics have reflected the efficacy of the growing trend of imposing longer jail terms in deterring cartels. The interested groups in the US have, for long, advocated the imposition of jail terms for individuals conducting the cartel.

Criminal penalties would also make the leniency provisions more attractive. Knowing that there is a risk of being deprived of personal freedom, there is a higher likelihood that firms and individuals would approach the CCI with leniency applications and disclose the operation of cartels they are part of in exchange for lenient penalties under Section 46.This has particular significance in relation to deterrence since most cartels function secretively and leniency provisions are key to their successful detection and prosecution.

One argument against criminalisation is that the standard of proof required would be “beyond reasonable doubt.” Since most cartels are secretive, their existence is dominantly proved through circumstantial evidence. There is rarely any direct evidence, and thus the proof may not be beyond reasonable doubt. However,this argument is rebuttable. It must be appreciated that circumstantial evidence is used by the CCI to impose civil penalties. In Builders’ Association of India v Cement Manufacturers’ Association(the Cement Cartel Case), the CCI observed that if there is enough circumstantial evidence pointing towards the existence of a cartel, then it will impose penalty. It was also recognised by the SC in Sushil Sharma v State (NCT of Delhi),that circumstantial evidence is admissible in criminal law in India. If all the evidence in conjunction unequivocally point towards the guilt of the accused, they will be convicted.



Conclusion

Cartels distort competition by fixing prices and output, allocating markets, and rigging bids. The anti-competitive effects of cartels, as mentioned initially, are borne by the consumers in the market. Cartelisation should be viewed as white-collar theft and punished accordingly. To reiterate, the inadequacies of administrative fines and the advantages of criminalisation call for the need to criminalise cartels. While having a retributive effect, criminal sanctions also have, more importantly, an increased deterrent effect. Criminalisation of cartels, thus, ought to be considered in India to bring it at par with international best practices.

Author: Tanay Karia is first-year law student at National Law University, Delhi.

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