This article is written by Advait Ghosh.
This article discusses the concept of bid-rigging, which happens to be one of the anti-competitive practices prohibited under the Competition Act, 2002. This article will help to elucidate the concept of bid-rigging through various case laws and will try to explain the various practices which constitute bid-rigging and will also try to explain what actions do not constitute bid-rigging.
As per Investopedia, Bid rigging is an illegal practice in which competing parties collude to determine the winner of a bidding process. Bid rigging is a form of anticompetitive collusion and is an act of market manipulation; when bidders coordinate, it undermines the bidding process and can result in a rigged price that is higher than what might have resulted from a free market, competitive bidding process. Bid rigging can be harmful to consumers and taxpayers who may be forced to bear the cost of higher prices and procurement costs. Bid rigging practices can be present in an industry where business contracts are awarded through the process of soliciting competitive bids.
As such, bid-rigging can occur in auctions for cars and homes, construction projects, and government procurement contracts. Although bid-rigging can take many different forms, one of the most common practices of bid-rigging occurs when companies decide in advance who will win a bidding process. In order to execute this, companies may take turns submitting the lowest bid, a company may decide to abstain from bidding altogether, or companies may intentionally submit uncompetitive bids as a way of manipulating the outcome and making sure the predetermined bidder wins.
Another practice of bid-rigging involves hiring a competing company as a subcontractor in order to subvert the bidding process. A company may also decide to form a joint venture with a competing company, but do this with the sole purpose of submitting a single bid, and without any intention of working together with the other company to achieve savings by combining resources or expertise.
Under the Indian Competition Law regime, the concept of bid-rigging finds indirect recognition. Section 3 of The Competition Act of 2002 which deals with the concept of anti-competitive agreements which empowers the Competition Commission of India to prohibit any agreement between enterprises or persons engaged in identical or similar trade of goods or services, directly or indirectly resulting in bid-rigging or collusive bidding. These agreements effect the competition prevailing in the market; hence they are prohibited by Law. In determining whether the agreement has an appreciable adverse effect on competition, we have to analyse various factors like creation of barriers to new entrants in the market and foreclosure of market etc.
The following case laws will illustrate the various scenarios of bid-rigging/collusive bidding.
An inquiry was initiated by the CCI on the basis of letter/complaint written by FCI Chairman to CCI. It was alleged that the 4 manufacturers of APT by entering into an anti-competitive agreement amongst themselves. It was submitted that for the last 8 years they had been quoting identical rates. Commission found a prima-facie case and ordered investigation by the DG, who opined that there was an evidence of monopolistic behaviour. The CCI and COMPAT held them to be guilty of anti-competitive behaviour. Appeal was made to the Supreme Court.
Whether the actions of the Appellant’s in quoting identical prices for the same tender despite varying cost factors amounted to bid-rigging under Section 3 of the Competition Act?
The Supreme Court held that the argument of the Appellants that parallel pricing in an Oligopoly market by itself did not amount to a breach of the Competition Act does not hold much water, as there are multiple incidents of same priced bids being submitted, despite the varying cost of production of each of the bidders. Supreme Court also drew attention to the fact of concerted withdrawal of bidding in 2011 by all the Opposite Parties.
The Supreme Court referred to the case of CCI VS Coordination Committee of West Bengal Cine Artists to hold that no written proof of anti-competitive agreement needs to be there before action can be taken against the defaulting party. Reference was also made to the observations of Lord Denning in Registrar of Restrictive Trade Agreements vs WH Smith & Sons – “People who form a Cartel, do not shout from the rooftops. They make their own arrangements in a cellar, and go about their business quietly. Even a nod or a wink will do”.
Informant is one of the subsidiary companies of Coal India. It is a major supplier of coal to Industries all over the country. A large number of power stations are its customers. OP’S who are a group of coal transporters were quoting identical bids in the transportation bids. The DG found evidence of cartelization in their conduct.
Whether the quoting of identical bids by the transporters amounted to acting in concert, and was a contravention of the Competition Act, 2002?
The Commission held that repeated quoting of identical prices for different bids, even at different costs of production is highly suspect. The Op’s claimed that the prices quoted by them were benchmarked against earlier prices, however, no evidence was lead in support of this. There were also business dealings with each other, regular social meetings. They were held to be guilty of collusive-bidding as per Section 3 of the Competition Act, 2002.
It was alleged by the Informant that the Opposite Parties were in contravention of Section 3 of The Competition Act, 2002. It was alleged that the Opposite Parties were functioning as a cartel and were indulging in bid-rigging/collusive bidding. The modus operandi of the Opposite Parties was to quote identical rates for the tenders offered to them by the railways. The rates were identical despite geographical differences. After forming a prima-facie opinion, the Commission ordered an investigation by the DG.
–Whether the act of quoting identical prices by the bidders was an act of bid-rigging, and in contravention of Section 3 of the Competition Act 2002?
The investigation by the DG showed that officials of the OP’S were co-ordinating with each other to manipulate the bids. They would decide prior hand the quantities to be supplied, in case a bidder was allotted less than the pre-decided amount, in that case they would be allocated a greater share in the next round of bidding. The OP’S cited the case of Rajasthan Cylinders to argue that they had successfully rebutted the presumption of Adverse effect of Competition automatically inferred under Section 3 of the Act, however Commission opined that no material has been put forth to show the rebuttal. The OP’S were held guilty of contravention of Section 3 of the Act.
The above-discussed judgements discuss the various modes in which bids are rigged. It can be seen that parties quoting identical prices for the same set of tasks even while the cost required to perform these jobs may be different for the Opposite Parties due to their size is regarded as anti-competitive behaviour by the regulator and will invite scrutiny by them. It is also important to note that in these cases, the standard of proof is that of “pre-ponderance of possibilities” as these activities are done clandestinely, in a quiet manner. It is also note-worthy to mention that the moment such an agreement is deemed to exist, it is presumed that there will be an “appreciable adverse effect on competition”. Let us see
Appellants are engaged in the manufacture of LPG Cylinders, which are primarily sold to four Public Sector Companies. As per the Informant all the 50 bidders made identical or near identical bids for the LPG cylinders, despite their being significant differences in cost of production, location, input cost’s etc. It was also alleged that they had an active association and all their representatives had met in Mumbai just prior to the bidding. CCI & COMPAT held them to be guilty of entering into an agreement to indulge in bid-rigging, prohibited under Section 3 of the Act. The appeal was made to the Supreme Court of India.
Issues before the Supreme Court
Whether the action of the bidders in submitting identical bids, and meeting shortly before the bid announcement is an example of collusive bidding?
Supreme Court relying on the judgement of Excel Corp agreed with the contentions of the CCI that may or may not be direct evidence in cartel cases. The standard of proof in proving wrongdoing in cartel cases remains that of “pre-ponderance of possibilities”. Apex Court said that the actions of the Appellant in meeting shortly before the bid and quoting near identical prices, was the natural outcome of a monopsonic market, and the burden of proof which was earlier pointed towards the Appellants successfully has been successfully rebutted by them, as quoting identical prices in a monopolist market is a natural outcome.
It was alleged by the Informant in this case that Hindalco and Vedanta by forming a cartel and in violation of Section 3 of The Competition Act, 2002 were conniving to keep the copper prices up by quoting identical bid amounts. It was held by the Commission that “price-parallelism by itself would not lead to inference of bid-rigging in absence of any documentary/oral evidence of bid-rigging”.
It can be thus concluded that price-parallelism is often a natural outcome of an monopsonic market, and if justifiable reasons are provided for the similar pricing, then it is not necessarily anti-competitive activity.
Bid-rigging is harmful for the competitive environment of the country as it can lead to false price escalation. Majority of the bids in India are invited by the public, and bid-rigging can lead to loss of public money. Bid-rigging can also result in important projects being marked to incompetent parties, which could lead to disastrous consequences. The abovementioned case-laws show that the Commission has played an active role in prosecuting cartels who are indulging in bid-rigging. In these digital times it is imperative that the investigative powers of the Commission are further enhanced and the Commission is given widen powers to investigate bid-rigging in various sectors of the economy.
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: