ALLEGED ABUSE OF DOMINANT POSITION BY COAL INDIA LIMITED- AN ANALYSIS OF THE VARIOUS ORDERS

  • Dhruv Chadha[1]

Introduction

Coal India Limited, along with its various subsidiaries, has faced a number of proceedings in the Competition Commission of India (‘CCI’), as a result of alleged abuse of dominant position. These proceedings have been under various batches of informations. This article will attempt to summarise these proceeding and analyse the reasoning used by the CCI to arrive at is finding of abuse of dominant position by Coal India.

Factual Background

In the years 1971-1973, the Indian Government began nationalising India’s coal mines, finding inter alia, that the sector faced an uncertain future on account of reasons such as inability of private players to make necessary investment to meet future demand and use of unscientific/inefficient mining techniques. The Government felt, that the uncertain production and supply of coal would be remedied by a purely State run coal mining industry.[2]

To efficiently manage the various mines, the Coal India Limited Company (‘Coal India’) was created and all the existing entities managing the coal sector were brought under its aegis. Today, (in its own words) it “produces around 84% of India’s overall coal production” and “feeds 98 out of 101 coal based thermal power plants in India”.[3]

One may argue, however, that this arguably impressive market share has come at a great cost to downstream firms and the eventual consumer. In certain cases, Coal India abstained from entering into in Fuel Supply Agreements (‘FSAs’)[4] (as was mandated by the Coal Distribution Policy). The proposed Coal Supply Agreement terms, were however seemingly burdensome. When however, there were FSAs, a number of red flags popped up.

For instance, the FSAs contained a “Deemed Delivery Quantity” clause. This meant, that Coal India had free reign to supply any quality it decided, and the purchaser was bound to accept it. Substantial inconsistencies between the billed quality grade, and the actual supplied quality, were alleged. This quite obviously, resulted in severe losses for the companies which Coal India supplied coal to (Purchasers). The quality slippage was worsened by the unilateral decision by Coal India to stop the procedure of checking quality both pre loading and post loading (this increased accuracy, as the two results could be averaged out).While an obligation to install Auger Sampling Mills rested on Coal India and/or its subsidiaries, this was not discharged. Ordinarily, the lack of this equipment would have necessitated a post unloading quality check, though this was not allowed by Coal India. There were additional allegations of substandard calorific value, which caused losses as well as technical difficulties.[5]

The facts mentioned in the forgoing paragraphs capture the essence of what resulted in various parties approaching CCI at different intervals. It would be pertinent to note, that one of the reasons for nationalization, and for setting up Coal India, was to be bring stability to prices and to ensure predictable demand. However, on the contrary, one of the alleged results of the conduct by Coal India has been uncertainty with regard to supply of coal.

Proceedings before the CCI and the Competition Appellate Tribunal (‘COMPAT’)

The various disputes that Coal India faced at the CCI were filed by various state suppliers of electricity and iron/steel manufacturers. This was on account of alleged abuse of dominant position committed by Coal India. The CCI in its initial set of orders found that Coal India’s ability to function independently of market forces, as adequate proof of its “undisputed dominance in the relevant markets of supply of non-coking coal to the thermal power producers”.

The CCI concluded that the nature of the terms and the manner in which they had been imposed, constituted an abuse of dominant position and terms set was an abuse of dominant position. Interestingly, the CCI even relied on Rawlsian Principles of Justice, which was reasoned to “postulate equitable enforcement of contracts, where the rights and obligations of the parties are balanced and do not favour one party to the contract.” Finding that the contracts were of a highly biased nature (in favour of the Coal India), the Commission declared that Section 4(2)(a)(i)[6] had been violated, on account of Coal India’s unfair/discriminatory conduct. The initial batch of orders led to an imposition of a fine of Rs. 1773.05 crore, along with necessary orders modifying the unfair terms. Subsequent batches of orders did not impose an additional fine, though terms of supply were altered where necessary There was no additional fine in either of the two as the CCI felt that the nature of the misconduct was materially identical, and there was no misconduct subsequent to the first batch of in formations.

All the above orders were subsequently appealed, and the COMPAT passed a consolidated order after having heard them all collectively. This decision was on account of the fact that members of the CCI who were not present during proceedings, had still participated in the decision making process. This was found to violate the principles of natural justice and the orders were quashed and sent back to the CCI.[7] While there was no leave to grant any additional evidence, the ability of Coal India and its subsidiaries to amend/withdraw terms of agreements was affirmed.

Subsequently, the Commission passed a fresh batch of orders. In a similar fashion as the first phase, the order disposing of the first batch of information detailed the fine to be paid while the others dealt specifically with the relevant terms required to be amended/annulled. The only discernible difference between the current and previous orders was the reduced penalty. While substantially streamlined, the analysis and reasoning followed the same spirit in all the agreements. A table summarizing the various stages of these disputes is as follows:

S.No Case No(s) Initial Order by the CCI All orders set aside by the COMPAT, by its order dated 17/5/16 Subsequent Order by the CCI
1. 03, 11, 59 of 2012 Order dated: 9/12/13[8] Order dated : 24/3/17[9]
2. 5,7,37,44 of 2013 Order dated: 15/4/14[10] Order dated : 21/4/17[11]
3. 08 of 2014 Order dated:16/2/15[12] Order dated : 21/4/17[13]

Analysis of the CCI order(s).

While the substance of all the orders passed by the CCI established dominance and its abuse in the same, the orders disposing of the first batch (03, 11, 59 of 2012) have been most frequently relied on to summarise the position adopted by the CCI. Any major variance has been highlighted. The three issues identified by the CCI are being followed in this article.

  • Determining the Relevant Market

Coal India contended that the relevant market should be broadened; both in terms of geographical market, as well as in terms of product market.

This was done by first trying to prove that the market was an International one, rather than merely an Indian one, as was submitted by the Director General (‘DG’). Coal India attempted to show the global nature of the relevant market by not only contending that imported coal was an easy substitute, but a preferred one, in power plants in coastal areas.  The informants on the other hand established the fact that the Indian thermal plants had been built to specifications suited for Indian supplied coal, allowing room for very little imported coal. It also noted that the imported coal used by these companies was as a result of an imposition by Coal India itself. The fact that Imported Coal, being subject to a number of duties etc. resulting in much higher costs, was also brought to the notice of the CCI. The Commission did not accept the arguments of Coal India, showing how the homogenous market definition under Section 2(d)[14] was defeated when the conditions of production and supply were itself different in India viz. abroad.

With respect to the product market, the Commission noted that non-coking coal was the raw material in production, and considering its structure and functions, did not have any substitutes. The Commission did not note “any serious objections” to this and interpreted the relevant product market to be non-coking coal.

  • Establishing a dominant position

The ability of a firm to operate independently of market forces is an indicator of dominant position. Coal India attempted to prove that it did not have a dominant position, by showing that it lacked the ability to operate independently of market forces as its actions were constrained/dictated by stakeholders such as the various Ministries and other State entities. This was attempted to have been painted out to be a “lack of commercial freedom”. Citing the “Ashoka Smokeless” case[15], (where certain guidelines were notified with respect to pricing by Coal India), an attempt was made to ascertain public good as its primary objective, especially since even these guidelines had to be met.

This was however, countered, on account of the monopoly status granted to it as a result of the Nationalisation Act. While the existence of the joint venture between the Union of India and Government of Andhra Pradesh, producing coal, their market supply did not make enough of a dent on the market share of Coal India and its subsidiaries. Even the policy making machinery claimed by Coal India to be stakeholders, were found to exert either minimal control or control which did not affect market power. While rejecting Coal India’s arguments, the CCI noted that the priced charged by the unregulated coal sector, were higher than unregulated markets, and there was a surge in profits once the New Coal Development Policy was implemented.

  • Determining abuse of the dominant position

The CCI considered the FSAs and the conditions enshrined therein to find that a number of instances of abuse had occurred. At the outset of its analysis in this regards, the CCI found that the historical backdrop of formation of the FSAs pointed to the fact that the drafting in its entirety, had been done by the Ministry of Power and CEA (Central Electric Authority of India)[16]. There was a complete lack of involvement from any of the shareholders. The terms were therefore accepted to have been a result of unilateral drafting. Further the CCI pointed out several instances of violation. These are briefly summarised as below;

  • With respect to “grading of coal”, there were several allegations of unfair terms in news FSAs and general unfairness of terms. The CCI noted the existence of an Independent Office of the Coal Controller as sufficient remedy. While purchasers operating under older FSAs had the right to ask for a “re declaration of grade” if there was consistent variation in grade for over three months, purchasers under the new FSAs did not have this remedy. The lack of this remedy was found to be contravening Section 4(2)(a)(i) of the Competition Act., (This unfairness was removed by Coal India during investigation)
  • The change in terms of sampling (which was allowed only at the loading stage, and not at the unloading stage as well) was alleged to be highly unfair. This was countered by Coal India, by citing the case of Marwar Tent Factory Union of India,[17] to show “that the title in goods passed on to the purchaser at the point of delivery of the goods”. Coal India attempted to show that their liability ended at that point. Coal India’s arguments were not accepted.
  • The CCI however, was most critical of Coal India’s conduct with respect to grading and sampling of coal. The CCI found the findings of the DG “unassailable” and found that Coal India had offered no acceptable explanation. The Commission found that the requirement of the Purchaser to pay the transport cost, freight etc. of the wrongly graded coal supplied, as inexplicable. Surprisingly, though, the Commission seemed to make a reference to “industry practice”. This was done by showing the practice of SCCL ( the joint venture between the Union of India and Government of Andhra Pradesh). The author respectfully states, that referring to the only other Indian supplier’s practice as industry practice, is logically anfractuous, as its market share and its relevance to show substitutes in the market had been held to be insignificant. The other reasoning supplied by the CCI was in fact sufficient.
  • The CCI also found that the cap placed on the compensation for oversized coals as violations, though it noted that necessary amendments were being made.
  • The CCI, though finding the right to unilaterally terminate the contract, as a violation, noted that changes had been made. This was similarly the case with the “force majeure” clause.

While the above conditions were indeed violations, the CCI found no basis for showing such conduct in relation to pricing and terms relating to quantity and trigger levels.

Penalty

While the previous orders ordered a penalty of 3% of the average turnover over the last three years, the CCI in its new order, reduced the amount to 1%. This meant that the fine amount was reduced from Rs. 1733.05 Crores, to Rs. 591.05 Crores. This was done on account of Coal India’s efforts to improve conditions in the FSAs especially with respect to sampling. The Court noted that these efforts were not limited to the duration of the proceedings before the CCI, but also during proceedings at the COMPAT.

Conclusion

The new batch of orders passed by the CCI granted limited relief to Coal India and it has decided to Appeal the matter.

The author submits that the significance of the disputes is particularly interesting on two counts. The first, that this is another instance of a matter being stretched out on account of Principles of Natural Justice. The new set of orders was almost identical to the first set and the entire exercise could easily have been avoided. The second notable point is with respect to the history of the Coal sector in India, especially nationalisation. The irony of an erstwhile private sector being nationalized, and subsequent monopoly itself coming under the scanner for affecting competition, is noteworthy. The very alleged defects of the private sector at that time, are arguably plaguing Coal India today.[18] This is particularly interesting in light of the relatively new decision to start allowing private sector to engage in coal mining.[19]

The National Company Law Appellate Tribunal (the ‘NCLAT’), with which the COMPAT was merged, has stayed the 591 Crore rupee fine, as of 31st May 2017[20]. A final decision is awaited.

[1] 3rd year student, B.B.A.LL.B. (Hons.), National Law University, Jodhpur (Rajasthan, India)

[2]  The Coal Mines (Nationalisation) Act, 197, Act no 26 of 1973

[3]https://www.coalindia.in/en-us/company/aboutus.aspx

[4]This was the case, for example, in Coal India’s dealings with MAHAGENCO.

[5]This was specifically alleged by Madhya Pradesh Power Generating Company Limited against South Eastern Coalfields Ltd.

[6] Section 4(2)(a)(i), Competition Act, 2002;

[7] For further insight into the findings of the COMPAT on violations of Principles of Justice by the CCI, see: http://www.iclr.in/assets/pdf/Article%2004%20by%20Swarnim.pdf

[8]http://www.cci.gov.in/sites/default/files/592012_0.pdf

[9]http://www.cci.gov.in/sites/default/files/03%2C%2011%20%26%2059%20of%202012.pdf.

[10]Ashoka Smokeless Coal (P) Ltd. v. Union oflndia, (2007) 2 SCC 640

[11]http://www.cci.gov.in/sites/default/files/05%2C%2007%2C%2037%2C%20%26%2044%20of%202013.pdf

[12]http://www.cci.gov.in/sites/default/files/08201427_0.pdf.

[13] http://www.cci.gov.in/sites/default/files/08%20of%202014.pdf.

[14]Section 2(d), Competition Act, 2002;

[15]http://www.cci.gov.in/sites/default/files/5737442013_2.pdf

[16]The CEA is a a statutory  body  which formulates short term  plans with respect to electrical connectivity (inter alia) http://www.cea.nic.in/aboutus.html

[17]Marwar Tent Factory v. Union of India, (1990) 1 SCC 71

[18]A Discourse Network Analysis of Coal Ownership in India”, Arpita, Asha Khanna, The Economic and Political Weekly, Vol. 51 Issue 50, 10th December 2016

[19]http://timesofindia.indiatimes.com/business/india-business/coal-ministry-to-allow-commercial-mining-by-private-companies/articleshow/56940490.cms

[20] http://nclat.nic.in/interim_orders/May2017/31052017AT012017.pdf

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