SBI Cartel Case: Assessing the Liability of the Company for Independent Actions of the Director

[By Harshit Upadhyay and Sangita Sharma]

The authors are students at the Gujarat National Law University, Gandhinagar.

A cartel facilitator is an undertaking that ensures the proper functioning and operation of the cartel by providing logistical support to the cartel. The facilitator does not need to have any commercial interest in the relevant market in which the cartel operates. Recently, in the Re: Alleged anti-competitive conduct by various bidders in supply and installation of signages at specified locations of State Bank of India across India (‘SBI Cartel’) case, the Competition Commission of India (‘CCI’) held a company liable for the independent actions of its director for facilitating a bid-rigging cartel.

This article argues that the CCI erred in holding the company liable for the independent actions of the director when it could have punished the director individually for his actions under Section 27 of the Competition Act, 2002 (‘the Act’). Moreover, there is a need for greater clarity with regard to the position of the facilitators under the Act, and the same can be resolved with the help of incorporating the principles developed in the European Competition jurisdiction.

SBI Cartel Case

In March 2018, SBI floated tenders for the supply and installation of signages at its branches, ATMs, and offices for specified metro centers of various circles of SBI across India, which was ultimately carried out on a ‘reverse e-auction’ basis among the eligible bidders. Five companies qualified for the technical and financial bids and were shortlisted for the final bidding. These five companies wanted to distribute the locations amongst themselves. In order to facilitate the same, the companies sought the assistance of Naresh Kumar Desarji (‘Naresh’), Managing Director (‘MD’) of Macromedia Digital Imaging Pvt. Ltd. (‘MMDI’). It is relevant to note here that MMDI is neither horizontally nor vertically aligned to the same market as the other five players.

Further, Naresh maintained personal relationships with the MDs of some of these companies. Based on the price inputs and geographical preferences he received from the companies, Naresh laid out how the bidding should be done and who shall bid how much for which location in an email marked to the companies. The companies followed the email and bid accordingly. The CCI took suo-moto cognizance of the anti-competitive conduct of the parties and held all the six parties (including MMDI) involved in the bid-rigging liable.

CCI Decision

The CCI held MMDI liable for the acts of Naresh in facilitating anti-competitive conduct, stating that under Section 3 of the Act, every person involved in manipulating the bidding process could be held liable. The CCI imposed a penalty of 51 Lakhs on MMDI. Further, it also held Naresh liable under Section 48 of the Act.

Analysis

On holding a Company liable for the Independent Actions of a Director

The CCI, in this case, held MMDI liable even though MMDI was never part of any bid-rigging agreement directly or indirectly, and the actions of Naresh had nothing to do with the day-to-day management or even with the business of the company. This position is contrary to established principles.

A company is a distinct legal entity, and a company cannot act beyond the scope of its Memorandum of Association or Articles of Association. A company can carry out the objectives mentioned in its Memorandum of Association or Articles of Association, including anything incidental or conducive to it, although it must be connected to those objectives. Further, the relationship between the directors and the company is analogous to that of agent-principal. An act not within the scope of the agent’s express or implied authority (falls outside the power or apparent scope of his authority and such acts) cannot bind or be attributed to the principal. The authority of directors is specified in the Memorandum of Association or Articles of Association and beyond which it cannot travel. In MRF Ltd. v. Manohar Parrikar, the court held that the actions of the director, which are ultra vires the same, cannot bind the company.

In the immediate case, the CCI holding MMDI liable does not provide anything to establish that Naresh was acting within his authority and, therefore, could bind the company. Further, the tender was entirely unconnected to the business of MMDI as it was not engaged in the production of the goods involved in the tender and was in no manner incidental or conducive to the day-to-day functioning of Naresh as MD. The CCI erred in penalizing MMDI under Section 27 of the Act since it requires the company to be ‘involved in such agreement.

The CCI held Naresh liable under Section 48, which requires the company to be held liable before punishing the individual in charge of and responsible for the company. However, the CCI has the requisite authority to penalize Naresh for his independent actions under Section 27 and Section 3 because of the term ‘person’ in these provisions. Further, Section 27 does not require holding the company liable before punishing the individuals.

Unclear Position of Facilitators under the existing Competition Law regime

  • Defining Facilitators

The CCI held the ‘facilitator’ liable. But, it failed to define a ‘facilitator’ properly. The jurisprudence surrounding this has yet not evolved under the Indian Competition law. However, the competition authorities in European Union have more evolved principles to deal with cartel facilitators vis-a-vis their Indian counterparts.

The General Court in AC Treuhand (later upheld by the top EU court) laid down the following legal test to determine the liability of facilitators:

“The Commission must prove that [facilitator] intended, through its own conduct, to contribute to the common objectives pursued by the participants as a whole and that it was aware of the substantive conduct planned or implemented by other undertakings in pursuance of those objectives, or that it could reasonably have foreseen that conduct and that it was ready to accept the attendant risk.”

This is a twin test, which requires it to be established that the perpetrator objectively contributed to the implementation of infringing conduct and that the perpetrator intended subjectively to make such a contribution.

  • Penalizing Facilitators

The CCI did not provide sufficient justification for the penalty imposed on the facilitator. Currently, in India, there is no guidance with regard to the appropriate amount of penalties, as in other jurisdictions. It is unclear whether the penalty on the facilitator will depend on what kind of role is played by the facilitator or will be imposed uniformly without considering the surrounding circumstances. It fined MMDI the amount of Rs. 51,77,659, where the whole concerned trading transaction (which had no direct relationship with bid-rigging) claimed to be linked to the anti-competitive activity only amounted to Rs. 2,80,253 without elucidating how penalties will be levied on the cartel facilitators.

This is in complete disregard of the settled legal principles. The Supreme Court in Excel Crop Care Ltd. v. CCI relied upon the doctrine of proportionality to hold that the penalties should be proportionate. In this case, the charge was that of facilitating bid-rigging without any financial gain. Still, MMDI has been fined almost twice that of any other party who would have benefited from the transaction without expounding on it. In line with the Indian proportionality doctrine, in the EU concerning facilitators, it was held that the penalties imposed against the facilitators should reflect the economic importance of the infringements in question and the extent of the facilitator’s individual participation in those infringements.

Conclusion

Competition Law is ever-evolving because of the dynamic nature of the markets. The Competition Authorities should provide proper reasoning and justification for their decision. The CCI in the SBI Cartel Case erred in holding the company liable for the independent actions of its director when it had the authority to punish the director individually within the terms of Section 27, which specifically uses the term ‘person’.

Further, the stance of the Indian competition regulators with respect to facilitators needs greater clarity, and the CCI can incorporate the European approach of the twin test with regard to facilitators to provide on this issue. With regard to penalties, there is a need for proper guidance on the same. The penalties imposed on facilitators should be determined by the economic significance of the conduct and the extent of participation in the anti-competitive conduct.

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