Jindal Steel and Power Ltd. Vs.

Steel Authority of India Limited

MANU/CO/0106/2011
Decided On: 20.12.2011
Background/Facts of the Case:
The Court was hearing an appeal by the CCI against the order dated Feb. 15, 2010 of the
Tribunal in Steel Authority of India Ltd. v. Jindal Steel & Power Ltd.
Jindal Steel had filed a complaint before CCI alleging anti-competitive practices and abusive
behaviour by SAIL while it entered into an exclusive supply agreement with Indian
Railways(“IR”). Upon receipt of the complaint/information, the information alleges abuse of
dominant position by SAIL in violation of Section 4 (1) of the Act.
As per the information, SAIL has entered into an exclusive supply arrangement with Indian
Railways (IR) through Memorandum of Understanding (MOU) dated 1.2.2003. It is alleged
that the said MOU result in denial of market access to JSPL by foreclosing a substantial part
of the relevant market. As per the information, the MOU contains exclusive supply
obligations and results in refusal to deal which causes appreciable effect on competition in
the relevant market in India in contravention of Section 3(4) of the Act. As per the
information, with nearly 96% market share, SAIL has a dominant position and substantial
market share in the market for rails in India that are compliant with Research Design &
Standards Organisation (RDSO), Ministry of Railways specifications. The MOU dated
1.2.2003 between IR and SAIL has the effect of foreclosing substantial part of the relevant
market and has also led to reduction and/or elimination of competition in the relevant market.
Furthermore, the MOU has the effect of restricting IR's ability to fulfil its requirements for
rail from sources other than SAIL. The MOU indirectly imposes restraint on IR so that IR
cannot deal with other sellers during the exclusivity period even if other suppliers are able to
provide better quality rails and at more competitive prices. This can cause significant market
distorting foreclosing effect. It is averred that the higher the percentage of total sales in the
relevant market, i.e. affected, the longer the duration of the conduct and the more regularly
such conduct is done, the greater is an anti-competitive foreclosing effect on the market.
JSPL also manufactures long finished rails of 120 metres length using RH Degasser
technology. RDSO has certified JSPL's rail manufacturing facility compliant with IRS-T-12-
96 and specifications IRS-T-12-2009.
The information also gives a factual background of the case and submits that IR had
expressed intention to develop the indigenous source of quality rails in April, 1988. At that
time, IR proposed to procure 100,000 tonnes p.a. from such new sources. The informant
JSPL informed IR in January, 2001 that it was going to set up rail manufacturing mill
conforming to international standards. In June 2001, IR informed JSPL that they may
purchase rails from JSPL if the same were of appropriate quality and offered at competitive
prices and on the required terms and conditions. JSPL continued to invest substantial sums on
building its rail mill.
 On 7.9.2001, JSPL informed IR that its rail mill could begin production in the 2nd quarter of
2002-03. However, on 21.12.2001, IR informed JSPL that SAIL had committed to supply
IR's entire requirement of rails and that IR would continue to buy from SAIL. Subsequent
repeated requests by JSPL through letters dated 6/9.5.2003 and 25.4.2006 were not
considered by Ministry of Railways on the ground that in pursuance to the MOU entered with
SAIL all requirements of IR were to be supplied by SAIL in respect of rails complying to IRS
T-12-96 specifications of RDSO. This MOU dated 1.2.2003 continues till date and IR has
refused to review exclusivity obligations with SAIL.
Further, despite repeated requests from JSPL to get its rail mill inspected and approved by
RDSO, the inspections were carried out only between February - July, 2005. RDSO observed
that JSPL was not using the degassing technology for removal of hydrogen content. The
information states that there are two main techniques of degassing rail steel i.e. using RH
degasser or vacuum tank degasser and JSPL was using the latter technology which did not
comply with specifications laid down by IR. During October, 2005 and November, 2007,
JSPL tried to convince IR that it was not a good idea to set specifications to a specific
technology but IR did not accept the recommendation. Finally in November, 2007. JSPL
installed RH degasser at its rail mill. However, despite this, IR did not purchase any of its
requirements from JSPI because with SAIL.
The information sought the following reliefs from the Commission:
(i) Order SAIL to end the exclusivity obligations with IR;
(ii) Impose fines on SAIL as per Section 27 of the Act for entering into an anticompetitive
agreement;
(iii) Introduce competitive bidding arrangement in the relevant market for purchase of rails;
(iv) Pass an order to pay the costs of the complainant/information provider; and
(v) Pass any other order that the Commission may deem fit.
Summary of DG’s report:

The DG report observes that both SAIL and IR satisfy the definition of "enterprise" contained
in Section 2 (h) of the Act and both these entities "are operating in different relevant markets
of production of long rails and consumption of long rails." Further though the information
does not level any allegation against the conduct of IR, it remains the necessary party for the
assessment of issues in the present case.
As per the information made available by SAIL, it had sold 814302 tonnes of rails to various
parties during 2008-09 of which 749928 tonnes were sold to IR. As against this, during the
period, JSPL had sold 34787 tonnes. Thus the market share of SAIL was 96%. Presently,
only SAIL and JSPL comply with RDSO specifications thus the HHI index was very high at
9232 which denotes very high concentrated market.
The investigation report observes that the MOU between IR and SAIL provides for review of
pricing by joint pricing committee with a condition that the decision of Chairman. Railway
Board shall be final and binding. The quality of rails produced by SAIL has to be compliant
to RDSO specifications. According to the investigation report, since the pricing of long rails,
"is carried out for the mutual advantage of both SAIL and IR", IR does not enjoy any
countervailing buying power. 'This means that the dominance of SAIL is enhanced.
With regards to Indian Railways or IR, the DG, in its report stated IR is the sole provider of
railway transportation in India except for some metro services. IR procures long rails for new
lines and replacement of old tracks. There are a few private sidings of certain manufacturing
units, mines, ports, etc. which also procure long rails but IR consumes 96-97% of long rails
sold in India. Accordingly to the report, IR enjoys almost absolute dominance in the relevant
market of consumption of long rails in India.

The report further examines the allegation of abuse of dominant position by SAIL and
IR. As per the investigation, report, in 1997, IR realized the need to develop a new
indigenous source for supply of rails in view of the available capacity at Bhilai Steel Plant
(BSP) of SAIL which was the only indigenous supplier of rails and on assessment of
projected requirements of around 7 million tonnes during the 9th five-year plan. A global
tender was floated and opened on 6.10.1997. Although 16 offers were received, no offer was
found acceptable by IR. In view of this experience, IR decided to issue a notice for pre-bid
meeting before floating of another tender. The pre-bid meeting in which about 25 firms
participated was held on 28.4.1998. However, the prospective bidders wanted the period of
commitment raised to at least 15 to 20 years against the five years desired by IR. In addition,
the bidders wanted to supply 2.00 lakh tonnes annually as against 1.00 lakh tones required by
IR (1.00 lakh is equal to 100,000). IR was not in favor of these conditions proposed by
prospective bidders. Under the circumstances, Ministry of Railways finally decided that the
problem of supply shortfall should be dealt at ministerial level in Government of India and
the matter may be taken up with Ministry of Steel for augmenting the activity of Bhilai Steel
Plant so as to meet future requirements of IR.The report further states, "from available
information and documents, it is clear that JSPL did not participate in the tendering process
undertaken by IR during October 1997. Further, JSPL was also not present during the pre-bid
meeting conducted by IR on 28.04.1998. From the documents of tendering process and pre-
bid meeting, it is evident that IR had made earnest efforts to develop indigenous sources for
procurement of rails. However, its efforts to develop such source failed.

Submission of parties:
The parties concerned. JSPL (Informant) and SAIL (Opposite Party) as well as Indian
Railways (IR) filed written comments and made oral submissions before the Commission and
also submitted written arguments from time to time during the course of the proceedings.
Submission by Opposite Party:
 1. It was submitted that the Competition Act is prospective in nature and Sections 3 & 4
came into force w.e.f. 20.05.2009. The MOU dated 1.2.2003 being a prior agreement
is beyond the purview of the Act.
2. It was submitted that IR carries out a sovereign function of development and
maintenance of safe and secure rail network in India. Therefore, as such, it is not an
enterprise under the Act.
3. It was submitted that one of the most important objects of the Act is to protect the
interest of consumers and it was argued that in the present case, IR was the ultimate
consumer. Since both the consumer (IR) and the supplier (SAIL) are highly satisfied
with the MOU, any action to quash the MOU would be highly prejudicial to the
interest of the consumer in this case.
4. Further, as regards the quality of rails, there cannot be any compromise on the
specifications of RDSO followed by IR. It was further submitted that substantial
investment was made by SAIL at the behest of IR for enhancing production of rails.
Moreover, SAIL has to seek permission of IR before supplying prime quality rails to
any third party. It was submitted that these facts indicate that there is no adverse
impact emanating from the MOU on account of price, quantity or quality as far as the
consumer, i.e. IR is concerned. This satisfactory position of the consumer is
emphasized by the fact that the Hon'ble Union Ministry of Railways had reviewed the
system of procurement of rails in 2010 and had decided to continue with the MOU.

5. Finally, as regards dominance, the OP argued that the alleged dominance of SAIL
must be assessed in the light of the peculiar circumstances in which the MOU was
entered into. The control of IR over pricing decision cannot be ignored. The
substantial investment incurred by SAIL at the behest of IR has to be taken into
account especially when production of structural is more profitable.
Submissions of Ministry of Railways (MoR):
1. It was submitted by MoR that the present matter pertains to a policy laid down by
Ministry of Railways. Government of India and such policy is a sovereign Act and is
governed by the Railways Act, 1989. Further, it was submitted that SAIL was obliged
by way of ministerial direction to put in place sufficient capacity to meet the needs of
IR for supply of rails in terms of both quantity and quality. Based on past experience
and the fact that no other source was available for long term needs of IR, it was felt
necessary to have a long term commitment from supplier of rails. This was also
necessary because of huge investments required to set up manufacturing facility
which would have a long gestation period. It was thought prudent to enter into MOU
with a Government PSU, which was fully under the control of the Central
Government and it was neither plausible nor prudent to commit to a new source.
Further, a commitment of 15-20 years with a new supplier was not considered in the
interest of IR especially when a Central Public Sector Undertaking, viz. SAIL was
capable to fulfilling the requirements of IR. It was submitted that SAIL had agreed to
increase production and quality of rails at the behest of Indian Railways after no other
supplier was available despite efforts of IR.
 2. It was also submitted that in the present MOU, the final decision in terms of pricing
lies with IR and till date, all payments have been made not as per the demand of SAIL
but as per the decision of IR.
3. MoR also disputed the observations of the DG that IR has not procured rails from any
supplier situated outside India in the last 12-13 years. It was stated that during 1986-
1999, the imports were made from Austria and UK and the MOU with SAIL has
helped IR save foreign exchange.
Submission by the informant (JSPL):
1. JSPL has relied on the opinion filed by it, its rejoinder dated 31.3.2010, written
submissions dated 29.3.2010, its observation to the DG's report dated 18.4.2011 and
opinion of RDE dated 14.4.2011.
2. In its arguments, JSPL submitted that in the instant case, the anti-competitive conduct
by SAIL and IR continues, therefore, the anti-competitive effect of the MOU is within
the purview of the Competition Act. The Informant has relied on the order of Bombay
High Court in "Kingfisher Airlines and other v/s Competition Commission of India."

3. It was submitted that even though MOU has an annual review clause, no renewal of
the terms and conditions have taken place till date. In effect, it makes the MOU
perpetual. It was contended that everything done by IR, i.e. buying portable water,
catering services, buying wagons etc. cannot be said to be outside the purview of any
law simply because IR is a statutory monopoly. Further action of statutory monopolist
is not protected from the relevant laws.

4. It was also contended that SAIL and IR are separate enterprises since the control of
the Government is only to the extent of holding shares and there are no structural
links between the two. Both are under different administrative ministries and,
therefore, cannot be said to be under common management and control. IR and SAIL
have complete independence and operate in different markets.

5. The Informant emphasized the contentions made in the information and submissions
before the DG to state that SAIL was dominant in the relevant market where it had
approximately 96% market share. The Informant also revisited other factors given
under Section 19(4) of the Act to highlight the dominance of SAIL in the relevant
market. Since these contentions were substantially same as those given in the
information and also before the DG, it is not necessary to elaborate upon the same.
JSPL contended that the exclusivity arrangements have led to denial of market access,
in violation of Section 4(2)(c). Further, it was contended that by adhering to its own
specifications, IR is limiting and restricting technical or scientific development
relating to manufacture of long rails and is in contravention of Section 4(2)(b)(ii).

6. JSPL submitted that the exclusive supply arrangement between SAIL and IR causes
AAEC and is in contravention of Section 3(4). It has resulted in increased costs for
JSPL and if the arrangements continue, JSPL may be forced to exit from the relevant
 market. It was also pointed out that there have been no recent entry into the relevant
market which is evidence of foreclosure of market.

Finding of the Commission:

1. It is observed that the SAIL is a Central Public Sector Undertaking (CPSU) wherein
the Govt. of India holds about 85% stake. It is engaged in the production and supply
of a wide range of steel products including rails. This fact is undisputed and therefore,
SAIL is an "enterprise" within the definition of section 2(h) of the Act.
2. The issue to be examined is with regard to the “relevant market”

At the outset it is necessary to define the relevant market. The relevant market,
consisting of both the relevant product market and the relevant geographic market,
have been defined differently by the different parties in this case. Using the concept of
SNNIP test JSPL, the informant, has defined the relevant product market as "RDSO
compliant rails", as rails that do not comply with the RDSO specifications are not
interchangeable and cannot exert competitive pressure. The relevant geographic
market for rails is India. According to them, high transportation costs and requirement
of RDSO compliance restricts the scope for imports of rails.

To SAIL the relevant product market is RDSO compliant rails including head
hardened rails as well as other industrial use rails conforming to various other global
specifications. SAIL has extended the definition of relevant product to include
substitutability from the supply side and the relevant market accordingly includes
both rails and structurals. The geographic market includes both exports and imports of
rails. IR however constrains the relevant product market to rails conforming to RDSO
specification but extend the geographic market beyond the boundaries of India.
DG in his report has defined the product market as rails conforming to RDSO
specification. The geographic market has been sub-divided into manufacture of rails
in India and procurement of rails in India.
In defining the relevant product market the Commission is inclined to accept the
definition of the DG and in doing so defines the market as 'rails compliant with RDSO
specification'. This definition is in conformity with Sec 2(f) where demand side
substitution is the determining factor in drawing the contours of the relevant product.
Studies on steel industry confirm that in the long range products, namely structural
and rails, there is very little switching. A shift to rails is determined purely by
demand. The shift, of course, entails additional capital investment and there is a time
lag.
The geographic market is taken as India by the Commission. Imports and exports are
part of the competitive pressures. The Commission looks at competition in the Indian
market where international trade is a factor for and of competition.
Given the relevant market definition, IR is a monopolist buyer of long rail steel. The
present MoU is an agreement between a monopolist and a monopolist buyer. SAIL at
the time of signing the MoU, was a de-facto monopoly supplier as regards RDSO
 compliant rails. Switching from structural to rails, although possible, has a cost and
time dimension limiting the scope for substitutability.

3. The decision of IR to enter an MOU with SAIL is the decision of a consumer to select
its supplier. Decision regarding the quantity, the quality and the price at which a
consumer would buy as well as the final selection of a supplier is a right that
constitutes consumer benefits. Such decisions cannot be considered as abuse in
context of section 4(2)(c). By selecting a supplier for valid reasons, a consumer
cannot be accused of denying market access to vendors whom it did not purchase
from. It is not even true that by denying market access to other rail producers, IR
would be in any position to exploit consumers in its own market, i.e. railway services
by charging higher prices. Every buyer naturally wants to make best value for money
deals. Any conduct that cannot and is not intended to translate into higher profit
margins cannot be an abuse of dominant position, which has foreclosure of
competition and higher profits as motive. Being a State monopoly, IR has no
competitors, therefore it does not have to try to ward off competition. There is no
evidence in this case that by entering the MOU, IR has got higher profits. At the same
time, if at all the MOU has resulted in higher profits or reduction of losses, then,
overall it is for the benefit of consumers since pricing of railway services, particularly
passenger services is completely under control of Govt. of India and Indian
Parliament and higher margins for IR would naturally result in non-increase of ticket
prices or even freight prices. In other words, ceteris paribus, higher margins would
translate into lower prices for consumers of JR Once again, it can be seen that IR is
not operating in a free market where it is able to control its own output or force higher
prices like a normal commercial enterprise. This is further evident from the fact that
IR has been consistently subsidizing passenger services for the welfare of common
man. It would serve no purpose to accuse a monopolist of predatory pricing because
such pricing strategy is actually self-injurious for a any monopolist, specially a State
monopoly. Considering these facts, IR cannot be held in contravention of section 4(2)
(c).
The Commission that not find SAIL or IR in contravention of section 3 or 4 of the Act.
The Commission stated in its order:
“Competition is not only in the market but also for a market. While harm to competition
in the market is more visible and open to simple remedies, promotion of competition for
the market is more in the realm of (sic) policy than competition law enforcement. This is
truer when in context of government enterprises.
In the instant case, it is a fact that due to government policy and law, there is no
competition in the market of railway service. Consequently, competition for the market
where 1R is a purchaser gets distorted. It is therefore felt that Govt. of India, MOR and IR
should remain highly sensitive to this fact and try to keep their procurement procedure as
competitive as possible wherever IR is the dominant purchaser so that competition for
that relevant market is not distorted unintentionally. Specifically in the context of the
instant case, it is recommended that MOR and IR should carry out a comprehensive
review of the MOU in the light of the fact that today there are other producers that are
also capable of and willing to supply rails to IR. Similarly, they can examine whether
RDSO specifications can be broadened to include other technologies. Such an exercise
would result in greater efficiencies for the IR and it would eventually lead to greater good
of the Indian economy.”
Therefore, the reliance of commission was primarily on the economy and the beneficial
interest of the consumers, which is basically the foremost objectives of the Competition
Act.