Rs 6 K cr penalty on Cement Cos: Competition Commission on slippery ground

The Competition Commission of India (CCI) has imposed a fine of more than Rs 6,000 crore on 11 cement makers alleging cartelisation and price fixing from May 2009 to March 2011.

It is a record penalty and is seen as an attempt by the ant-trust regulator to assert itself. But the last word has not been said on the issue, yet. The cement makers can go on appeal to the Competition Appellate Tribunal (COMPAT), and even to the Supreme Court.

Legal experts think the CCI is on slippery ground here. Cement companies say the CCI rules require the commission to establish the existence of a cartel only if there is a written agreement among the parties involved. That is not the case here and the commission has based its findings on circumstantial evidence. There are around 47 cement players and any sort of agreement or understanding is next to impossible. That too, when the industry has added around 100 million tons capacity in the last three years.

Fact is, despite all the arguments about lower capacity utilization at cement plants and higher prices that informants in the case -- the Builders Association of India -- has brought against the cement companies, it would be tough to prove that cement prices rose because of cartelisation. As the Cement Manufacturers Association (CMA) submitted before the commission, that the capacity utilization is bound to be lower on account of higher capacity growth rate as compared to cement demand growth rate and that the report is based on surmises and conjecture.

The CCI ruling said its director general has submitted that the cement companies have enough scope to reduce the price of cement but have tried to earn better margins on sales instead of utilizing more capacity. The argument flies in the face of the very system of free market economics where the price of cement is determined by demand and supply in the market. Interestingly CCI has totally ignored the submission of the cement industry that cement manufacturers cost is more than the increase in the Wholesale Price Index as well as the cement price increase in the market.

 The shareholders of cement companies want the managements to bring them the best possible returns. But in fact, it is the government which wants to earn more from the cement sector, as government levies have gone up from Rs 49 per bag in FY07 to Rs 72 per bag in FY 12.  This adds to the cement price increase. The result is that despite increase in cement prices, costs, and government levies, PAT margins of companies have come down in FY 11.