The Competition Commission of India (CCI) order on Coal India Ltd imposing a penalty of Rs 1,773 crore, has been a double whammy for the government-owned company that was forced to supply coal to power companies despite production constraints. The power generating companies, as consumers, alleged abuse of dominant position by the monopoly coal producer.
The signing of fuel supply agreements (FSAs) and memoranda of understanding (MoUs) was something that the company had been resisting. Being a listed entity, independent directors within the company and The Children Investment Fund, a UK-based institutional investor, had opposed the Prime Minister Office dictated presidential directives.
Larger debate
The larger debate, however, is whether the government could protect its companies. It can provide relief to its companies by taking them out of the purview of Competition Act.
In its submission before CCI, CIL said given the totality of circumstances, including the fact that it was faced with significant shortages in production, but still being forced to supply coal, the clauses in the FSAs as well as the process followed by CIL, when viewed in totality, are "fair, proportionate and balanced".
Most decisions of public sector undertakings, especially those relating to pricing, have an unofficial government endorsement, so it can be argued that the Centre should bail them out too.
In the last one year, the government has used section 54 of the Act twice to grant exemption to banks and shipping arrangements though they are not limited by ownership.
Exemption exception
The provision allows the Centre to issue notification exempting any class of enterprise from the application of the Act or any of its provision for a specified period if it is in the interest of security of the state or public interest, obligated under any treaty or convention, or for performance of a sovereign function.
"It has happened in the case of banks where in consultation with CCI, it was decided that those falling under section 45 of Banking Regulation Act, which essentially means failing banks, be exempt from provisions relating to merger and acquisitions provided in the Competition Act.
If a bank has failed, RBI has to be very quick and cannot wait for CCI to apply principles of M&A," says Ashok Chawla, chairman, CCI.
In the case of the shipping industry, the exemption was granted for pooling cargo between two ports of call and not for fixing freight since efficiency reasons require vessels do not carry cargo with less load.
The section makes no distinction between a government and a private company.
Loaded against companies
According to Suhail Nathani, partner, Economic Laws Practice, "Where the government dictates the action of a company, the statutory exemption could be granted but the government typically does not mandate actions that are against public interest."
Chawla said CCI investigations revealed the agreements were loaded against power companies and Coal India needed to change some of these.
Coal India monopoly has arisen out of a historical economic decision when the government took over mining in India through the Coal Mines (Nationalisation) Act.
Even the CCI order recognises this. Nathani, however, points out that even if it is a statutory enabled dominance where the government tells CIL who they should sell to, it does not tell the company on what terms to sell.
"Coal was being supplied in wrong sizes and of low quality for which there was inadequate protection for the buyers."
The regulatory action to a large extent would be determined by a thin line drawn beyond which the commercial entity implements a government decision even if it is government controlled.
Besides Coal India, oil marketing companies (OMCs) too have seen cases being filed against them in CCI. The charge against Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum is that they work as a cartel when it comes to supply of jet fuel or even in the case of pricing of petrol.
When CCI started investigating the matter relating to OMCs, there was a writ filed in the Gujarat High Court. OMCs have also gone to court challenging its jurisdiction since the downstream sector in petroleum is regulated by the Petroleum and Natural Gas Regulatory Board.
"The matters got clubbed and our hands are tied but in matters relating to competition it is clear the jurisdiction of CCI should not get comprised," says Chawla.
The Coal India order asks the government to repeal the Coal Mining Nationalisation Act.
"Once there is a competitive pressure in coal producing space, it is very likely that the issues will be resolved because there will be pressure on CIL from other producers to behave in a more market friendly way," says Chawla.
OMCs not making profit
Unlike Coal India, however, OMCs are not making profit and their pricing decisions have only insulated consumers from high global prices.
Nathani says, through the Coal India decision, PSUs have been initiated lightly into the competition law. "This is the first case in which a PSU has attracted penalty. In other cases, involving abuse of dominance, penalty has been higher."
CIL has to pay only three per cent though section 27(b) allows CCI to impose penalty up 10 per cent of the average turnover of previous three years.
It is not just PSUs but other entities like the Railways that have worked as monopolies or near monopolies till the private sector came in with investment after the opening up of the economy in the 1990s.
Still, the government interference in these companies continues, often at the cost of their commercial viability.
But in a marketplace, the sovereign cannot be expected to take sides especially if a case relates to consumer redressal.
| WHAT BROUGHT PENALTY ON COAL INDIA |
CCI order of December 9 came on three petitions filed by Maharashtra State Power Generation Company Ltd (Mahagenco):
Under section 27(b) of the Act, CCI imposed penalty for abuse of dominant position as defined in section 4(2)(a). |
HOW THE PENALTY WAS ARRIVED UPON?
CCI decided to impose penalty amounting to 3 per cent of the average turnover of the last three years totalling to Rs 1,773 crore. The Act provides for a penalty not more than 10 per cent.
| TAKING OUT FROM COMPETITION LAW |
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Section 54 of the Competition Act empowers the Centre to issue notification exempting any class of enterprises from the application of the Act or any of its provisions for a specified period if it is in the interest of security of the state or public interest, obligated under any treaty or convention, or for performance of a sovereign function. |
CASES WHERE EXEMPTION WAS GRANTED
Vessel sharing agreements of liner ships from the provision relating to anti-competitive agreements under section 3 of the Competition Act. Exemption applicable from December 11 will be available to carriers of all nationalities operating ships of any flag from any Indian port for one year
Bank mergers and amalgamation under section 45 of Banking Regulation Act were exempted on January 8, 2013, from Competition Commission's oversight of India the power to regulate acquisition, amalgamation and mergers.
