Crackdown on a Cement Cartel

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It comes as a relief that India’s mechanisms of business supervision are not as weak as feared

Can stiff penalties deter the formation of business cartels? The Competition Commission of India (CCI), empowered by the Centre to crack down on business collusion that goes against consumer interests, would hope so. In its first ever big move, it has slapped 10 cement companies in India with fines—calculated as a percentage of their past profits—that add up to more than Rs 6,000 crore. After an investigation, it has found them guilty of earning huge profits ‘by acting together on prices, production and supplies’. The size of the penalty has taken breaths away across India Inc.

“Obviously, the intent is to put in place good practices,” says Nirupama Soundararajan, a corporate governance expert at Ficci. However, she adds, “The correct way would have been to set some guidelines [for the industry] before passing an order of this nature.” Several of these firms, accused of using the Cement Manufacturers Association as a platform for their sneaky efforts to curtail production and raise prices, have decided to contest the CCI’s ruling.

In its order, the CCI took note of a sustained increase in cement prices since 2004-05 and failure of manufacturers to churn out the grey powder in sufficient quantities to satisfy demand, despite having ramped up their production capacities over the years. The CCI also claims to have found evidence of actual measures adopted to control the market in a way that would boost their profits beyond normal limits. The actual money made by these companies has also been taken as a sign of collusion. Not just this, the order mentions a general tendency among cement companies worldwide to operate as cartels; the EU has in the past penalised the Switzerland-based Holcim, which has controlling stakes in ACC and Ambuja Cements Ltd in India.

The appeals will be closely watched. Charges of cartelisation typically make use of circumstantial evidence to ascertain guilt, and hard documents are always hard to come by. Yet, even if doubts persist over the validity of the CCI’s order and fairness of the fines, the regulator’s action has been widely welcomed for its boldness. For many observers, it comes as a relief that India’s mechanisms of business supervision are not as weak as feared, that regulators have markets under watch, and that they can act when required to harmonise the divergent interests of economic agents. The truth is, far too many rules have been flouted in India for far too long.