Coal India penalty is first for a public sector entity

In a landmark decision on 9 December 2013, the Competition Commission of India (CCI) imposed its first penalty against a state-run enterprise, ordering Coal India to pay ₹17.73 billion (US$286.2 million) for abusing its dominant position, essentially in relation to its fuel supply agreements (FSAs) with power generation companies. The CCI stated that the objective behind the fine was not only to penalize Coal India but also to deter other enterprises that may consider anti-competitive activities.

Apart from the penalty, the CCI ordered Coal India to modify its FSAs with power generation companies after consulting the stakeholders so as to ensure fairness and parity between private and public sector power producers.

Three complaints

The CCI considered two complaints filed by Maharashtra State Power Generation Company against Coal India and one of its subsidiaries, alleging abuse of dominance in contravention of the Competition Act, 2002, and a similar complaint filed by Gujarat State Electricity Corporation. In essence the complaints related to onerous and one-sided FSAs, or the execution of non-comprehensive memorandums of understanding instead of FSAs, of the dominant parties.

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The facts of the cases were similar and the CCI directed the Director General (DG) to submit a consolidated report on its investigation. The DG determined that the relevant market was production and sale of non-coking coal to thermal power generators in India, and that Coal India and its subsidiaries have been vested with monopolistic power for production and distribution of coal in India, by operation of law. Consequently the DG determined that Coal India is in a dominant position in the relevant market.

The DG noted the only other option for power generation companies is imports, which for various reasons cannot substitute for domestic coal. On analysis of the terms and conditions of the FSAs, the DG concluded that Coal India and its subsidiaries had violated the Competition Act by imposing unfair and discriminatory conditions in the relevant market.

Coal India’s response

Coal India contended that the relevant market should be supply of coal globally. Even if the relevant market were to be confined to supply of non-coking coal in India, Coal India argued that is not dominant as it cannot operate independently of competitive forces or its customers, and that its conduct is significantly constrained by directions it receives from the Ministry of Power, the Ministry of Coal, etc., which exert significant influence and are involved in decisions that impact various aspects of its business. Coal India also contended that the FSAs have been modified after negotiations between the parties, and therefore no prejudice had been caused to the complainants.

CCI’s analysis

The CCI rejected the contention that the relevant market was the global market on the grounds that it is contrary to the explanation to section 4 of the Competition Act. This provides that “dominant position” means a position of strength enjoyed by an enterprise in the relevant market in India. The CCI pointed out various reasons why imported coal cannot be compared to domestic coal. The CCI concurred with the DG’s findings on the relevant market and the two factors used for such determination – demand-side and supply-side substitutability.

The CCI agreed that Coal India and its subsidiaries have by operation of law been vested with monopolistic power for production and distribution of coal in India, and stated that they have no competitive pressure in the market and operate independently of market forces. The CCI held that the coal distribution policy regulates supply and pricing for industries such as power, fertilizers, railways and defence, but does not curtail the independence of Coal India. Concurring with the DG, the CCI concluded that Coal India in line with its commercial interests is at liberty to decide the quantity and price of coal supplied.

The CCI noted that Coal India drafts the FSAs without any meaningful consultation with any stakeholders, reflecting that Coal India is abusing its dominance. The CCI reviewed various provisions of the FSAs and found that the majority were determined unilaterally and in contravention of section 4 of the Competition Act.

The CCI concluded that in the matter of supply of non-coking coal to power producers, Coal India and its subsidiaries were in contravention of the provisions of section 4 of the Competition Act for imposing unfair and discriminatory conditions and indulging in discriminatory conduct. Coal India has preferred an appeal before the Competition Appellate Tribunal and a hearing is scheduled for next month.

The CCI through this decision has demonstrated that it will not treat the government any differently than the private sector. The CCI’s call for reform in the coal sector, including introduction of more service providers, demonstrates that the CCI has taken a macro view of the issues and is concerned about systemic risks in non-competitive environments.

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Amit Tambe is a partner at Trilegal and Kunal Chandra is a counsel. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad.