A 1700 crore rupee penalty order against Coal India!

Competition Commission of India’s

conclusion that Coal India is guilty of abuse of dominance is unprecedented in more ways
than one. This is the largest individual penalty imposed by the competition regulator so far
and the first against a public sector enterprise. Will CCI’s reasoning hold water on appeal?
Payaswini Upadhyay puts that question to experts.
Lat year, 3 thermal power producing companies knocked the doors of the Competition
Commission of India alleging abuse of dominance by Coal India. They alleged imposition of
unfair and discriminatory conditions in the Fuel Supply Agreements signed by Coal India.
To assess the presence of anti-competitive conduct, CCI defined the relevant market as
production and sale of non-coking coal to the thermal power generators in India.
Samir Gandhi
Partner, AZB
“I think they went through the motions – they looked at whether import substitutability was
in fact a possibility at all. They looked at the who the key customers were and they have
come to a fairly reasonable definition of what the relevant market should be. They were
presented with the conundrum whether they should widen this concept of relevant market to
outside of India and I think they took a sensible and pragmatic view to decide to limit it to the
relevant market for non-coking coal in India.”
With a market share of 70%, CCI concluded that Coal India and its subsidiaries enjoy a
dominant position in the relevant market. Coal India argued against this conclusion saying
that it is not the only supplier of coal in India; other sources include Singareni Collieries and
imported coal. Further, it is a leading producer of coal only due to nationalization. And since,
various stakeholders such as the Ministry of Power, Coal, Planning Commission, NTPC
constrained its business activities, it did not have any commercial freedom in choosing its
customers or in the pricing of coal.
But these arguments did not pass muster with the regulator. CCI concluded dominance saying
Coal India enjoys monopolistic powers as a result of nationalization and even though
government policies governed the pricing structure, the supply terms were decided by the
company. But since dominance itself is not a violation under the Competition Act, CCI went
on to determine abuse.
For that, the regulator examined the Fuel Supply Agreements signed by Coal India and
concluded that Coal India discriminates between existing power companies and new power
companies without any objective reasons. For instance, FSAs with new power producers did
not provide for re-declaration of grade or for compensation if oversized coal was supplied.
Further, the sampling and testing procedure to determine the grade of coal was controlled by
Coal India....leaving the buyer as a spectator in the process. The FSAs provided that Coal
India needed to only try to ensure that ungraded coal is not loaded. If it did, there was no
provision for compensation and the buyer was to bear all transport and royalty expenses.
Based on all these grounds, the CCI concluded that Coal India abused its dominant position
by imposing unfair and discriminatory conditions in its FSAs.
Vijay Lakhanpal
Executive Director, Nathan Economic Consulting
“All over the world if you see the practices, discrimination is part of any business practice.
Now discrimination can be in form of prices, it can be in the form of other non-economic
factors. For example simple thing – it can be based on track record of a company, or it can be
based on volume of transaction which is involved, or it can be based on strategic relationship
which a seller has with buyer, it can be because of transaction cost. So in any contract what
happens is both the sides are trying to minimize their own risks in a project, to what extent
they go- that is what defines the contract. Now in that sense the discrimination per say is
actually not anti-competitive. It is the effect of discrimination which can be considered anti-
competitive or harmful to consumer. Now that is what the crux of the matter is or that is what
the competition authority should always look at it. The discrimination per say is acceptable
provided it is not providing harm to the consumer or to competition.”
Vinod Dhall
Former Chairman, CCI
“They haven’t gone into calculations in quantifying the adverse effects on the informants or
other consumers or customers of coal- that kind of calculations are not there. But they have
expressed the view that there is a downstream negative effect of this which goes all the way
down to the consumers of products produced from coal i.e. electricity. I don’t think that was
really necessary for them to quantify the damage because that may be a task more for the next
stage if any of the informants or any other customer of coal goes in for compensation which
is the task of COMPAT not the Commission.”
In penalizing Coal India for abusing its dominant position, CCI considered the principles laid
down by the Competition Appellate Tribunal in the Aluminum Phosphide Manufactures case.
It reasoned the 1700 crore rupee penalty amount based on several mitigating and aggravating
circumstances.
The regulator conceded that Coal India does not enjoy complete commercial freedom in
deciding its customers and quantity of supply and that Coal India’s is affected and restrained
by various stakeholders. And that Coal India prices coal taking into account the larger public
interest.
Having said all of this, the CCI pointed out that inspite of the overarching regulatory
environment, Coal India has sufficient flexibility and functional independence for
commercial operations. And that the FSAs were finalized by Coal India’s Board and accepted
by the company’s subsidiaries without any reservation.
Samir Gandhi
Partner, AZB
“There is a school of thought which reads Section 4 of the Competition Act to suggest that
once you have established dominance and you have then displayed or demonstrated that there
is either unfair or discriminatory conduct being engaged in by that dominant enterprise, CCI’s
responsibility stops there and they don’t need to prove a further effects based contravention. I
would argue, however, that this entire law is about the effects and I think there is a lot to be
said about demonstrating that the unfair or discriminatory conditions imposed by a dominant
enterprise actually results in market foreclosure. I think that’s the effect that the Commission
needs to test for – that’s the effect which I can’t see plainly there in the CCI’s order and I
think that it would be a sound ground for future appeal.”
Vinod Dhall
Former Chairman, CCI
“CCI has sent a strong message to the government that these kind of situations are arising
also because of the fact that there isn’t enough competition in the market for coal; there aren’t
enough players in the market to supply coal and real reforms are required to increase the
number of players who can compete with Coal India. It is a very strong advocacy message
given by the Competition Commission. And it will send out a very strong deterrent message
to other PSUs who may be in a similar monopolistic or dominant position.”
1700 crore rupees in penalty and an order to modify FSAs to ensure parity between old and
new power producers! The Coal India order reminded most competition lawyers of CCI’s
order in the case against Indian Railways. There, the competition regulator had concluded
that Ministry of Railways and state owned CONCOR were not guilty of abusive conduct.
That order had received severe criticism from experts not only on the principles of
competition law but also whether the regulator had the might to go after public sector
enterprises. The Coal India order seems to have put that apprehension to rest!
In Mumbai, Payaswini Upadhyay