The Petroleum and Gas sector (P&G Sector) is one of the eight core sectors in the Indian economy and serves as one of the significant backbones of India. Over the past few years, it has had various foreign and domestic investments that have led to a rapid rise in its refinery capacity, production, and exports. However, at the same time, it has been prone to various competition law issues such as abuse of dominant position and cartelisation. It becomes imperative to scrutinize such intersectionality between the petroleum sector and competition issues.
In this blog post, the authors have discussed: (i) in brief the historical development of India’s P&G Sector and the role of the sectoral regulator, i.e., the Petroleum and Natural Gas Regulatory Board (PNGRB); (ii) jurisdictional issues between a sectoral regulator like the PNGRB and the Competition Commission of India; (iii) the inquiry procedure under the provisions of the Competition Act, 2002 (Competition Act) relating to anti-competitive agreements and abuse of dominant position; (iv) cases under the Competition Act relating to the P&G Sector; and (v) way forward for the stakeholders in the P&G Sector to ensure compliance with the provisions of the Competition Act.
1. Introduction to India’s Petroleum and Gas Sector
India’s Petroleum and Gas (P&G) sector commenced at a languid pacein Digboi, Assam, wherein the P&G production and extraction locationswere mainly in North-Eastern parts of India until the 1970s. Due to this, the Indian Governmentheavily subsidized the P&G sector to pump its growth and development.In 1991, after the economic privatization and liberalization, the Indian Government diluted its control of the P&G sector, wherein the Indian Government entered into various joint ventures with private players. Thus, with the assistance of the private players, India became thesecond-largest P&G refiner in Asia, and the P&G sector became one of the Indian economy’s core pillars. Presently, oil demand in India isprojected to register a 2x growth to reach 11 million barrels by 2045. At the same time, consumption of natural gas isexpected to grow by 25 billion cubic meters, registering an average annual growth of 9% until 2024.
Since India is thethird-largest consumer of crude oil and petroleum products and one of the leading players in the P&G sector, a sectoral regulator, i.e., the Petroleum and Natural Gas Regulatory Board (PNGRB), has been established under thePNGRB Act, 2006 (2006 Act). The 2006 Act aims to regulate the production, distribution, storage, etc. of products and services related to the P&G sector for securing the interests of consumers and entities, ensuring adequate supply, and promoting a competitive market in the P&G sector. The 2006 Act gives power to the PNGRB to issue directions and levy penalties in case of restrictive trade practices. Here, restrictive trade practices are defined as “a trade practice which has, or may have, the effect of preventing, distorting or restricting competition in any manner and in particular” based on the 2006 Act.
To ensure steady growth of the P&G sector, the PNGRB has multiple functions such as registering entities for marketing, establishing and operating products, services, and facilities related to the P&G sector. Further, the PNGRB can monitor prices, levy fees, and lay down specifications and technical standards for various infrastructural facilities used in the P&G sector. Apart from its functions, the PNGRB has the power to adjudicate and decide disputes between entities or between an entity and any other person on matters related to the P&G sector. It can also conduct inquiries and investigations on receipt of complaints about violations of retail service obligations, marketing service obligations, display of retail price at retail outlets, and any other provision of the 2006 Act and can pass the requisite orders or issue directions as it deems.
2. Sectoral Regulators v. Market Regulator: Analysis of Overlapping Jurisdiction
The market regulator, i.e., the Competition Commission of India (CCI) was introduced and established under the Competition Act, 2002 (Competition Act), to prevent anti-competitive practices, promote and sustain market competition, protect consumers’ interests, and ensure free trade in the market in India.Section 18 of the Competition Act casts a positive obligation on the CCI to eliminate anti-competitive practices and promote and sustain competition, protect the consumers’ interests, and ensure free trade in markets in India. Some sectoral laws enacted after the Competition Act (i.e., year 2002) also bestow sectoral regulators with some competition enforcement functions. These include the 2006 Act,Electricity Act, 2003, etc. However, from a bare reading of the jurisdiction of the PNGRB (a sectoral regulator) and the CCI (market regulator), it is evident that both the regulators are engaged to ensure fair and equitable market competition. Thus, the key question that needs to be addressed is when there is an overlapping jurisdiction of two regulators’, which one out of the two presides over the other?
Post the enforcement of the substantive provisions of the Competition Act, the CCI had the opportunity to examine an issue that fell into the jurisdiction of the PNGRB. Inone of the information filed before the CCI, it was alleged that the PNGRB (Authorizing Entities to Lay, Build, Operate or Expand City or Local Natural Gas Distribution Networks) Amendment Regulations, 2013 (that were in the nature of subordinate legislation) were contrary to the substantive provisions of the Competition Act. The CCI, while observing that the information was beyond the scope of its jurisdiction, suggested that the Informant should approach the appropriate forum if he is aggrieved by the scope of powers of the PNGRB. The CCI had also dismissed cases dealing with the P&G sector, i.e.,Geeta Chatterjee v. Bongaon Service andGiriji Meena v. Mohan Gas Service, wherein the dispute was found to be in the nature of a consumer dispute. Accordingly, the CCI refrained from exercising its jurisdiction as the matters primarily related to consumer relief.
The jurisdiction issue was dealt with by the CCI in the case ofXYZ v. Indian Oil Corporation Limited. In this case, the CCI observed that there is no underlying inconsistency between the object and purpose of the 2006 Act and the Competition Act. Further, the CCI distinguished its jurisdiction from that of the PNGRB. Key observations of the CCI are demonstrated in a tabular format below:
The CCI’s focus is on the functioning of the markets by way of increasing efficiency through competition.
The PNGRB’s focus is on the dynamics of the specific sector, i.e., the P&G sector.
Power to inquire
The CCI has the power to take suo moto action or if any information is provided to the CCI regarding any possible anti-competitive conduct in the market.
The PNGRB can adjudicate and settle disputes only when a dispute has occurred, and damage is done.
Aim of proceedings
Proceedings before the CCI are aimed toward the overall market correction, penalising the market players engaged in anti-competitive practice/conduct, and may or may not be confined to a particular sector.
Proceedings before the PNGRB are aimed to resolve the dispute between the parties only.
The CCI’s decision grant relief is in rem.
The PNGRB’s decision grant relief is in personam.
Accordingly, the CCI concluded that the presence of a sectoral regulator could not exclude the jurisdiction of the CCI. The mandate provided to the CCI under the Competition Act and sectoral regulators under their respective acts are complementary and supplementary to each other. Thus, the CCI’s jurisdiction (regarding competition law issues) presides over the sectoral regulators’ jurisdiction.
The issue of overlapping jurisdiction between the CCI and sectoral regulators was finally settled by the Hon’ble Supreme Court (SC) in the landmark case ofCCI v. Bharati Airtel Limited and Ors. (Bharti Airtel Case). In this case, Bharti Airtel Limited, Idea Cellular Limited, and Vodafone India Limited were accused of abuse of dominant position and cartelisation. Accordingly, the CCI passed an administrative order and directed an investigation to the Director General (DG) (i.e., the investigative arm of the CCI). However, the CCI’s administrative order was challenged before the Bombay High Court. The Bombay High Court inter alia (i) quashed the administrative order; (ii) held that Competition Act itself is not sufficient to decide and deal with the issues arising out of the provisions of the Telecom Regulatory Authority of India Act (TRAI Act); and (iii) upheld the jurisdiction of the Telecom Regulatory Authority of India (TRAI) i.e., sectoral regulator to deal with the concepts arising out of TRAI Act. According to the Bombay High Court, the TRAI was well-equipped to decide telecom-specific issues, and the CCI should not have passed an order regarding anti-competitive practices until the final decision by the TRAI was passed. This ruling of the Bombay High Court was appealed to the SC. Thus, the primary question was a jurisdictional issue between the TRAI and the CCI before the SC.
The SC observed that the power to decide jurisdictional fact is with the sectoral regulator post, which the CCI can investigate the competition issues being the sole authority for the same. In this regard, the SC observed that the CCI is not a sector-based regulator, but it has “…the jurisdiction across which transcends sectoral boundaries, thereby covering all the industries…”. Further, the Court observed that the CCI is an experienced body in conducting competition analysis and is likely to opt for “structural remedies” that would lead to the possible evolution of the market and promote genuine market competition. Thus, the SC held that the CCI’s jurisdiction could not be completely washed away as “…the ‘comity’ between the sectoral regulator (i.e., TRAI) and the market regulator (i.e., the CCI) is to be maintained.”
In the view of the authors, this judgment applies across all sectoral regulators and aims to strike a balance between sectoral regulators and the CCI. These sectoral regulators have the power to decide the jurisdictional aspects in the first instance/stage. Post such determination, the CCI can investigate into the competition issues based on the criteria laid down by the Competition Act as the CCI is the only authority to decide on anti-competitive issues across sectors.
3. Inquiry Procedure under the Competition Act, 2002
Under the Competition Act, the CCI has the power to inquire into anti-competitive agreements (Section 3) and abuse of dominant position (Section 4), either suo moto or upon receipt of information in accordance with the provisions ofSection 19. Such inquiry is to be conducted by the CCI based the procedure evolved by the legislature under Section 26 of the Competition Act.
Based onSection 3(1) of the Competition Act, no enterprise or person shall enter into any agreement in respect of production, supply, distribution, storage, acquisition, or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition (“AAEC”) within India. Section 3 deals with different type of agreements which includes horizontal agreements and vertical agreements.
Horizontal agreements: Any agreement between players at the same level of the production chain which directly or indirectly determines purchase or sale prices, limits or control production, supply, markets, technical development, has the effect of market sharing or bid rigging is considered to be anti-competitive underSection 3(3) of the Competition Act. Such agreements are presumed to have AAEC, and the burden of proof is upon the opposite party.
Illustration: There is a small town within which only two gas stations are located. Both these gas stations have been competitively engaged with each other by significantly decreasing the gas prices to attract more customers. However, after some time both these gas stations mutually agree to increase the gas price to earn more profits. Due to this, both gas stations’ gas price is higher and approximately the same. Thus, the consumers are now forced to buy gas at higher prices because they do not have other alternatives/options. Accordingly, such an agreement between the two gas stations in the form of a cartel is void and prohibited under Section 3(3) of the Competition Act.
Vertical agreements: Based onSection 3(4) of the Competition Act, any agreements amongst players at different stages or levels of the production chain in different markets, for instance, agreements between manufacturers and distributors or distributors and retailers. Such agreements are in respect of production, supply, distribution, storage, sale or price of, or trade in goods or provision of services, shall be an agreement in contravention ofSection 3(1) if such agreement causes or is likely to cause AAEC in market in India. Vertical agreements are considered less harmful than horizontal agreements like a cartel and may provide substantial scope for efficiencies. Section 3(4) includes tie-in arrangements, exclusive supply agreements, exclusive distribution agreements, refusal to deal, and resale price maintenance.
Illustration: There is only one gas supplier in a town. This gas supplier supplies gas to all the gas distributors, who, in turn, sells gas to consumers. Initially, the gas distributors would set the retail price of the gas (final price at which gas should be sold) based on the competition in the market. However, the gas supplier amended the gas supply agreement with distributors and stipulated the retail price to be charged by the distributors. This prevented the gas distributor from selling the gas at a discounted price. Thus, such agreement amounts to resale price maintenance between the gas supplier and the distributors in contravention of Section 3(4) of the Competition Act.
Abuse of dominant position:Section 4 of the Competition Act prohibits the abuse of dominant position in the relevant market by a dominant enterprise. For abuse of dominant position to be established, the CCI generally follows the following procedure:
a. Delineate the “relevant market” – To examine the allegations under Section 4 of the Competition Act, it is necessary first to determine the relevant market that consists of the relevant product market [Section 2(t)] and the relevant geographical market [Section 2(s)]. To delineate the market, the CCI relies uponvarious factors [Section 19(6) and 19(7)] including, but not limited to, demand side interchangeability/substitutability of the product, basic characteristics, prices, intended end-use, demand of products being distinctly homogeneous, conditions prevailing in neighboring areas, etc.
b. Establish dominance – After delineating the relevant market, the CCI proceeds to determine dominance. A dominant position means a position of strength that is enjoyed by an entity in the relevant market in India. The underlying principle in assessing the dominant position of an enterprise is linked with the concept of market strength, which allows an enterprise to operate independently of its competitive forces prevailing in the relevant market or affect its competitors/consumers/relevant market in its favor.Various factors [Section 19(4)] are taken into consideration to establish the dominance of an enterprise, such as: (i) market share of the concerned entity; (ii) concerned entity’s size and resources; (iii) competitors’ size and importance; (iv) concerned entity’s economic power; (v) concerned entity’s vertical integration; (vi) consumers’ dependence on the concerned entity; (vii) existence of entry and exit barriers and countervailing buying power; (viii) relevant market structure and size. These factors are non-exhaustive as the CCI can consider other factors it deems fit to determine the existence of a dominant position.
Once dominance is established, the question of examination of allegations relating to abuse of dominance arises. It is pertinent to note that the Competition Act prohibits the abuse of dominance and not dominance per se. Abuse is stated to occur when an enterprise or a group of enterprises uses its dominant position in the relevant market in an exclusionary (for example, denial of market access) or/ and an exploitative manner (for example, excessive or discriminatory pricing).
UnderSection 26(1) the Competition Act, if the CCI is of the opinion that there exists a prima facie case of anti-competitive agreements or abuse of dominant position, it directs the DG (i.e., the investigative arm of the CCI) to investigate into the matter and submit an investigation report. Such orders are in the nature of administrative orders. Whereas, underSection 26(2), if the CCI is of the opinion that there is no such prima facie case, it can dismiss the case without directing an investigation. Further, underSection 26(6), if the CCI agrees with the recommendation of the DG in its investigation report that there is no violation of the provisions of the Competition Act, the CCI can close the matter by passing the requisite order. Lastly, there have been cases where the DG, upon investigation, found a violation of the provisions of the Competition Act, however, the CCI disagreed with the investigation report of the DG and closed the case.
In case the CCI (after considering the investigation report, submissions of the parties and granting an opportunity of oral hearing) concludes contravention of the provisions of the Competition Act, the CCI (underSection 27) apart from directing cease and desist can:
(i) in case of vertical agreements and abuse of dominant position, impose a penalty of up to 10 % of the average turnover of the enterprise for preceding 3 years.
(ii) in case of cartels, impose a penalty up to 3 times the profits or 10 % of the turnover for each year of continuance of the cartel.
(iii) impose a penalty of up to 10 % can be imposed on individuals (such as directors, employees in-charge) on their average income for preceding 3 years.
(iv) direct modification of the anti-competitive agreement; or division of an enterprise in case of abuse of dominance.
(v) pass such other order or issue such directions as it may deem fit.
Illustration: There is only one gas distributor i.e., ABC Oil Ltd. that enjoys 100% market share in the state of Assam. ABC Oil Ltd. chooses to hike up the prices without any commercial justification. Being the sole player in the gas distribution market, ABC Oil Ltd. can: (i) operate independently without facing any competition constrains from any other competitor and (ii) affect the market in its favour, thus such conduct may amount to abuse of dominant position. Generally, a case-by-case analysis needs to be undertaken to establish abuse of dominant position.
Further, an appeal can be filed against the final orders of the CCI before the appellate tribunal within 60 days from the date of receipt of the order. A person aggrieved by the order of the appellate tribunal can file an appeal before the SC within 60 days from the date of communication of the appellate tribunal’s order. We now proceed to discuss relevant orders under the competition Act relating to the P&G sector.
4. P&G: Applicability of Competition Act
Considering the whole scheme and ambit of the Competition Act, it is manifestly clear that if any entity is found to be engaged in any anti-competitive conduct, the CCI has not only the mandate but also a duty to examine such cases to prevent distortion in the competition in the particular market. In the context above, the CCI alone has the jurisdiction to deal with issues of abuse of dominance and anti-competitive agreements under Sections 4 and 3 of the Competition Act.
4.1 Applicability of Section 4 of Competition Act
Given that under the Competition Act the CCI has the powers to inquire into unilateral conduct by dominant enterprises across all sectors, P&G sector is no exception. Since the enforcement of Section 4, the CCI, on various occasions, analyzed the allegations of abuse of dominance by the stakeholders in the P&G sector. Main allegations under Section 4 have been regarding one-sided and discriminatory conditions being imposed in the Gas Supply Agreement (GSA). For instance, inone of the cases, it was alleged that Indian Oil Corporation Limited (IOCL) imposed restrictions (by way of holiday list/ blocklist clause) on gas cylinder manufacturers from participating in the competitive bidding process, thus resulting in the imposition of unfair and discriminatory conditions in the tender document and denial of market access. While closing the case, the CCI observed that “the condition uniformly applied to all bidders. The Informant and individuals in similar situations were not barred from supply cylinders in other areas to other users. Thus, no violation of Section 4.”
Inanother case against IOCL, it was alleged that IOCL imposed unfair and discriminatory terms and conditions in a tender for procurement of transport services provided by the tank truck owners, which amounts to abuse of dominance. The CCI observed that IOCL was not dominant in the market for tank truck transportation services, and there were other oil companies procuring tank truck transportation services. In this case, IOCL, a purchaser/buyer of tank truck transportation services, had a right to prescribe terms and conditions for purchasing commodities in the market, and such conduct cannot be considered discriminatory under the Competition Act. Similarly, allegations were raised againstBharat Petroleum Corporation Limited (BPCL) for abusing its dominant position by procuring truck transportation services for the transportation of LPG Cylinders. The CCI dismissed the case as: (i) BPCL was not found to be dominant, and (ii) the introduction of a new model for delivery of LPG cylinders was not found to be inferred as anti-competitive or denial of market access.
Inanother case of unfair conditions, it was allegation that Gujarat Gas Company Limited (GGCL) imposed unfair conditions on the supply of gas and arbitrarily hiked gas prices, the CCI, while dismissing the case, observed that: (i) price of gas and other terms and conditions were uniformly applicable to all the consumers of GGCL and (ii) the operating margin charged by another company similarly placed as GGCL was on the higher side, thus strengthening the inference that there was no imposition of unfair and discriminatory prices/conditions by GGCL.
However, inone of the key cases, the CCI found various clauses of the GSA unfair and discriminatory and imposed a penalty of INR 25.67 crore on Adani Gas Limited (AGL). As a background, Faridabad Industries Association (FIA) (having about 500 members comprising of different industries such as auto components, medical devices, steel, alloys, textile, chemical, etc.) filed an information against AGL alleging unconscionable terms and conditions in GSA, which are unilateral and lopsided, besides being heavily tilted in favor of AGL in violation of Section 4 of the Competition Act. The CCI found AGL dominant in the relevant market of supply and distribution of natural gas to industrial consumers in the district Faridabad. AGL had a 100% market share in the relevant market, being the only entity authorized by the Government of Haryana to set up and operate the CGD network in Faridabad. The CCI observed the following clauses of the GSA as unfair and in violation ofSection 4(2)(a)(i) of the Competition Act:
a. Billing and payment clause – An excess payment by the buyer to the seller due to erroneous billing/invoicing on the seller’s part gives rise to no liability whatsoever on the seller’s part, including interest. In contrast, a delayed payment by the buyer renders him liable to pay interest on “such rates as may be decided by the seller in future.” Such a lopsided clause was found to be an unfair condition.
b. Expiry and termination clause (Buyer’s failure to take gas) – Based on this clause, AGL could terminate the contract on account of failure to off-take 50% or more of the cumulative DCQ by the buyer during 45 consecutive days as against the longer period available to the AGL from GAIL. Given that there was a wide disparity between the two periods, i.e., as available to the AGL from GAIL as against the AGL providing to its consumers, such stipulation was found to be an unfair condition.
c. Force majeure clause – To the extent AGL had reserved the right at its sole discretion to accept or reject customers’ request for force majeure, it amounts to imposition of unfair conditions.
d. Shutdown clause – To the extent that the buyer is obliged to meet its MGO payment obligation even in the event of an emergency shutdown calling for complete or partial off-take of gas, it amounts to imposition of unfair conditions.
AGLappealed the CCI’s order to the appellate tribunal, i.e., National Company Law Tribunal (NCLAT). NCLAT upheld the CCI’s order that AGL had abused its dominant position. However, the NCLAT lowered the quantum of penalty from 4% of the average annual turnover of relevant 3 years to 1% to make it proportionate with the level of proven abusive conduct by AGL.
4.1.1 “Take or pay liability” clause in GSA when not Anti-Competitive
In many cases (such as in thePaharpur case and theGujarat State Fertilizers case), the Informants challenged the “take or pay liability” clause imposed in the GSA as being unfair, one-sided, and discriminatory in nature. Based on the “take or pay liability” clause, the buyer is obliged to pay for the quantities of gas not taken but agreed to be taken. However, the CCI, upon inquiry, concluded that the “take or pay liability” clause is not abusive as: (i) in cases where the “take or pay liability” clause was invoked and demand was raised, it was much less than the actual liability; (ii) the Informant was reasonably able to ascertain deficiency bases consumption of gas and take or pay liability and also verify the claims raised by GAIL in that regard; (iii) in terms of the GSA, the Informant had the option to exercise the make-up gas facility for the shortfall in off-take. It may not be out of place to mention that GSAs are entered into after thorough negotiations and discussions. If the opposite party (like GAIL) invokes a contractual clause to safeguard its commercial interest, such conduct cannot be considered unfair/abusive. In fact, raising a reduced demand against the actual liability demonstrates the opposite party’s rational and not arbitrary behavior.
4.1.2 Unilateral Right of Termination mere Existence and Invocation when not Anti-Competitive
In an interesting case filed against Oil and Natural Gas Corporation Limited (ONGC), the CCI dealt with the issue of whether the unilateral right of termination, by itself, or its invocation, amounts to abuse of dominance. As a background, ONGC, to undertake oil and natural gas exploration and production activities sought support from offshore oilfield services providers, including Offshore Support Vessels (OSVs). ONGC floated tenders for charter hiring of such OSVs and entered into Charter Hire Agreement (CHA) with the successful bidder, including the unilateral right of termination for convenience clause. The termination for convenience clause entitled only ONGC to terminate the contract without assigning any reasons, while no such reciprocal right is provided to the OSV suppliers. The CCI found that ONGC possesses a very high market share for drilling rigs, which indicates its dominance in the relevant market. This was substantiated by the fact that ONGC dominated a high number of OSV employment in India, accounting for a significant part of offshore oil and gas production.
As ONGC emphasized on various risks that it is exposed to being in the exploration and production operations that include: (i) geological risk, i.e., the difficulty of extraction and the possibility that accessible reserves in any deposit will be smaller than estimated; (ii) uncertainty of the worldwide price of crude oil which continuously determines the commencement and continuity of projects; (iii) elaborate government procurement rules resulting in a long lead-time for the hiring of vessels; and (iv) termination at the behest of the OSV providers for their convenience would result in re-issue a tender and pending its completion, the project would come to a standstill resulting in huge losses. Accordingly, the CCI observed that the mere existence of a unilateral right of termination for convenience is not unfair and in violation of the provisions of the Competition Act.
On the question of invoking the unilateral right of termination for convenience clause, the CCI observed that: (i) the invocation of the clause was in response to the changing dynamics in the global oil market and consequently in the market for OSVs; (ii) the clause was invoked for the first time, only in an unprecedented and exceptional situation, though it is stated to have existed for 30 years; (iii) the termination acted as more of a renegotiation tool for bringing the pre-determined contract prices in alignment with prevailing competitive prices. Accordingly, the CCI concluded that the termination clause was not invoked in bad faith but as a response to an exceptional change of circumstances and, thus, not anti-competitive.
Given that ONGC demonstrated objective justifications and commercial reasonings associated with the unilateral right of termination for convenience clause, the CCI had rightly found that the existence and invocation of the same are not anti-competitive. The CCI might have had the occasion to approach the case differently if the clause was invoked capriciously and/or frequently to make illegitimate gains at the expense of the other contracting party. Thus, the use of such a termination clause in view of change in circumstances and/ or good faith is a valid defense under the Competition Act.
The CCI had dismissed many cases on the ground that the opposite party did not hold a dominant position. For instance,information filed by North East India Petroleum Dealers Association inter alia against oil companies, i.e., IOCL, HPCL, or BPCL, was dismissed, as oil companies were not found to be individually dominant. Similarly, inanother case filed by a dealer of retail petroleum outlet (i.e., petrol pump) against Reliance Industries Ltd. for suspension of operation of the petrol pump, the CCI dismissed the case as Reliance was not found to be dominant. Thus, for applicability of the provisions of Section 4 of the Competition Act, the dominance of the opposite party in the relevant market is a sine qua non.
Whereas in some other cases, the CCI found the opposite party in a dominant position in the relevant market, yet no case of abuse of dominance was made out. For instance, cases were filed by different enterprises (Paharpur Cooling Towers Limited andGujarat State Fertilizers and Chemicals Limited) alleging abuse of the dominant position by GAIL (India) Ltd. (GAIL) in the supply of natural gas by way of imposing unfair and discriminatory terms and conditions in GSA. The CCI found GAIL to hold a dominant position in the relevant markets for the supply and distribution of natural gas to industrial consumers. However, the CCI observed that in the absence of cogent material on record to suggest that GAIL had indulged in any conduct culpable under Section 4, mere possibilities of unfair conduct of GAIL are not sufficient. Thus, the cases were dismissed.
4.2 Applicability of Section 3 of Competition Act, 2002
As discussed in the preceding section, Section 3 of the Competition Act deals with anti-competitive agreements between horizontally placed enterprise/ person and enterprise/ person placed at different levels of the production chain in different markets. There is a laudable purpose behind it prohibiting anti-competitive agreements. It ensures healthy competition in the market that translates into various benefits for the consumers and the Indian economy. Knowing that competition has several benefits, it follows those anti-competitive agreements adversely harm consumers by: (i) fixing prices, (ii) limiting outputs, or (iii) allocating markets. The CCI has proactively inquired into such conduct and even imposed penalties where appropriate.
In the landmark case ofRajasthan Cylinders v. Union of India (Rajasthan Cylinder case), the Supreme Court set aside the order of the Competition Appellate Tribunal (COMPAT) (i.e., erstwhile appellate tribunal) and the CCI, wherein the suppliers of Liquefied Petroleum Gas (LPG) cylinders were penalized for cartelization by indulging in bid-rigging in the tenders floated by Indian Oil Corporation Limited (IOCL). The CCI found elements of bid-rigging/ collusive bidding based on the following factors: (i) market conditions; (ii) small number of suppliers; (iii) few new entrants; (iv) active trade association; (v) repetitive bidding; (vi) identical products; (vii) few or no substitutes; (viii) no significant technological changes; (ix) meeting of bidders in Mumbai and its agenda; (x) appointing common agents and (xi) identical bids despite varying cost.
The CCI exonerated two companies/suppliers and imposed a penalty on 45 companies/suppliers. Out of these 45 companies/suppliers, one did not challenge the orders before the COMPAT, and the other 44 had filed appeals that have been decided by the COMPAT. The COMPAT, while upholding the order of the CCI, reduced the amount of penalty.
Upon appeal, the SC observed that the market conditions in the LPG cylinder market suggested that: (i) there were only a few buyers (i.e., IOCL, BPCL, and HPCL) and (ii) such buyers had some influence over the price of their inputs. Thus, the LPG cylinders market was described as an oligopsony (i.e., when there are only a few buyers in the market). The SC observed that in “…a situation of oligopsony, parallel pricing simplicitor would not lead to the conclusion that there was a concerted practice.” In such a market, rivals are interdependent (i.e., they are aware of each other’s presence and are bound to match one another’s marketing strategy). Thus, price competition between them will be minimal or non-existent. Accordingly, the SC concluded that the suppliers of LPG cylinders duly rebutted inferences drawn by the CCI, and the onus shifted upon them has been discharged.
Following the binding ratio of the SC’s order in the above Rajasthan Cylinder case, the CCI dismissed 2 cases (dated20 August 2020 and26 August 2020) involving similar allegations of collusive bidding by several manufacturers of 14.2 kg LPG cylinders in tender floated by BPCL. The CCI held that while the price parallelism may have resulted from concerted action by the manufacturers, the nature and characteristics of the market of manufacturers of 14.2 Kg LPG cylinders can also be responsible for parallel behavior. The CCI had observed that for the finalization of the financial bid, BPCL negotiated with the bidders and decided the final price at which the tender was to be closed and the order to bidders was to be awarded.
Inanother case of bid-rigging, it was alleged through an anonymous letter that there was a cartel operating in tenders floated by Hindustan Petroleum Corporation Ltd. (HPCL) in 2011 (Tender 1) and 2013 (Tender 2). For Tender 1, the CCI noted that: (i) parallel pricing by bidders can only lead to a strong suspicion of cartel and cannot lead to a positive conclusion regarding bid-rigging; (ii) the investigation did not bring out any evidence of exchange of any strategic information in relation of discussion of quotation bids in Tender 1; (iii) HPCL’s submission clarified that the rate quoted by the bidders is only one of the factor that is taken into consideration in addition to existing procurement cost and industry rates and HPCL is neither constrained nor dependent on the rates quoted by the bidders. Accordingly, following the binding ratio of the SC’s judgment in the Rajasthan Cylinders Case and submissions of HPCL, the CCI decided not to examine the conduct of bidders in Tender 1.
Regarding Tender 2, there was a collective withdrawal by the bidders. The CCI observed that: (i) 51 bidders simultaneously withdrew their bids, out of which 46 withdrew their bids on the same date; (ii) the reasons furnished by many bidders were identical or many a time common, even though such bidders were located in different areas of the country and had bid for different States; (iii) many bidders exchanged withdrawal letter through email, and there was a common format of withdrawal letter; (iv) IP addresses of many bidders who submitted bids for Tender 2 were identical; (v) six common agents were working for all the cylinder manufacturers; (vi) regular exchange of information and communication between the bidders including strategic information pertaining to bids and negotiations; and (vii) association acted as a platform for the exchange of information between the bidders.
Accordingly, the CCI imposed a penalty of INR 39.74 crore at the rate of 1% of the average relevant turnover for the financial years 2013-14, 2014-15, and 2015-16 on the 51 LPG manufacturers who withdrew their bids. Also, a penalty of INR 0.45 crore at the rate of 1% of the average income of the financial years 2013-14, 2014-15, and 2015-16 was imposed on 43 office-bearers.
In view of the above cases, not only in the P&G sector but also while dealing with other sectors, the CCI relies upon circumstantial evidence for deducing bid rigging, as an absolute proof cannot be expected in such cases. Such agreements are made in a clandestine manner, meetings are held in secret and documentations are reduced to a minimum. Few examples of circumstantial evidence that the CCI had relied upon in earlier orders relating to bid-rigging include: (i) quoting of unusually higher rates than previous tenders; (ii) consecutive serial numbers for demand drafts; (iii) common typographical errors in the tender document; (iv) WhatsApp messages for exchange of price sensitive information prior to the bid; (v) call detail records, etc.
In view of the above, this blog post is an attempt to provide an update on the recent developments under the competition law regime vis-à-vis P&G sector. Based on the annual reports, tillMarch 2021, the CCI had proactively dealt withabout 44 cases arising from the P&G sector. Accordingly, most of the cases were either dismissed under Section 26(2) or closed by the CCI post investigation by the DG. In a few cases, penalty was imposed on enterprises operating in the P&G sector for anti-competitive agreements and abuse of dominance. Even though the P&G sector is regulated by the PNGRB, i.e., a sectoral regulator, competition enforcement is a mandate of the CCI. This results in a scenario of overlapping jurisdictions. It is undisputed that both sectoral regulators like the PNGRB and the CCI have objectives that converge (i.e., to improve economic performance), yet both regulators have different legislative mandates. As discussed in the preceding paragraphs, the SC’s ruling in the Bharti Airtel Case settled the jurisdictional issue, promoting cooperation among sectoral regulators and the CCI.
Based on the CCI’s decisional practice, the following points can be considered by the stakeholders in the P&G sector to ensure compliance with competition law:
a. In GSAs, clauses such as termination, force majeure, take or pay liability should be: (i) balanced and not tilted in the seller’s favor; and (ii) supported by a commercial justification.
b. The mere existence of exploitative conduct (such as excessive pricing and unfair terms of the contract) inflicted upon a consumer may amount to an abuse of a dominant position.
c. An unfair condition imposed by a dominant enterprise in a B2B transaction would require a fairness or reasonability test (i.e., examining both: (i) how the condition affects the trading partners of the dominant enterprise and (ii) whether there is any legitimate and objective necessity for the enterprise to impose such condition).
d. Mere possibilities of unfair conduct by a dominant enterprise may not be sufficient to find a violation under Section 4 of the Competition Act.
e. While participating in a tender, take independent decisions related to bidding, pricing, strategy, and other related decisions.
f. Parallel pricing by bidders can only lead to a strong suspicion of cartel and cannot lead to a positive conclusion regarding bid rigging in violation of the Competition Act.
g. Take an independent decision on whether to participate or not to participate in a tender, and the same should be supported by commercial reasoning.
h. Commercially sensitive information should be treated as confidential and not shared with competitors.
i. Do not use the platform provided by a trade association to exchange commercially sensitive information and maintain clear records of every discussion that takes place during the meeting.
j. In case of any doubts, please reach out to your in-house counsel or a competition law expert.
The views and opinions expressed by the authors are personal.
About the Authors
Mr. Ankush Walia is a Competition/Antitrust Lawyer based in Delhi.
Pushpit Singh is a 3rd-year student at Symbiosis Law School, Hyderabad, and is an Associate Editor at IJPIEL. Pushpit assisted in research and worked under the guidance of Mr. Walia.
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastav and Akanksha Goel
Senior Editor: Muskaan Singh
Associate Editor: Pushpit Singh
Junior Editor: Manav Ganapathy
Preferred Method of Citation
Ankush Walia and Pushpit Singh, “Inquiry by the Competition Commission of India in the Petroleum and Gas Sector under the Competition Act, 2002” (IJPIEL, 25 April 2022)