What is Cartelisation of Cement Industry?
As you may have noticed, major cement stocks saw a fall on Thursday (10 December 2020). The shares of major players such as ACC, Ambuja Cement, UltraTech Cement, and JK Cements declined by over 2-3%. The reason behind such a fall can be attributed to an investigation that was initiated by the Competition Commission of India on each of these companies. In fact, this is not the first time that such an investigation was conducted on cement manufacturers. Let us have a deeper understanding as to why these companies are in trouble.
What is Happening Now?
Over the last decade, major cement companies in India have been frequently accused of cartelisation. A cartel is an organisation created through a formal agreement between a group of manufacturers. They work collectively to manipulate the prices of their product by regulating its supply. Thus, all the companies involved in a cartel will be able to increase their profits and dominate the market. Unfortunately, cartelisation is a common practice conducted by cement companies all over the world.
Many associations in the Indian construction sector have constantly warned government officials and regulatory bodies against unfair practices being conducted by major cement companies. They have stated that such companies are making huge amounts of profit by entering into agreements with each other and controlling the prices.
The CCI Investigation in 2012
Way back in 2012, the Builders Association of India (BAI) accused cement manufacturers of fixing prices. After receiving BAI’s complaint, the Competition Commission of India (CCI) conducted a thorough investigation into the operations of cement companies. This was one of the first signs that Indian authorities were taking a proactive role in eliminating cartelisation.
As per their investigation, the CCI found 10 cement manufacturers guilty of cartelisation. They booked the companies under Section 3 of the Competition Act that prohibits anti-competitive agreements. The CCI found that the Cement Manufacturers Association (CMA) was the main platform for cartelisation. After CMA meetings were held in January 2011, the companies suddenly increased cement prices. These cement manufacturers also posted super normal profits during FY12. With all this proof, the CCI ordered 11 companies to pay a fine of Rs 6,300 crore. The penalty amount to be paid by the cement companies was 50% of their profits of 2009-10 and 2010-11.
Given below is a graphic showing the fine imposed by CCI on the major cement companies:
What Happened Next?
The Competition Appellate Tribunal (COMPAT), in 2015, set aside CCI’s orders as there were irregularities with respect to certain procedures. The tribunal asked CCI to take up the case once again. After a few months, the CCI re-examined the matter and stuck to its original conclusion that the companies were guilty of cartelisation.
In 2018, the National Company Law Appellate Tribunal (NCLAT) heard the matter again and agreed with the points made by the CCI. (By then, the Competition Appellate Tribunal had merged with NCLAT). It upheld the Rs 6,300 crore fine imposed by CCI on the group of cement companies. The tribunal stated that it found no merit in the plea filed by the cement companies. Even then, the companies kept challenging the judgment made by NCLAT and moved the Supreme Court. In October 2018, the apex court stayed the penalties imposed by CCI and asked them to deposit only 10% of the total amount. Thus, even after the CCI provided evidence of cartelisation, the cement manufacturers were able to get away with it.
The Latest Probe by CCI
On December 9, the CCI initiated a fresh investigation against cement companies in India, regarding alleged anti-competitive behaviour. This comes after Nitin Gadkari, the Roads and Highways Minister hinted at possible cartelisation and “black marketing techniques” in the cement industry in September. Also, the Builders Association of India (BAI) wrote a letter to PM Modi to constitute a cement regulatory authority to put an end to ‘undue profiteering’ by manufacturers. Due to all these accusations, the CCI has agreed to conduct an in-depth investigation into the matter.
Reports have stated that the CCI conducted searches on the premises of leading cement producers. The offices of UltraTech Cement Ltd, ACC Ltd, Ambuja Cements Ltd, Dalmia Cement (Bharat) Ltd, Shree Cement Ltd and of Cement Manufacturers Association (CMA) to find evidence of price collusion. The raids signify how serious the allegations of anti-competitive behaviour in the cement industry are.
We also saw that major listed cement companies came out with their disclosures to the stock exchanges on Thursday. ACC, Ambuja Cement, and Shree Cement have stated that “they have acted and will continue to act in compliance with competition laws and are fully cooperating with investigations”. The probe is still underway and the CCI is collecting data for its report.
What Will Happen Now?
Cement is one of the most vital substances required in the construction sector. The builders are facing problems due to the huge increase in cement prices over the past few years. The construction sector has seen a major revival after the lockdown restrictions were removed. Thus, the demand for cement has increased, and cement companies have used this opportunity to collectively increase their prices. This is a prime example of why the Government needs to take a more proactive role in ensuring that such anti-competitive practices are stopped at all costs.
We have now seen that cement companies have faced multiple accusations of cartelisation or anti-competitive behaviour over the last 10 years. The stocks of these companies had shown a decline when CCI had imposed the Rs 6,300 crore fine. However, we saw that they only had to pay 10% of the total amount. And now, with the new investigation underway, we can see that the stock prices have fallen again.
Let us look forward to seeing what the CCI reveals through its latest investigation. Will the cement companies be in big trouble? Or, will they be able to get away from all allegations and keep accumulating more profits? Do keep a close watch on the stock prices of the companies that have been mentioned above.