Since the inception of the Competition Act, 2002 and the coming into force of key provisions such as § 3 and § 4 in 2007, the Competition Commission of India (CCI) has actively tried to penalizes instances of abuse of dominant position in all markets. However, the trend has generally been to sanction private players who either unfairly gain a dominant market share or having naturally gained a dominant status, misuse their position to reap profits. However, the recent fine against Coal India Ltd., a state run enterprise and three of its subsidiaries has shown that not even government owned and managed Public Sector Undertakings are safe from scrutiny.
Reasons for Investigation
The investigation into the activities of Coal India began after complaints were filed by Maharashtra State Power Generation Company and Gujarat State Electricity Corp against Coal India and three subsidiaries- Western Coalfields, Mahanadi Coalfields and South Eastern Coalfields under § 19(1) of the Competition Act, 2002. The CCI ordered an investigation by the Director General into the allegations of use of unfair business practices by these subsidiaries. Based on the evidence collected and submitted to the CCI in the form of the DG report, the CCI decided to take cognizance of the matter.
Establishing Coal India’s Dominant Position in the Market
The norm in any matter concerning abuse of dominance in India is that the CCI must first determine whether the commercial entity holds a dominant position in the relevant market. The DG makes a recommendation as to what this ‘relevant market’ should be and the CCI is free to adopt, amend or reject it as it sees fit. The factors that the CCI may look at in this regard are present in § 19(4).
The DG had recommended that since the conditions for the production and supply of coal in India vary from those in other nations, the ‘relevant market’ should be the market for production and supply of coal in India. The CCI accepted this conceptualization of relevant market without question in this case.
Usually the CCI has to analyze a wealth of statistical data before coming to the conclusion (based on any of the factors mentioned in § 19(4)) that an entity occupies a dominant position in the relevant market. However, so far as Coal India was concerned, the task of the CCI was simplified to a large extent since Coal India effectively held a monopoly in the coal market due to the nationalization of all coal mines and of the coal industry in general, by way of the Coal Mines (Nationalization) Act, 1973 and the Coal Mines (Taking Over of Management) Act, 1973. According to the CCI, Coal India had a dominant position as it accounted for the supply of 69% of the market in (2010-2011) and 63% in (2011-2012).
The counsels for Coal India made several arguments stating that being a PSU, Coal India did not have the same amount of commercial freedom in decision making and fixing of prices as one would normally associate with a privately owned company. However, the CCI opined that notwithstanding the overarching control of the state and the regulatory framework in which prices of coal are decided, Coal India as a company has sufficient independent control over commercial and contractual affairs. Government control and regulation do not detract from the fact that Coal India and its subsidiaries operate independent of market forces and enjoy an undisputed dominance in the relevant market.
Analysis of the CCI Order
The power corporations had alleged that Coal India, taking advantage of its dominant market position was not adhering to the terms stated in the Fuel Supply Agreements (FSAs) signed between the two parties. This was adversely affecting the commercial interests of the power corporations. In its order, the CCI noted that first of all, the terms and conditions specified in the FSA were “heavily loaded in favour of opposite parties” and such terms had been allowed to persist simply because the buyers of coal had no alternative source of fuel supply. Since Coal India had a market monopoly, buyers were forced to agree to the terms of the FSA no matter how commercially obtuse they were.
The CCI specifically charged Coal India with supplying low-quality coal at artificially increased prices, imposing unfair contractual terms in opposite parties such as a condition allowing them to retain the right to unilaterally terminate contracts with buyers, providing a fair dispute redressal mechanism and disrupting the natural market forces of demand and supply by favouring state-owned companies as buyers over private buyers of coal.
The CCI ordered Coal India to stop such practices in the future and also to modify the terms of their FSAs relating to sampling and testing procedure and charging buyers transportation and other expenses for supply of ungraded coal, among others. Coal India was also instructed to “ensure parity between old and new power producers as well as between private and PSU (public sector unit) power producers, as far as practicable.” The CCI also fined Coal India and the concerned subsidiaries a combined total of Rs.1,773 crore for the abuse of its dominant position in the coal market. The penalty has been calculated at 3% of Coal India’s average revenue in the past three financial years.
Importance of the CCI Order
The order of the CCI marked the first time in the history of the Indian competition law regime that a public sector company was penalized for anti-competitive practices in any manner. The order underlines that fact that despite that fact that even if a company is a government entity, it still has very real commercial interests and if it seeks to use anti-competitive practices to achieve these interests, the CCI will step in and take the required action. It shows that the CCI is firmly focused on the object for which it was constituted, competitive neutrality.
This article has been written by Pratik R Das, third year student at the West Bengal National University of Juridical Sciences.
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