Market malpractices go well beyond cement

Should there be an international dispensation akin to Competition Commission of India (CCI), it would have been at OPEC’s — the world’s most durable and admittedly incorrigible cartel — throat many times.

In its absence, the oil cartel has routinely held the oil importing nations, big and small as well as the high and mighty, to ransom. Producers can band themselves together into a cartel if what they produce has no substitute, with an inelastic demand.

The Cement Manufacturers’ Association (CMA) in India must be ruing the day when it brought the oligopolistic cement industry in India — save the formidable Swiss cement major Holcim which, chastened by its experience with the European Competition Commission, had the uncanny foresight to steer clear of it — together.

Going purely by the numerous and mounting circumstantial evidence, the CCI has slapped a hefty Rs 6,307 crore penalty on ten Indian cement companies and the CMA for benefiting unconscionably from cartelisation. The CMA has been collecting elaborate statistics relating to production and dispatch from its members, ostensibly for statistical purposes catering to the government, but in reality to manipulate production and fix prices. What cooked the companies’ goose were the numerous instances of cement prices being raised hot on the heels of members meeting informally over a glass of beer at swanky hotels.

The CCI came to the conclusion that creating artificial scarcity by producing less than the installed capacity was the key stratagem. As an aside, what escaped attention in the hullabaloo over the verdict was the fact that the investigation by the Director General attached to the CCI was at the behest of Builders’ Association of India — an act which many would regard as kettle calling the pot black. Not long ago, one of their brethren, the formidable DLF, was at the receiving end of the CCI’s ire on charges of short-changing its customers.

Skating on thin ice

Collusive price fixing in an oligopolistic situation is old hat, but the charge does not stick easily, because it could well be argued that what appears to be manipulation by the cartel is actually a natural market reaction in a competitive situation.

In fact, this was the line taken by almost all the cement companies in the dock and the CMA — the parallelism in pricing was neither orchestrated nor a coincidence, but purely a market reaction in a perfectly competitive market.

This however did not cut much ice with the CCI, which set store largely by the price parallelism ushered in by the cartel and correlated it to the meetings held by the tight clique. In the wake of the CCI order, the CMA might be disbanded, or its activities conducted sub rosa without fanfare.

Since telephonic conversations lend themselves to interception, production manipulation and price parallelism can be maintained through coded messages sent across the net, with anonymity a la the international terror organisations.

Whatever the reaction of the cement manufacturers, the CCI must be commended for taking on the high and mighty. It comes out as a knight in the shining armour in a country where other authorities and regulators have been lax in nailing white collar crime. Its activism would act as a check on other incipient cartels.

There are thousands of Rajat Guptas strutting the Indian bourses, but we do not have anything to report by way of nailing of insider trading. Mr Rajat Gupta was nailed by the American system based purely on telephone transcripts of the conversations he had with the wily Mr Raj Rajaratnam, the promoter of Galleon Hedge Fund cooling his heels in prison.

One hopes our market regulator, SEBI, bestirs and cracks down on insider trading.

Taming cartels

The lasting solution to taming incorrigible cartels is to allow free imports. Both, natural monopolies and contrived ones like cartels should be tamed through competition, more specifically by making available greater quantity of goods whose short supply is responsible for the relentless rise in its price.

For instance, the first-ever compulsory licensing in India of the kidney cancer drug manufactured by Bayer to an Indian company, Natco, is bound to have a salutary effect on the price front, as the latter has undertaken to make available the same critical drug at tenth of the price charged by the German company, Bayer.

Meanwhile, the CCI would have a tough job defending the penalty it has slapped on the cement companies — 50 per cent of reported profits earned during the years 2009-10 and 2010-11 — given the fact that no two companies earn similar margins and have similar expenditure patterns.

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