Title: End Term Assignment for Project Report Groups Subject: Managerial Economics Batch: 2012-14 Section: E Word

Count: 1,488 Pages:6 Group Members: Sr.No. Name 1 Saksham Mendiratta 2 Shafique Gajdhar 3 Sugandh Jindal Group No:1

Roll. No. 2012265 2012289 2012314

CCI finds 11 cement majors guilty of price cartelization:

Economic Times, June 19, 2012, 08.30PM IST Link:http://articles.economictimes.indiatimes.com/2012-06-19/news/32317692_1_cementmanufacturers-cement-firms-cartelisation Competition watchdog CCI is believed to have a slapped penalty of about Rs 3,000 crore on 11 big cement manufacturers, found guilty of being involved in price cartel, a high-level source said today. "The Competition Commission of India has found 11 cement firms guilty of cartelisation. The penalty of eight per cent of their three year's average turnover will be imposed on them," he said. The cumulative turnover of these companies is around Rs 37,500 crore.Most of the top cement firms have been indicted by the CCI. Cement companies declined to comment saying they have not seen the order. CCI was probing the cartelisation charges based on complaints from realtors' body, Builders Association of India (BAI), which alleged that the retail prices fixed by cement manufacturers were almost similar.Shares of cement companies have been in action recently ahead of Competition Commission of India's verdict in the case. The CCI had carried investigations into allegations that cement companies had decreased production to inflate cement prices. The highest penalty prescribed in the Competition Act 2002, is 10 per cent of three years' average turnover.

Highlights of the Article:

1. CCI imposed a whopping Rs 6307 crore fine on 11 leading cement makers for forming a price cartel. Industry body CMA was also fined with Rs 73 lakh. 2. The maximum fine was imposed by Jaiprakash Associates at Rs 1323.6 crore followed by Aditya Birla groups Ultratech cements (Rs 1175.49 crore),Ambuja Cements(Rs 1163.91 crore) and ACC (Rs 1147.59 crore) 3. The other companies found guilty are Grasim Cements now merged with Ultratech Cements, Lafarge India, JK Cement, India Cements, Madras Cements, Century Cements and Binani Cements. The industry body Cement Manufacturers Association (CMA) has also been fined. 4. The allegations by Builders Association of India (BAI), which alleged that the retail prices fixed by cement manufacturers were almost similar, is also being probed by CCI.

Introduction:
A cartel is a formal agreement among competing firms. It is formal organizations where there are a small number of sellers and usually involve homogeneous products. Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. The aim of such collusion (also called the cartel agreement) is to increase individual members' profits by reducing competition. One can distinguish private cartels from public cartels. In the public cartel a government is involved to enforce the cartel agreement, and the government's sovereignty shields such cartels from legal actions. Inversely, private cartels are subject to legal liability under the antitrust laws now found in nearly every nation of the world. Furthermore, the purpose of private cartels is to benefit only those individuals who constitute it, public cartels, in theory, work to pass on benefits to the populace as a whole. Competition laws often forbid private cartels. Identifying and breaking up cartels is an important part of the competition policy in most countries, although proving the existence of a cartel is rarely easy, as firms are usually not so careless as to put collusion agreements on paper.

DIGRAMATIC REPRESENTATION OF A CARTEL-

To explain the concept cartel let us assume that there are two centralized cartel. In the above given diagram D is the total market demand curve and MR is the corresponding MR curve for the cement produced by the two firms forming the cartel. The total MC for the centralized cartel is obtained by summing horizontally the MC curves of the two member firms. The cement cartel authority cartel will set price= P and sell quantity and sell quantity which is given by intersection of MR curve and total MC curve. To maximize profit manager of cartel must allocate production to the member firms based on the rule of marginal cost. Incremental output should always be allocated to the firm that has lower marginal cost.

THE CEMENT INDUSTRY IN INDIA: India is second largest producer of cement in the world only after China. 183 large cement plants and more than 360 mini cement plants. 330 million tones a year installed capacity 97% of the installed capacity is accounted for by large producers, around 40 in number 21 top companies control 90% of the market 40% of the market is controlled by two groups, Holcim and Aditya Birla Group

Source: http://forbesindia.com/article/briefing/cci-the-cement-cartel-of-india/33354/1

Market Share Of Cement Companies

A.C.C. Ltd. 11% Grasim Industries 10% Ambuja Cements 9% Dalmia Cement 2% Madras Shree Century Textiles Cements Group Cement J.K. 4% 4% 4% 5%

other 33%

UltraTech Cement 8% Jaypee Group India Cements 5% 5%

Source: NINETY FIFTH REPORT ON PERFORMANCE OF CEMENT INDUSTRY (PRESENTED TO THE RAJYA SABHA ON 24TH FEBRUARY, 2011) 4

Analysis:
View of CCI: The CCI had carried investigations into allegations that cement companies had decreased production to inflate cement prices.CCI believes that cement makers have controlled the supply through underutilization of capacity. According to CCI the act of cement firms(of limiting and controlling supplies in the market and determining prices through an anticompetitive agreement is not only detrimental to the cause of the customer but also to the whole economy since cement is crucial input in construction and infrastructure industry vital for economic development of the company. View of Cement Companies: The cement companies have denied any cartelSisation saying prices are controlled by demand & supply. Companies have maintained that the prices reflect the rise in the input cost such as transportation and coal. CMA has argued that for a cartel to exist there should be a mechanism in place for: 1. Coordinating the cartel agreement and to ensure its functioning. 2. Monitoring the behavior and conduct of the members of the cartel 3. Punishing the members of the cartel who do not fall in line with decision of cartel.

Our View In Support Of Cement Companies: The document proof, that there was a cartelization and arising out of the cartelization companies really entered into profiteering and they made profit, is still pending. Also we do not have the privilege of having the order in front of us. So it will be a comment without having read the order, but having said this, yes if 8% is true, it is too harsh. The analyst talked about EBITDA margins, but ideally the penalty has to be paid out of the post-tax profits. It has got nothing to do with EBITDA. Actually 8% is not even the profits for most of the companies. The PAT level is 8% for very few companies. So if there are 8 or 10 companies who are involved in this case and if the penalties are there of the nature of 8% of the turnover, it is extremely harsh. Third thing is that a cartelization acquisition particularly in a cement kind of an industry which has about 45 to 50 players is very hard to believe that there can be a very effective cartelization for a very long period.

Our views in support of Commission:

Considering organized shortage of cement supply in various regions of the country and increased operating profit of the industry, even during the recent recession, this make us believe that there was some sort of cartel operating in the industry. They further corroborated their point by quoting news from a leading newspaper about the Associated Cement Companies(ACC) and Ambuja Cement, both part of Holcim group of Switzerland, walking out of Cement Manufacturers Association. The Committee was informed that both these companies had done so, for the fear of being charged with the allegations of cartelization in Europe as Cement Manufacturers Association has the reputation of forming cartels and following unfair trade practices. The BAI stated that the said companies resigned from the membership since they feared punitive action from Competition Commissions of other countries, and the Competition Commission of India does not have any power to deter such companies in India itself, BAI felt. According to the Commission, one contradictory trend that is noticed is that in spite of high installed capacity, production is far below the capacity. In Southern region in last two-three quarters of the year 2009-10, installed capacity has increased but the price level has been on the rise continuously.

Conclusion:
We would like to make certain recommendations that: Competition Commission of India which was constituted to check restrictive trade practices across the country should be strengthened legally to enable it to take suomotu34action in all such cases. Proper infrastructure may be developed for the Commission, so that it can obtain requisite information and can take suo motuaction and exert its powers effectively. Already installed capacity for cement production should optimally be used to prevent artificial scarcity. Department of Industrial Policy and Promotion should take strong action against nonperforming cement industries. REFERENCES http://forbesindia.com/article/briefing/cci-the-cement-cartel-of-india/33354/1 http://articles.economictimes.indiatimes.com/2012-0619/news/32317692_1_cement-manufacturers-cement-firms-cartelisation http://economictimes.indiatimes.com/news/news-by-industry/indlgoods/svs/cement/builders-association-of-india-urges-cci-to-review-finequantum-on-cement-companies/articleshow/14370338.cms
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