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NCLAT upholds CCI's verdict on cement cartelisation
Publish Date: 27th July, 2018
The National Company Law Appellate Tribunal (NCLAT) recently dismissed cement manufacturers’ plea challenging the penalty imposed by the Competition Commission of India (CCI) for alleged cartelization.
Background
- When: In June 2012, the Builders' Association of India petitioned the fair trade regulator CCI. The latter slapped a penalty on the 11 accused cement manufacturers. They were to pay 50% of the profits earned in FY2010-11 and FY 2011-12. The judgement was challenged at the then appellate body Competition Appellate Tribunal (COMPAT). It was subsequently remanded to CCI for fresh adjudication.
- What: In a judgment in August 2016, the fair trade regulator CCI slapped a penalty of Rs 6,700 crore on 11 cement companies.
- Why: The companies were allegedly indulging in cartelization.
- Who: Among these companies were UltraTech Cement Ltd, ACC Ltd, Ambuja Cement Ltd, Ramco Cements Ltd, JK Cement Ltd, and industry body Cement Manufacturers’ Association (CMA).
CCI alleged that these institutions violated the Competition Act of 2002. In India, distorting a competitive market through cartelization is illegal.
What is cartelisation?
It is an unethical trade practice in which a handful of companies come together to distort a competitive market. They often agree to produce less than their existing capacity could produce. The aim is to create an artificial scarcity in the market. That in turn increases the price.
Cartelization among a few companies is harmful to other companies as well as the consumers. The latter are often made to pay a higher price in a cartelized market.
What went wrong?
CCI stated that the cement manufacturers used the CMA platform to share information about prices, capacity utilisation, production, and dispatch. Thereby, they restricted production and supply in the market. They also acted in concert to fix prices.
These companies held more than 57% share in the market for cements and the commission held that their cartelisation affected the market significantly. They were fined 50% of their profit for FY 2010-11 and FY 2011-12.
Cement companies and the association appealed to NCLAT against the CCI verdict. A two-member NCLAT bench dismissed the petitions of the cement makers.
Impact on industry
The companies are likely to challenge the ruling of the NCLAT in the Supreme Court. However, the situation remains rather fluid.
They may be required to deposit either the full amount or some amount of the penalty imposed until the proceedings run in the apex court. So far, they have deposited only 10% of the penalty amount.
This will certainly lead to higher provisioning and strain their books. There is a general assumption that their pricing power would be impacted, too.
The share market reacted sharply to the decision of the appellate court. The stock prices of all concerned companies plummeted.
- India Cements took the hardest blow with its share price going down by almost 4%.
- Other companies saw declines in share prices by 1–3%.
- Market analysts expect some more movements as the uncertainty regarding the provisioning remains.
Analysis by Kotak Securities suggests that the current valuations may get impacted as higher provisioning may be required by the companies and it may result in some de-rating of the sector.
However, the research suggests that the pricing power would not be impacted fully. There is reason to remain positive on companies where growth is likely to be led by volume upticks, such as Ultratech Cements and Shree Cements.
Get details on the state of the cement industry here
The bigger picture
If one looks beyond the particulars of the case, the CCI verdict and the NCLAT's upholding it have larger significance, too.
Cement is an essential commodity in all infrastructure projects, both public and private. Skyrocketing cement price impacts those projects adversely. Moreover, the real estate sector is affected, especially during slumps in the market. By upholding the CCI's decision to impose penalties, the appellate court sent a strong message that no tampering with the country's interest will be tolerated.
Union Roads and Highways Minister Nitin Gadkari informed the parliament recently that if cement industry does not abandon the practice of cartel pricing for road projects across the country, the government may bring cement under the Essential Commodities Act and slap price control on it. The stern warning should be read along with the NCLAT's judgment. That the practice of cartel pricing is not going down well with the government is evident. One may infer some downward adjustment in cement pricing shortly.
This may not be good news for the cement industry or investors linked to it. However, the real estate and infrastructure sectors could benefit. Cement price is a significant part of the cost these sectors incur. So, the bottom lines in the infrastructure and real estate sectors may be affected positively.
Get details on the state of the cement industry here
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