Jindal Steel & Power Ltd vs Steel Authority Of India Ltd. Main ... on 20 December, 2011

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Competition Commission of India

Jindal Steel & Power Ltd vs Steel Authority Of India Ltd. Main ... on 20 December, 2011

BEFORE THE C@MPE"HTHON COMB/HSSE@N GE' ENDIA CASE NO» 11/2009 DATE OF DECISION: 20.,l2.20H Jindai Steeﬁ & Power Ema -- informant fl "'0 . fv .

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_ \ Steel Authority of Endriza Lﬁmﬁted -- Gpposite Party 1 c' I y I 1 ; f ,/A K F Information

1. The presen.t information was received byyCompetition Commission of India (CCI) (hereinafter referred to as the "Cor11rnissio11") from Jindal Steel & Power Limited (hereinafter referred to as ".lSl'L") on 16m October, 2009 under Section 19 (1) of the Competition Act, 2002 (hereinafter referred to as "Act"). The information was filed against Steel Authority of India Ltd. (hereinafter referred to as "SAIL").

2. 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.

3. 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.

4. Furthermore, the l\/IOU has the effect of restricting IR"s ability to fulfill its requirements for rail from sources other than SAIL. The MOU indirectly imposes rest.raint 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.

5. The information describes the SAIL as the leading steel making Company in India. It is a fully integrated iron and steel producer, making both basic and special steel for domestic construction, engineering, power, railway, autopagfirie-iaiad . fence industries and for SAIL in export market. It manufactures a d;ETs;ells}réi '

6. including sheets, coils. structural products, railway products, bars, rods, alloy steel and others. It is ranl<ed aiiiongst the top 10 basic companies in India in terms of turnover.

The information clescribes that JSPL is a listed public company registered under the Companies Act, l9:S(i. It is engaged in the niariufacture of steel and steel products at its manufacturing I'2.icil.ity at Raigarh, Chhatisgarh and production of power tlirough its subsidiary Jindal Power Ltcl. ISI-'L also manufactiires long ﬁnished rails of 120 metres length using RH I)egassei' technology. RDSO has certiﬁed JSPL"s rail nmnufacturiiig facility compliant witli IRS-="li"~l2«96 and specifications lR.S--T»12--2009.

The information also gloves 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 inl:'oif1nant JSPL iiiI'oi'ii.ied IR in January, 2001 that it was going to set up rail manufacturing mill ctiiitmiiiiiig to international standards. In June 2001, IR informed JSPL that they may piircliase rails from JSPL if the same were of appropriate quality and offered at conipetitive prices and on the required terms and conditions. JSPL continued to invest substantial sums on building its rail mill.

On 7.9.2001, JSI'l.. in termed IR that its rail mill could begin production in the 2" quarter of 2002-03. I~Iowevei'. on 21.12.2001, IR informed JSPL that SAIL had committed to supply IR's entire requireinent of rails and that IR would continue to buy from SAIL. Subsequent repeated reqiiests 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 of1R were to be supplied by SAIL in respect of rails complying to IRS '1'--12»9(i specifications of RDSO. This I\/IOU dated 1.2.2003 continues till date and IR has reluscd to review exclusivity obligations with SAIL.

Furtlier, despite repeated requests from JSPL to get its rail mill inspected and approved by RDSO observed that JSPI. was not using the degassing technology for removal of hydrogen RDSO, the inspections were carried out only between Fehi'Liai'y ---- July, 2005.

content. Tlie II1,lI()I"t1iZ:11,l()tI states that there are two main techniques ofclegassing, rail steel i.e. using RH degasscr or vacuum tank degasser and JSPL. was using the latter technology which did not coniply with speciﬁcations laid down by IR. During October; 2005 and November", 2007. .1."'§I",I., tried to convince IR that it was not a good idea to set specifications to a speciﬁc technology but IR did not z'i.'c/re/;:2git:\'t'I1t\;1.7'::r*1r(§co\n111ieiidatioii. }'«'ii~1al1y in November, 2007. .1 .'3I'It, installed RH degasser at I I er, despite this. IR ' 1\4@U 'ith SAIL.

. '\ . . '.' ii .\ did not purchase any (it its requirements from JSPI; becfatisg ' , pl. ., «K 1* ' 1: 'i , 3 1" -- I i ~' A ~::-' ~ -

10. The information detines the relevant market as "rails which conform to the RDSO speciﬁcations laid down by IR in India." The information alleges that SAIL is dominant in the relevant marl<et and its conduct is exclusionary. SAIL is an incumbent dominant seller and IR is the doniiiiant purchaser. As a result, there is an anti--competitive foreclosure in the It'l2.tl'l{Cl I or new/smaller players.

11. The exclusive supply obligations imposed by IR on SAIL is a vertical restraint as per the information and its effect in the longaterm would be to eliminate all coinpetitioii in the relevant market.

12. The information specitically alleges contravention of Section 4 (2) ( c) of the Act in terms of denial of marltet access as well as contravention of Section 3 (4). The information sought the following reliefs from the Commission:

(i) Order SAIL to end the exclusivity obligations with IR;

(ii) Impose lines on SAIL as per Section 27 of the Act for entering into an anti» competitive t.tf._11'Cf31T]€¥11l.;

(iii)lntroduce competitive bidding arrangement in the relevant market for purchase of rails;

(iv)Pass an order to pay the costs of the complainaiit/iiiforination provider; and

(v) Pass any other order that the Commission may deem tit.

13. Upon coiisideratioiii ol' the information filed by JSPL, the Commission passed an order under Section 26 (fl) pl' the Act dated 8.12.2009 holding that priina-facie, the case exists for referring the matter to the Office of the Director General (DG) for conducting an investigation into the matter. SAIL preferred an appeal to the Competition Appellate Tribunal (liereiiial'ter referred to as the "Tribunal") under Section 53 (B) oi' the Act. The Tribunal stayed the proceedings and remitted the case to the Commission for a fresh hearing. The Coiniiiissioii reconsidered the inatter and passed another order dated 29.6.2010 making .1: rel'erence to the DG to conduct: investigation into the matter.

Accordingly, the DC: 2-;ubnii.tted investigation report/ «\.'<\ A Summary of DG"s iiivestigiatiori report:

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18. Since the allegation ll'IdtflCi by the Inl'orinant relates to l\/IOU dated 1.2.2003 between the Opposite Party (OP). SAIL and liidian Railways (IR). the DC} has considered IR an essential party in tiliis case. The investigation was focused on analyzing whether the actions of SAIL were in violation of the provisions C0nI.E'tl1"lti'.--d in Section 3(4) and Section ,4 of the Competition Act. 2002. Specifically the iiivestig,atioii report examines the allegation of the liiloi'ii.i2ii'it that the MOU - (a) contains exclusive supply obligatioris; and (b) results in i'el'iisal to deal by IR, which causes an appreciable adverse effect on competition in the l'(fit3\."(llll. inarl<et in India and, therefore, falls foul of Section 3(4) of the Act. Subsequently. SAIL has abused its dominant position tliroug_li the exclusivity provisions of the l\4.0l.,.l which has an effect of foi'eclosing, a substantial part of the relevant market to coiiipetitors.

The DG report has delineat.ed the relevant market in terms of Section 2 (t) read with Section l9 (7) of the Act.

The report observes that Research Designs & Standards Oi'ganization (RDSO) was established in I957 under the l\/Iinistry of Railways (MOR) at Lucl<iiow to function as the Technical Advisor of railway and its production units and to provide comprehensive eiigineeriiig, consiiltaiicy and project: irianageinent services relating to designs, new technology, staiicl;ird:~,:. testing, tecliiiical investigation, inspection. safety etc. All railwa_v tracks owned and operated by Indian Railways have to comply to technical speciﬁcations prescribed by Rl)St.i). l?'iirther, these speciﬁcations have to be inspected by RITES, a Government ol' Il'lL.ll£,l l7.iiterpi'ise for quality assurance. The projects ol' rails by IR have to be viewed in view ol" tlicse reqiuremeiits.

. the lnforniani has coiiteiided that the relevant inarl;et in the case is the 111£:\.t'l<;f_'I for rails.

which conforms to the RDSC) specificatioiis laid down by IR in India. On the other hand, SAIL argued that tor an integrated steel plant iiiaiii.ifactiii'iiig of a saleable product starts from iron ore vvliieli caii undergo a gamut of processes to ti'ans'forin into any type of finished product. 'l'hcrefore, SAIL argued that the relevant inarket includes heavy structurals alongside long; rails as both products can be manufactured using the same plant both by SAIL as well as by .lSI'L. The DO has COl'lSltiCI"t.'Ll the ar_sg,uinents of JSPL as well detailed report of Genesis ~ I - - - . '1\x;.l'CI'I:' ' ' W ILCOIIOHIIC Corisulting Private Limited (GENE e'poi3f)7;7P'su/ iitted by SAIL. The k.3.." 'c\S, :>\ . . . . 'W, »" . .

investigation report observes that heavy struc i (I y "(A igeialace ong rails of railway ~.

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20. tracks. Applying the principles of the SSNIP Test, it may be seen that a small but significant non=~transiLory increase in price of long rails will not make the consumers switch to heavy structurals. It is observed that IR is the major consurner of long rails and its demand for the same cannot be substituted by heavy structurals. Therefore, according to the DG report. the relevant product in the present case is long rails for the purpose ol' 'V assessment of Section 3 & 4 of the Act. Furtlier, the relevant geographical market in the present case is I ndia since IR operates only in India and its demand for long rails comes from its operations in India. In conclusion, the DG report states, "tlierefore. for the purpose of lI1f()l'HI£tl,l()l'), the long tails are the relevant product, geographical limit of India is the relevant g(3()gI"2l]')lllC market and the manufacture of long rails in India is the relevant market for SAIIL and the consumption of long rails in India is the relevant market for IR for the assessment of' violation of provisions of the Act".

The DG report observes that both SAIL and IR satisfy the deﬁnition of "enterprise"

contained in Section 2 (I1) 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 lllft)I'111£,ill()ll does not level any allegation against the conduct of IR, it remains the necessary party for the assessment of issues in the present case.

The investigation report has examined SAIL according to the parameters laid down in Section 19 (4!) of the Act. The gist of the observations made may be suininarized as below:

(21) I'/Iarltet sltaiire, nnarltet structure and size of the niarltet:

As per the lI1ili)l'mt:tll<f)11 made available by SAIL. it had sold 814302 tonnes ofrails 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 SAII, was 96%. Presently, only SAIL and ISPL comply with RDSO speciﬁcations thus the HHI index was very high at 9232 which denotes very high concentrated market.

Size and resoui'ces of SAIIL:

(b) For financial jycar 2()O9--lO, the annual turnover of SAIL was Rs.40060 crores (1 crore equal to ':0 million) and net profit was Rs.6790 crores. In comparison, the turnover Ol'.l5§l"l,. was Rs.l I083 crores and net proﬁt "as Rs.3634 crores.

1] «'):\a (C) Size and iinportanee of the eompetit "(I:,rf??:&§niic power of SAIL i\ wx It is observed that WiI.l'I the market share of 96°/or SAIL enjoys clefinite commercial advantages over its competitor JSPL in the relevant rnarltct.

((I) Verticai lIltl€€:;l;';I"£ti'IOHI oil" SRAIIL:

It is ()bS6:1'\'Ct(l that SAIL is a Fully integrated iron and steel maker and among the maharatnas oi' public sector unclertaltings. Its products include a wide range of steel products and it has extensive net work in the country. Its operations are highly iittegrated giving it a distinct edge over its competitors.

(c) Depciitlcincc tit' consmners on SAIL:

The in\r'CSilg2ttI('>I1 report observes that after e1rtet"it1g, into a I\/IOLI with IR. the consumer. i.c. IR is dependent on SAIL, therefore, SAIL is a. dominant enterprise.

(I) Statutory inoinopoly/dtnnintant position of SAIL:

It is stated that SAIL is a Government of India enterprise but not a statutory monopoly.

(g) Entry I)arricrs:

Steel plants are capital intensive and hence require very heav_v investrnent. Moreoven I(')lI§:'. rails have a very speciﬁc market and mainly the demand comes from only one consumer. i.e. IR. Therefore, the report: concludes the presence of entry barriers in the market which adds to the dominance of SAIL. (In) Countervaiiiiiig haying power:

The II'1VKtStlf;£1ll()I1 report observes that the I\/IOLI between IR and SAIL provides for revievi' oi' pricing by joint pricing committee with a condition that the decision of Cliairinan. Railway Board shall be final and binding. The quality of rails produced ht $9/a\.II, has to be compliant to RDSO specifications. According to the investigation report. since the pricing of long rails. "is carried out for the mutual zidx/ziiitzigge til' hoth SAI L and IR", IR does not enjoy any countervailing buying power. Iliis means that the dominance of SAIL is entranced.

The report (.)I'.IfSt3I'V(3S that although SAIL is a central PSU owned and controlled by Governignent of India, it is not performing any sovereigii functions. lts contention that it has l'I<.i<.'.I'1 involved in ful'lilling, the nation"s socioeconomic ob_ieet.i\/es, iiifi'astruetui'e and industrial development as well as discharge of corporate social I rcsponsibi.Iity are not linked in any l'TI.Etl1I"lC'i' witn the pricing of its products supplied to IR. Therefore, these contentions are irrelevant.

21. As regards, Indian Railways, the DG report observes "IR cannot be said to be carrying out any sovereign l'unt:tions in the strict sense". It liurtlier states that IR is an economic venture of the ULI\'(3I'l]II]€7I'll ol' India and therefore, it is covered in the deﬁnition of "enterprise" given in ftleetioii 2 (h) of the Act. The report further assesses the dominant position of IR in the relevaiit market which may be suinniari7,ed as below:

(21) Market share of the ER:

IR is the sole provider of railway transportation in India except for some metro services. IR procures long rails for new lines and replaeenient of old tracks. There are a tew private sidiiigs of certain mEi1'1llfL'I.Cl11l'll1g, units. ininesr ports, etc. which also procure long rails but IR consumes 96«97°/o of long; railssold in India. Accordingly to the report, IR enjoys almost absolute dominance in the relevant market of COIf1St.1m])tlOl1 of long rails in India. (Io) Size and ]t"«§)§>;(II..ﬁIi'"<(:é.:§§ of IR:

Virtually tliere is no competition for IR in the eonsuniption of long rails. The size and resources of' IR can be adjudged by looking at its total earnings which have arisen from Rs.4I7038 crores in 2004-05 to R.s."/9837 erores in 2()()8~=()9. (C) Size and iinpoirtaiice of eonipetitors:

IR has prac.tieaIly no competition in the relevant market of procurement of long rails.

(d) Econoinic: ptiwtcr of the enterprise ineluding eoinniereiai advantages over eoinpetitoirs:

The report oliseiyes that "IR possesses enough economic power due to share and size of its activities". Further., it enjoys "eoin_plete dominance in the relevant Hi;

marl<et based on its economic power and yt§-\1'"1n1i<fe'g1'(s,1,;1,iIyagl//[H itages enjoyed by it." a" ' .a' a g" ') / ' ((3) Vertical integration:

IR has various zonal railways, several coach, l<>co1notive and wheel tactories and has also promoted various PSUS such as (:ﬁ)f\iC'()Rﬁ IRCON, IRC"I"C etc. for carrying out various integrated activities.

(l) DC}')(%K1(l€l'RCQ of consumers on the enterprise:

The report states that in the passenger transport niarltet through rails, IR enjoys absolute dorninan<:e in absence of any competitor for the services provided while in freight transport; it enjoys 35% of niarket slun'e. Thereforet as per the DG report, based on dependence OfCO1"1SU11161'S, IR is highly dominant enterprises.

(g) Monopoly or tloininant position wlietlier actgniretll as a result of any statnte:

The report observes that IR is a state monopoly and is a part of the Government of India tlirougli Ministry of Railways and no other enterprise can run railway services in India. Therefore, IR enjoys complete dominance.

(h) Entry l)ai'i'iers:

Railway services in India are not open for private enterprises.

(i) Countervailing buying power:

According to the DG report, the buyers of railway services have no countervailing buying power.

(j) Market str'tit'ttire and size oii'n1arltet::

Being, a Mate monopoly, IR is a dotninant player in providing railway t1'an_spo1'tattion in India.

(k) Social ohlingations and social costs and relative advantage lay way of eontrilmtion to economic development:

The report observes "there is no denial of the fact that IR has certain social \ I I 4,', '1 p'\|":=:».;l ..n__'w'm;,m I "aw

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26. Based on the above analysis in accordance with pararneters given in Section 1.9 (4) of the Act. the DC} report concludes that SAIL is a dominant enterprise in the relevant market of manufacture o1'rail.~< in India and IR is a dominant enterprise in the relevant market of procurement of rails in India.

The report tiirther «3Xtt1't'"111'1<3E§ the allegation of abuse of dominant position by SAII, and IR. As per the ir1v'esti;gat.i<n>ri. report, in 1997, IR realized the need to develop a new indigenous source for supply o 1' rails in view of the available capacity at Bhilai Steel Plant (BSP) of SAIL which was the only indigenous supplier ol' rails and on assessment of projected requirements of around 7 million tonnes during the 9"' tive»=year plan. A global tender was ﬂoated and opened on 6.10.1997. /-Xlthough 16 ol'Ters were received. no offer' was found acceptable by IR.

In view ofthis experience. IR decided to issue a notice for pre=bid meeting before floating of another tender. The pre--bid meeting in which about: 25 tirms 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 lal'h tonnes annually as against 1.00 lakh tones required by IR (1.00 lakh is equal to 100.000). IR was not in favour of these conditions proposed by prospective bidders. Ijncler' the circumstances, l\/Iinistry of Railways ﬁnally decided that the problem of supply shortfall should be dealt at mini.sterial level in Government of India and the matter may be taken up with l\/Iinistry of Steel for Ell..tgl11€111.'I11g the activity of Bhilai Steel Plant so as to meet l7uture requirements of IR.

The report tiirther states. "l'i"oiii available information and docurneiits, it is clear that JSPI. did not participate in the tendering process uiidertaken 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 prenbid 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.

The investigation report then refers to the int"ormation filed by .1SP1.. wherein it is stated that .ISl'L infornied IR on 4.1.2001 that it was going, to ina1iiitacti.ir'e stat.e--of--tl1e--art rails in India. The subsequent development given in the DG report has already been detailed in earlier paras and is. therefore, not repeated here.

The DG report t'urtlier states that "JSPL was not in a position to produce long rails 28, 2008. This is verified from the cert" yreﬁie

35.': ,3 Kothari Mehta & Coinpany. Chartered Ac ourﬁan C2.

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29. As per the ii1vestig_;ztti<>ii report, the inspection conducted by R.DSO in l7ebruary 2005 and July 2005 of JSPI. facilities had revealed that JSPI... was not complying with RDSO specification, IRS'I7~~l LBW--Qti.

JSPL wrote to IR on20.0:3.2003 and 20.01.2004 trying to convince IR that the technology used by J91-)I_1 was superior as compared to the one specified by RDSO. flit:

investigation report of the DG examined the records of the proceedings of the Review Committee ofthe Railway Board held on 24.02.2006 on this issue. A copy ofthe minutes of the said meeting, are part of the investigation report at Aiii"text.ire--XIll. The relevant para 6.4 ofthe minutes are as below:

"though l:)D/l\/I&C agreed that RH degasser is better and efficient compared to other processes presently in use in absolute terms when used for plain carbon steels, he was of the view that other methods are also dependable and capable of meeting the requirement. In any case, use of other methods is pegged to approval by RDSO/purchaser alter satisfying itself after measurement at tundish level which takes care of all aspects of hydrogen pick up on the transit from degasser to tundish. With time, some better methods may also come up. If there are frequent cases of failure to achieve desired levels first time, we may not approve the process, Only when the purchaser has satisfie 'l himself about: the reliability of the system, a new process can be approved. "this provision will allow the evaluaition and adoption of better processes or more economical processes satisfying our I'CC[tll.]'Gll16Jj1l".

In context of the above. the DG report refers to para (ii) of the MOU dated 1.2.2003 between SAIL & IR which states the "railway committee to buy and sell its total requirements of l<.>i1g rails. has also the plans of its normal requirements in other leiigtlis like 13m, 26m etc. subject to annual review within the overall policies of Government of India. According to the DG, this commitment to buy total requirement ofIR. from SAIL forecloses coinplt-tely' for the cornpetitors in the market for manufacture of long rails due to effect relationship. Thougli the cause of the abuse lies in the relevant market of procurement of long rails. its effects is seen in the marltet of rnamifacture of long rails as well. The DG report further comments, "the MO U is not open for any review. I'liere'fore, it is a perpetual agreenieiit whereby IR cannot procure its requirement of long, rails from u any other source except SAII As per the report. this mal<es the foreclosure effect more SCVCYC.

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. fhe Db has made t'eIei'eiice to the minutes of the 2/"0" meeting ot Board oi Dn'e<:tors ol SAIL held on 28.05.2001 wherein the Board has acl<nowledg,ed the need "to meet the threat of competition posed by setting, up of a new I" & Structural Mill (R&Sl\/I) by k . . . . V\"'C'd""-"' _. , _ .

M/s. Jindal Steel t'.<:. power Limited (JSPL) gr®d(iy;r:rrry3g§p_;;;_' y accorded 1n--princtple .53 .2 S 2,': V0, " ,.

approval for Llpgtﬂcllllg. the Rail & Structura f~\;'.;;if§% ofgﬁl lai Steel Plant. At the

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36. same time, the Board also (_lesired that "avenues of export of rails as well as cliversifying the customer's base be explor'ecl."

According, to the DC} report, the minutes of Board of Directors of SAIL coupled with the MOU between IR and SAIL indicate "an attempt to counter the threat of competition from JSPL. The report also observes that though the MOU is subject to annual review within the overall policy of Government of India, actually the review is limited to determination of pricing by a joint pricing committee of IR and SAIL. It does not encompass review of' procurement from only one source and hence does not allow the entry of competitor. According to the DG, the MOU restricts the production of long rails by any other competitor and, therefore, forecloses the marl<et. According to the report, the conditions of the MOU are in contravention of Section 4l~(2)(b) (i) of the Act. According to the ltl\/'C.Sllg'c1llO1'1 report, the Indian Railways by adhering to its own speciﬁcations as laid down by RDSO has limited and restricted technical or scientiﬁc development relating to manufacture of long rails. This is a contravention of Section 4 (2)(b)(ii) ofthe Act.

The DG report furtlter observes that the decision to enhance production capacity of SAIL to meet the requirements of IR was taken only in 2001 whereas JSPL had informed about its intentions to set up production unit in November, 1999. As per the report not giving, JSPL chance of supplying after installation of production capacity was denial of market access in violation ot' Section 4(2) (c ) ofthe Act by IR.

The report also states tliat SAIL is unable to sell its products to other purchasers both domestic and foreign due to its commitment to supply rails to IR. Although the MOU does not place any such restrictionsi, in effect. IR has restricted ability of SAIL to sell its products to other parties as per the DG report. According to the 1'epo1'L this is a IT\ contravention of Section 4 (2) ta)('i) oi' the Act by HR.

At the same time. tlirottgli the MOU, SAIL has taken a commitinent from IR that all the requirements ol' IR shall be met only from SAIL. Tire DC reportr tlicrefore. concludes that SAIL has denied inarket access to other purchasers and. t.lierefore, violated Section 4(2) ( C) olthe Act.

The DC} report has also examined the exclusivity provision of the IVIOU between SAIL and IR and has concluded a vertical restraint in contravention of the Section 3(4)(d) of the Act. The DG report analyses appreciable adverse eftiect on competition (A/-\l?LC) resulting from the MOU in terms of Section l9(3) of the report can be sL1mrnari7,ccl as below:

(i) Creation of loarriers to new entrantsi ririvirig eiiisting competitors otit and foreclosure of eoinpetition:

The assurance sought by SAIL and acceeded to by IR leads no scope for any competition in procurement of long rail marl<.et. The additional investment made by JSPL tlie waste till such time .lSP.l. is aliowecl for entry into 96°/o of the market which belongs to IR." As per the report. the MOU has the effect of foreclosure of competition and thus creates entry barriers as well as drives the existing competitors from the inarket.

(ii) Accrual of iicnefits of consiiniers:

As per the DU report, IR has failed to indicate whether it has achieved any saving due to purcliase of long rails from SAIL or that such savings have been passed on to the ultimate consumers of railway services in India. As per the report. .lSl'L has been able to demonstrate that IR would have saved Rs/400 crores if it uses l2() meter length rails produced by .lSl'l... According, to the investigation report, this denotes appreciable adverse effect.

(iii) ill'lpl'0\'t:IntiiliS in production or distribution of goods or provision of services and promotion of technical, scientific and economic development by ineans of proiiiietion or distribution of goods of provision of tSt'll"i'1iC€;3§«l.

As per the DC} report, neither SAIL nor IR have been able to demonstrate that by following l<.l,)S(;) speciﬁcations, they are manufacturing, or purchasing "the most superior rails in the world at the most competitive prices."

TN IN (1 f\ it is also not knovvn whether the rxuou specifieatioiis are also evolving in line with the developments across the world in this area. Accorcling to the DG report. this indicates AAEC.

37. In conclusion, the l,)Cj report holds that the condition set out in the MOU l't:gttl'CllI1g procurement of complete requirement of long rails by [R from SAII, is an exclusive supply agreement xiiiicli has the effect. of refusal to deal with other competitors. Therefore, IR and S/\,ll,. are in contravention of Section 3(4) of; ' Act read with Section 3(i) as the MOU causes AAECT in India.

38.

39. The Comtnission (.3t)t"t.'~il(lt,'t'tiCl the lllvtjsllgulloll report of" the DC} and issueti an Oltitiil' dated 27.01.2011 for settclittg a copy 01" the investigation report to the parties for filing tlteir reply/objections. Tltc Ciotnmission observed that the DC} report had made lRs an essential party and, therefore. directed that a copy of the investigatiott report should also be sent to the Ministry 01' Railwz'tys for tiling, their t'eply/objections.

The parties CO11CCI'l1£)tl. .l§3le'L (ln'fot'mant) and SAIL (Opposite Party) as well as Indian Railways (ll?) tiled written comments and made oral stthmissions before the Commission and also submitted wt"ittcit argtttnettts from time to time during the course of the proceedings. l'allavi Sltro1'f, Counsel (Atnarchancl & l\/latigaltlatss and Suresh A. Shroff & Company) made submissions on behalf of the l'nt'ormant. l\/lr. Parag T ripathi, Senior Advocate (lttthra & Luthra, Law Offices) made submissions on behalfotithe 01'. Mr. Chahar, Sr. Counsel and Dr. Ashwani Bl'ta1'ClWi:lj, Advocate, made submissions on behalf of Ministry of Railways.

Gist of submissions of (W:

40. 41

It was submitted that the Competition Act is prospective in nature and Sections 3 & 4 came into force w.e.l', 20.05.2009. The MOU dated 1.2.2.003 being a prior agreement is beyond the purview oi' the Act.

. It was tittrther argued that tor an agreement to be in contraventiion of Section 3( 1). it has to cause or likely to cztttse an appreciable adverse effect on competition in lndia (AAEC) and for this, it is itttpot'tant to determine whetlter the agreement is amongst persons at different stages or levels of production chain in differettt markets. it was argued that in the instant case, S/\l1, is the supplier and IR is the ultitnate consutner and. thet'efore. they cannot be said to be in a production chain. A t'efet'e1tce was made to Sliasltikant Lakshman Kale v/s li(7)l (Al-SCC366)/'l990 to emphasise that public policy can support differential treatment ol' ;t ptthlic sector Corporation. l"{et'erence was also tnade to Hindustan Paper Corpotmion Ltd. v/s Govt. of Kerala (AIR 1989 SC I713) to submit that Government Cotttpattics have special privileges which are recognized by the Cotnpanies Act, 1956. It was lttrtlter submitted that the itnpure l\/1tf.i)U is nothing bttt a record of the policy decision of the (_ioverntne1tt of lnclia. Since SAIL is a Governtnettt Cotnpznty. the MOU binds SAIL to implement policy decision of the Ciovernment of India. it was also contended that SAIL and IR are both under controll 0 ownership of the Government of India, therefore, provisions oi' Section 3 and regfto, t apply under the concept p~sC"',:"\, K 1" >7') of"a single economic t;'.t't1ll_V'-.

42.

43.

44.

45.

46.

47. It was submitted that IR carries out a sovereign function of development and maintenance ofsafe and secure rail net work in India. Therefore, as such, it is not an enterprise under the Act.

It was subinitted 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 I\/IOU. any action to quash the l\/IOU would be highly prejudicial to the interest of the consumer in this case.

It was ?1l'gU€Cl that the MOU in question is the arrangement within the Central Government ~ l'vIinistry of Railway through the Railway Board and SAIL. This arrangement is in exercise of Executive Power by the Government of India through the concerned ministry and there is no jurisdiction over such arrangement under the provisions of the Act. Attention was drawn to the condition in the MOU that makes it subject to annual review within the overall policy of the Government of India. This condition makes it abundantly clear that the MOU emanates and tlows from the Government policy. I t was contended that the key issue to be determined in the case is as to how the I\/IOU harms the interest of the consumeix which in this case, is IR. In this context, it was submitted that the MOU provides that the decision of the Chairman, Railway Board will be linal with regard to pricing of the rails supplied by SAIL to IR. It was submitted that llx' has in fact effectively exercised this favourable position which is evident from the tact that the change in price of rails vis=a--vis change in wholesale price index shows lower price increase for the reference period .2002 to 2008.

Further, as regards the quality of rails, there cannot be any compromise on the speciﬁcations of I{lf).'5(;f) followed by IR.

It was ft.ii'tliei' submitted that substantial investment was made by SAI L 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 nnpact emanating from the l\/l()l,.l on account old' price. quantity or quality as far as the <.:onsuincr, i.e. IR is concerned. This satisfactory position of the consumer is e1n,pliasi7.cd by the fact that the Hon"ble Union Ministry of Railways had reviewed the system ot' procurement of rails in 2010 and had decided l\/IOU.

to continue with the The OP also rejected the claim of the Informant that 'l};/VX?@(§tI{.dgt7l1c,' substantial savings

33.

- . . .'i¢'\ c<:.""*"»'t/I V7'/at of more than Rs.30(l crores by opting for long rails 185$' rence was made :3' '-15' ~§&' /' ':9 J': '7," /P 15 I ' 'étlﬁzﬁiviyi , I ;> to detailed analysis given by GENESIS which showed that at best the savings can be estimated around Rs. 1 .00 crore or 0.03% of the total cost of procurement. It was argued

48.

49.

50.

52. that for this marginal and disputed will haveito foregoithe benefits of MOU which included security of supply and control over pricing.

The OP also submitted that at the time of signing of l\/IOU. there were no other indigenous supplier except SAIL and, therefore, not contracting for full capacity of SAIL would have left IR with insecurity regarding supply.

It was argued that the definition of relevant product taken by DG was flawed because manufacturers/suppliers of steel cater to consumers which include consumers for structurals as well as for rails including head hardened rails. Similarly, the geographic market should not be limited to India since the IR itself ﬂoated global tender in 1997 and 1998 and since it cannot be denied that imports are perfect substitutes of indigenous rails. It was pointed out that JSPL itself had exported to Iran in the past and SAIL could not export rails due to its commitment to IR.

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 structurals is more proﬁtable.

.With reference to size and resources of SAIL, it was submitted that SAIL is in competition with all global steel makers who export rails to various countries including India and has lost many export opportunities due to its commitment to first meet the requirements of IR.

It was argued that JSPL has itself admitted that IR is dominant in the relevant product market in which it is a consumer. Therefore, the confusion that IR does not possess any countervailing buying power is baseless. This is evident from the fact that the Chairman, Railway Board has the final say in pricing of rails purchased from SAIL. It was further contended that although the MOU does not restrict IR to take suitable recourse in case SAIL is not able to meet its requirement, IR still did not procure from JSPL which reflects the consumer preference of IR. It was also pointed out that SAIL cannot sell prime quality rails to other users without clearance jom'IR. It was submitted that all ' \ _vr\'«W;:y¢ the IR in the relevant market.

53.

54.

56.

57.

59. The OI' also submitted that it was fulfilling several social obligations as a public sector undertaking and was incurring substantial cost on discharging its CSR commitments in the field which included edtication. alleviation. recognition while interpretating Section l9(4) of the Act for determining dominance. It was further submitted that JSPL had itself admitted that SAIL was the only manufacturer in India which had the ability to supply rails to fulﬁl the entire requirement of IR. The MOU was entered into by IR because it wanted a single indigenous supplier.

In a situation where IR decides prices, quality and quantity of rails, it cannot be said that IR is dependent upon SAIL.

. The OP vehemently denied having prevented the entry of JSPL into the supply to RDSO compliant rails in India. It was pointed out that IR entered into the MOU with SAIL for ensuring supply oil' rails at a time when no other player was prepared to do so. This MOU was at the behest of the Government of India which also directed SAIL to make critical investments to meet the requirements of IR. It was submitted that although SAIL was not in comfortable position in ﬁnalizing to make the investment it had to do so as it was a policy decision at the level of Union Ministries which SAIL is under a mandate to follow. Supply of rails to IR has resulted in disadvantage for SAIL in the structurals market due to commitment of SAlL"s production capacity towards IR.

The OP referred to Minutes of the 270"' Board Meeting of SAIL and submitted that the minutes clearly show the intention of trying to meet substantial competition faced from competitors. The fact that SAIL was forced to install facilities in RSM at Bhilai and a decision was also taken to explore alternate market for exports shows that SAIL was not able to act independently of its competitors.

In view of the above. it was argued that SAIL neither had dominance in terms of Section 4 nor can its conduct be construed as abuse under the provisions of the Act.

. With respect to the conclusion drawn by the D53 regarding contravention of Section 3(4) of the Act, the 0P strongly contended that there was no AAEC. It was argued that the MOU was entered into at a time when there was no other indigenous producer of RDSO compliant rails in India. Moreover, JSPL had entered the market in full force only after the signing of the MOU. This shows that the MOU did not create entry barriers in the market.

It was also argued that JSPL has been consiste'\.

53' 3.:

structural market. It was also pointed out th: Oii V Q) process initiated by IR in 1997 and could notgpro ' J SPL is also capturing orders from non--IR segments where it gets high margin. These facts prove that existing competitors are being driven by the market.

60.

61.

62.

63.

64.

65. It was also pointed out by the OP that the MOU stipulates tliatiiinitllie event SAIL is unable to meet IR's delivery schedule, IR is free to take suitable recourse. This shows that MOU does not foreclose competition in the market.

It was submitted that in the instant case, IR was in the position of the consumer and that it had complete control over the quantity, price and quality of rails it procured from SAIL. Further, JSPL does not have the capacity to meet the entire demand of IR. It was contended that IR's preference for indigenous and secure source of supply for rails from a single supplier reveals the preference of the consumer. Therefore, in this case, the consumer is beneﬁtted.

The OP rebutted the contention of the Informant that the MOU has not led to any improvement in the production or distribution of RDSO compliant rails. It was argued that RDSO speciﬁcations are not stagnant but evolve continuously. It was submitted that SAIL's facilities have been used time and again as testing ground for RDSO thereby leading to improvement in production and distribution.

The OP also countered the charge of direct and signiﬁcant harm to users of rail transport services. It was submitted that in this case the product in question has only one major "consumer", viz. IR. The l\/IOU was entered into at the behest of the Govt. of India and gives IR complete control over the quality, quantity and price of rails. These factors have placed IR in the best possible situation any consumer can be in a market.

It was submitted by the OP that SAIL had invested about Rs.7ll crores at the behest of IR for creating new facilities upgradation of production quality and expansion of existing facilities etc. It was argued that the exclusivity clause is a part of the reciprocal contract which makes it feasible for SAIL to dedicate its capacity for IR. These factors indicate promotion of technical, scientific and economic capacity and have to be accordingly viewed under Section I 9 (3) of the Act.

In conclusion, the OP prayed that the Commission may reject the findings of the report ﬁled by the DG and reject allegations of contravention of Section 4 or Section 3 (4) of the Act.

Gist of submissions of Ministry of Railways (MOR):

66. It was submitted by MOR that the present matter sTLEgapplicy laid down by 'Cc-tTt:r' 9'/i/V. . .

erergn Act and IS '/1 I\/Iinistry of Railways, Government of India and s 18

67.

68.

69.

70.

72. 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.

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.

It was contended that IR performs sovereign functions of the Government and in public interest and, therefore, it is not an "enterprise" within the meanings of Section 201) of the Competition Act.

It was submitted that the MOU was a result of Government policy and it is for the Government to decide its policy after considering several factors including liability, public interest etc. It was further submitted that as per the MoU IR has the right to take such recourse as deemed fit in case of failure on part of the SAIL to deliver as per the agreed conditions. Therefore, such MOU cannot be termed as "exclusive supply agreement" in terms of Section 3(4) of the Act. The MOU does not restrict IR from acquiring rails from any other source if SAIL fails to deliver.

As regards annual review clause, it was submitted that IR did not feel it necessary since it is satisfied with SAIL.

. MoR also disputed the observations of the DG that IR has not procured rails from any supplier situated outside India in the last l2-I3 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.

It was further submitted that IR had float I r in 1997 followed by another pre-bid meeting in 1998 but no se i9u% offg " 9 ved for manufacturing 19 1:35.'. W " 1 .

74.

75.

76.

77. .As regards cost analysis indigenously. It was emphasized that JSPL neither participated in the tender nor attended the pre--bid meeting. Under the circumstances, it was decided at the l\/Iinisterial-«level that should be developmentioifi Steel Plantiof SAIL. 7 Due to the requirement of huge investment and long gestation period, a reciprocal long term commitment had to be given for SAIL. It was contended that like any other prudent consumer, the Government is not bound to purchase from any other Company if Government owned Company itself is fulﬁllingits requirements at competitive rates. It was contended that RDSO acts as a Technical Adviser to IR and is associated with development of new and improved products and absorption of new technologies.

Therefore, RDSO's speciﬁcations of rails cannot be said to discourage external players.

. It was argued that it is open to the consumer to decide what he wants to buy particularly with a product like rail, which has a lot of safety concerns, strategic movement of defence personnel and similar other highly sensitive matters involved.

It was also contended that rails have a global market and it was not correct to limit the geographical market to India in this case.

MoR submitted that Chairman of Railway Board is expected to intervene and correct the pricing of rail only if he has enough reason to do so. His non-intervention demonstrates that the pricing of long rails as determined by the pricing committee is in order.

IR caters to social, strategic and commercial needs of the nation. It was submitted that dominance of IR should take into account all these factors. On the issue of the finding of the DG that SAIL had abused its dominant position, MoR submitted that the MOU does not foreclose the market for competition. Laying down specifications cannot be construed as limiting and restricting the scientific development but only reflects the actual requirement of IR based on RDSO speciﬁcations.

l\/IoR contested the ﬁnding of the DG that IR had restricted SAIL from selling to any other party without prior approval of IR. It was submitted that all rails laid down on the network of rails India, require to adhere to RDSO specifications and that is why approval is required from IR in the interest of safety of railway operations. submitted by JSPL, it was submitted that IR requires rails of different length due to geographical locations, transportation, constant maintenance requirement etc. It was contended that estimates -

presumptive and not based on actual requii-e1_ §\ has also submitted that it .§~,;;° 4 ?

was not SAIL that forced IR to buy its ruigeni - QSA L but it was IR which *= t-..

79. forced SAIL to enhance its capability and meet the requirements of IR. According to MoR, the MOU is in the best interest or IR.

Without pre_judice to its submissions on facts and merits, l\/10R also submitted that no fruitful purpose would be served by interfering with the existing MOU and it would only cause bottleneck in the supply of rails to IR. IR is a satisﬁed consumer and if the MOU is interfered with IR would suffer adversely.

Submissions of the Iiiforiiiaiit (JSPL):

80.

81.

82.

83.

84.

85. 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 repoit dated 18.4.2011 and opinion of RDE dated 144.201 1.

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."

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.

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.

The informant contended that IR is not acting as the state but just like any party to a contractual agreement with respect to an agreement. The MOU cannot be considered to be a Government policy.

The Informant reiterated its contention that the relevant market in this case is RDSO compliant rails in India. It contended that there does not between rails and any other structural products.

ill , y2,;9vvi»j;/ ,'.

uh '\ . . S' ~'~'i7 ':1 '$0.,'/X' . .

geographic market, it was contended that con deﬁng ,';i.' f igifp its, logistics and as .-[Q transportation issues, the geographic market is Ii 21

86. 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

87.

88.

89.

90.

91. approximately 96% market 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 , ti is not necessary to elaborate upon the same. J SPL contended that the exclusivity arrangements have led to denial of market access in violation of Section 4(2)(C)-

limiting and restricting technical or scientiﬁc development relating to manufacture of Further, it was contended that by adhering to its own speciﬁcations, IR is long rails and is in contravention of Section 4(2)(b)(ii).

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 J SPL and if the arrangements continue, J SPL 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.

It was contended that IR has admitted that they cannot buy from JSPL because of the MOU and therefore, the MOU is SAIL.

a significant barrier to entry for any competitor of It is submitted by JSPL that the investments made by SAIL in augmenting rail manufacturing capabilities was due to direct threat from JSPL and not at the behest of IR. It was contended that total exclusivity in perpetuity incorporated in the MOU cannot be justified under any circumstances. It is further contended that even if some exclusivity was to be retained to protect investment, it could have been granted for shorter duration, smaller quantity of rails and limited to long rails only. This is not the case with MOU.

It was contended that the MOU has harmed both IR and the ultimate consumers of rail services in India. It was contended that in the absence of the MOU, IR would have been able to source its requirements in a competitive market from more than one competing supplier. Consequently, requisite investment in improving the product would be made. IR would have been able to benefit from cost savings because of competitive pricing. In the process, JSPL would be able to exercise economies of scale and emerge as effective competitor. This would have given positive signals to potential new entrants who would [to produce better and efficient products.

92. JSPL has also questioned the safety aspect of rails produced by SAIL and contended that Mlonger rails of 120 mtr are safer. The Informant also contended that IR is using rails, expensive and inefficient which is state eixchequerr contended that higher cost for IR results in higher cost for ultimate consumers of railway transportation service.

93. It was contended that it is a matter of common sense that there will be a security of supply " in the market where there is more than one supplier. It was argued that if for any reason SAIL has some problems with its Bhilai Steel Plant, IR will be left on SAIL's mercy to either wait or switch to expensive imports that would drain exchange reserves.

94. It was also contended that the MOU has not led to any improvement in the production and distribution as SAIL has not been able to improve or innovate, it was further argued that RDSO is engaged in continuous R&D activities on behalf of IR and, therefore, IR has no need of access to any R&D that SAIL might do.

95. In conclusion, the Informant sought the following reliefs from the Commission and also suggested remedies as given below:

In light of above, JSPL reiterates that ~

(a) The MOU is anti-competitive agreement within the meaning of Section 3(l) and Section 3(4); and

(b) Both IR and SAIL have abused their dominant positions in respective relevant markets in violation of Section 4 of the Competition Act. Speciﬁc orders sought from the Hon'ble Commission:

(a) Order SAIL and IR to immediately terminate the MOU:

(b) Impose tines on SAIL and IR in accordance with Section 27 of the Competition Act for entering into an anti--competitive agreement which has caused an AAEC by foreclosing almost the entire market for RDSO compliant rails in India;

(c) Impose fines on SAIL and IR in accordance with Section 27 of the Competition Act for abusing their respective dominant positions;

(cl) Permanently restrain SAIL and , 23/ ;' ' QomF3e(,»,. , . ' "()0 behavior in future;

It 23

(e) Introduce competitive bidding arrangement in the relevant market for purchase of rails;

(I) Pass an order to pay the costs to the complainant/information provider; and

(g) Pass any other order that the Hon'ble Commission may deem tit. SPECIFIC SUBMISSIONS ON REMEDIES Introducing competitive conditions

96. J SPL submitted that the MOU between IR and SAIL is the main stumbling block which is preventing the competition from emerging in the rails market and the Commission must direct IR and SAIL to terminate the MOU forthwith.

Fines

97. SAIL: In addition to above, JSPL made the following speciﬁc submissions in relation to fines that should be imposed on SAIL;

(a) Throughout the entire process, SAIL has left no stone unturned to derail the investigation through its grossly anti--competitive conduct;

(b) SAIL has continuously sought to delay the process by raising completely baseless and unmeritorious challenges to Commission's jurisdiction and decisions;

(c) All the challenges raised by SAIL during these proceedings have eventually been decided against SAIL at all levels of the judicial ladder i.e., at the CCI, High Court and even the I~Ion'ble Supreme Court of India;

(d) During the entire process, SAIL has continued with its belligerent stand and continued with its attempt to deny access to JSPL and further, has denied all the opportunity to IR to source better quality rails at better prices.

(e) In light of above aggravating factors, the Hon'ble Commission has been r its continued anti=~

(h) Permanently restrain SAIL and IR from indulging in such anti-competitive S behavior in future; pg L A

(i) Introduce competitive bidding arrangement in the relevant market for purchase of rails;

(i) Pass an order to pay the costs to the complainant/ information provider; and

(k) liPass any other order that the Hon'ble Commission may deem ﬁt. Findings of the commission

98. The preliminary issue for the Commission's discussion is whether both SAIL and IR are enterprises in terms of provisions of the Competition Act.

99. 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.

100. As regards the status of Indian Railways (IR) which has been treated as "necessary party" in the investigation report of the DG, there is need to also determine whether Ministry of Railways (MOR) is one and the same as IR or are they two distinct though related entities.

101. For this, reference is made to THE GOVERNMENT OF INDIA (ALLOCATION OF BUSINESS) RULES 1961. Relevant portion of the said Rules is reproduced below:

a) Allocation ofBusiness -- The business ofthe Government of India shall be transacted in the Ministries, Departments, Secretariats and Ofﬁces speciﬁed in the First Schedule to tlzese rules' (all which are hereinafter referred to as "depai'tn1ents'Q.

17) Distribution ofSul2ject.s -

The distribution ofsubjects among the departments shall be as speciﬁed in the Second Schedule to these rules and shall include all attached and subordinate ofﬁces or other organisations including Public Sector Undertakings concerned with its subjects and sub--rules(.2), (3) and (4) ofthis rule. "

102. The First Schedule gives a list of Ministries Wag:

3 comm; 57,» , , O s, Secretariats and Offices which lists Ministry of Railways (Rail M 8. Distribution of work amongst various departments is given in Second Schedule of the Rules. The allocation of the business of Govt. of India to MOR is mentioned therein as:

103.

"MINISTRY OF RAILWA YS (RAIL MANTRALAYA) RAILWAY BOARD (RAIL BOARD)

1. Government Railways- All matters, including those relating to Railway revenues and expenditure, but excluding Railway Inspectorate and Railway Audit.

2. Non~Government Railways -- Matters in so far as provision for control by the Ministry of Railways, Railway Board as provided in the Railways Act, I989 (24 of 1989) or in the contracts between the Government and Railways, or in any other statutory enactments, namely, regulations in respect of safety, maximum and minimum rates and fares, etc. excluding the item of work allocated to the Department of Urban Development.

3. Parliament Questions regarding offences relating to pilferage of railway property other than oﬂences relating to crime on Government Railways and Non-Government Railways.

4. Administration of pension rules applicable to Railway employees. "

Indian Railways (IR) is a departmental undertaking of Govt. of India, controlled through Ministry of Railways (MOR) and administered by Railway Board that reports to the Ministry of Railways. IR was created by consolidation of about 42 rail vays in l95l as a single Government railway and placed under overall adininistrative control of the Railway Board. "Railway" is deﬁned under section 2(3l) of The Railways Act, 1989 as, " "railway" means a railway, or any portion of a railway, for the public carriage ofpassengers or goods and includes----

(a) all lands within thefences or other boundary marks indicating the limits of the land appurtenant to a railway;

,..

'o sedfor the purposes of

- 2 Ii i 53* ﬂi) all lines of rails, sidings, or y 3 }'/O/§?

or in connection with, a railwa ' Quilipefl ' . : It I (.'-.'.,z,'' / \<\\'4(\:E3"' "6' elf)"

(c) all electric traction equipments, power supply and distribution installation" .11-5"?§lf0F..?l%€1??!Z2?Qé'.F??_.'?t.l?7_?0"t1¢.¢?l0" .r%it/1: a,.reilwm»;:-.

(d) all rolling stock, stations, ofﬂces, warehouses, wharves, workshops, manufactories, ﬁxed plant and machinery, roads and streets, running rooms, rest houses, institutes, hospitals, water works and water supply installations, staff dwellings and any other works constructedfor the purpose of or in connection with, railway;

(e) all vehicles which are used on any roadfor the purposes of traﬂic of a railway and owned, hired or worked by a railway; and ()9 all ferries, ships, boats and rafts which are used on any canal, river, lake or other navigable inland watersfor the purposes of the traﬂic ofa railway and owned, hired or worked by a railway administration, but does not include---

(i) a tramway wholly within a municipal area; and (it) lines of rails built in any exhibition ground, fair, park, or any other place solelyfor the purpose of recreation; "

104. The Railways Act. 1989 further deﬁnes and differentiates railways into "Government railway" and "non-Government railway". Section 2(20) says "Government railway"

means a railway owned by the Central Government. Section 2(25) says "non-- Government railway" means a railway other than a Government railway.

105. As seen above, l\/Iinistry of Railways has greater control over IR, which is "Government railway" and lesser degree of supervision and control over non-Government railways. Thus, very clearly, IR is a "Government railway" as distinct from MOR, which performs a supervisory role in relation to all railways in India on behalf of Govt. of India. While IR performs the economic role of an enterprise, MOR is vested with the role of policy formulation or discharging the sovereign functions aspect related to the railway industry in India.

106. IR as a departmental undertaking ofMOR is engao dginigzictivity of public carriage tg\7t"l'["%t'1'J}' _ of passengers or goods and all other activities me t'o'§1\eds1ii1'sag,tih;)) (31) of The Railways ,\I7E"'/>'.(:'~l '0x 9 .

Act, 1989 quoted above. Thus IR is engaged '1Lp;f,ov'1' V" ' rﬂ service as defined

-\.

above. "Transport" is included in the definition of "service" given in section 2(u) of the Act and public carriage of passengers or goods is transport. Therefore, IR is an f'enteipr'ise" within the deﬁnition of section 2(h) of the Competition Act, 2002.

107. The central issue before the Commission is whether the Memorandum of Understanding (I\/loU) signed by SAIL in the supply of rails to Indian Railways (IR) is anti-competitive by foreclosing the market for new entrants. The thrust of the arguments put forward by the informant is that the MoU between SAIL and IR in the supply of rails is an exclusive supply agreement between a dominant seller and a dominant buyer results in entry barriers by way of denial of market access and refusal to deal. The informant has alleged violation of Sec 3(4) of the Act. Since SAIL is a dominant player in the market of rails, the informant has further averred that vide the MoU, SAIL has abused its position of dominance (or superwdominance the preferred nomenclature used by the informant) foreclosing the market for new entrants thereby contravening Sec. 4(2).

108. Having heard the arguments put forth by the parties and having analyzed the investigation report of the DC}, the Commission's observations and analysis is set out in the following paragraphs. The critical issue is whether the MoU, an exclusive supply agreement, is anti~competitive and forecloses competition. The allegations of violation of Sec 3(4) and Sec 4(2) calls for examining the fundamental tenet of market functioning that 'buyers' choice', is not anti-competitive. The analysis will keep in focus the hypothesis that an agreement between a seller and buyer represents efficient outcomes provided it is based on rational considerations. Questioning this approach as has been done by the informant, points towards the possibility that exclusive supply agreements may affect competition. Economic rationale does not automatically lead to this conclusion. Efficiency of such supply agreements is dependent on the conditions incorporated in the agreement. Therefore, we need to look at the rationale of the MoU under investigation, the conditions and nature of the MoU, and whether the MoU leads to foreclosure of competition; so as to determine whether the MOU under investigation is anti-competitive.

109. The MoU is recognized as a valid agreement/ contract. The present MoU between SAIL and IR is in the nature of a contract and is the basis on which the informant has 'tes the MoU have been ., Q .

VAL ._[_/n/Q? 729) r?L§°O '2) alleged that the action of SAIL is anti-competitive.

highlighted by the informant -- February 2003, 28 being the date on which the MOU was signed. On this date SAIL was the only RDSO

-....S?9.17.'I?ll3"l. 511PPa1l€i" Of. "W5 T9. .¢.9llll?P¢d with 3" RH Degasser technology, appeared as a new entrant to RDSO compliant rail 2008, SAIL was the monopoly supplier to IR. From 2008 onwards, the rail steel market has one buyer and two potential suppliers with IR still as the dominant buyer of rails. The review in November 2010 is a reiteration of the existing MoU, whereafter IR came to the conclusion that there was no justiﬁcation for IR to shift its source. IR in its ﬁlings has stated that it reviewed the MOU on 10"' November 2010 and "then considering the safety aspect of the investment made by SAIL, it did not ﬁnd it suited to review it further".

110. The issue to be examined is whether IR is free to choose its supplier and exercise the right of 'buyer's choice' and to continue to exercise this right, or whether SAIL as a dominant player in the market for rails has locked IR into a long-term contract that deters new entry.

Relevant Market

111. 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.

ll2. 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 relevan-terrrarket accordinoly includes both . ,. . . ax"? '--}<l7.1j'l"i'.'7 §», .5 .

rails and structurals. The geographic market inc ,i§l?e(st\b}°g}N'l'{r§v':.3'§cq3/o;4§g5.%.{1iid imports of rails. IR s'~.\"\~' ,\r¢r';' CY') 1:') ﬁt' however constrains the relevant product market to rails conforming to RDSO speciﬁcation butexwnd the ae.og:'ap11i.¢i 11}€1_1?li¢.?b.?Y911?l. the ,b.Q.1¥1?.?l?I¥'l.?$..°f1I?dI3.-._ I13. 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.

114. In deﬁning the relevant product market the Commission is inclined to accept the deﬁnition of the DO and in doing so deﬁnes the market as 'rails compliant with RDSO speciﬁcation'. This deﬁnition is in conformity with Sec 2(t) 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.

115. 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.

1 16. Given the relevant market deﬁnition, IR is a monopsonist buyer of long rail steel. The present MoU is an agreement between a monopolist and a monopsonist buyer. SAIL at the time of signing the MoU, was a demfacto 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.

Buyer's Choice-- Supply Agreements (MOU) I 17. The exercise of buyer's choice normally is not a competition issue and not questioned by the Commission unless, as alleged by the informant, there is dominance of a single player. A dominant buyer such as IR, if it purchases solely from a single seller (also be seen to foreclose apprehending the rationale for the MoU and allegations therein arises from the exercise of

118. Firms often source their intermediate input requirement from the market either through conventional market mechanisms or by alternative procurement mechanisms which are through agreernents such as MoUs. Horn and Wolinsky in their paper 1988 paper on long term agreements observe that these arrangements are often with 'bilateral monopolists' defined as where both the buyer and seller are -in monopolistic position. Similarly a paper by Cusumano and Takeishi (1991) on purchase of automobile parts by automotive manufacturers in Japan and USA show that in the US sample 59% of the parts were procured from one supplier and 70% in the case of Japanese firms. The authors found that the manufaeturer-supplier relationships were "long--term and stable".

119. The economic rationale of buyer's choice for IR to sign the MoU is to ensure a steady and secure supply of domestically produced rail steel. Prior to the SAIL supply, rails were imported. Requirements of rapid rail transport network expansion, combined with maintenance of technical security standards, pointed towards development of domestic manufacture of rail steels. Imports are more expensive than domestic rails, as Indian steel produce is one of the cheapest in the world. Easy access to raw material such as iron ore make it cost effective for steel manufacturers, and for IR, to source rails through a steady domestic source. Domestic supply source also provides for continuous up-gradation in the quality of rails (length and strength), to meet the requirements of faster trains with heavier loads. All rails purchased by IR have to be cleared by RDSO and are classiﬁed as RDSO compliant rails. Security of supplies of rails (RDSO compliant) tends to minimize transaction costs and costs of uncertainty. This dimension is of great importance for national transport networks like IR.

120. We now address the rationale for SAIL signing the MoU. We find that this was done at the behest of the Ministry of Railways. For SAIL this meant a shift from the more lucrative structural market to the less lucrative rails market. It also involved additional investment for the shift with further investments to upgrade the quality of rails. 'National interest', rather than profit motive, was the guiding principle. Did SAIL get a good deal?

This is a difficult question to answer, for the decisions of SAIL and IR are within the paradigm of state--oriented development policy, where omic rationale was often 1?" = ' l<~.\; girlrli 'HI? V as' egiﬁawgiasrg.

~_;._\__«;'O A . . Q l'm7§ i ¢ SAIL's entry into the steel rail market was not w thgit agv ' not the deciding factor. Critics might argue, as presumably may have compensated SAIL in terms of SAIL's foregone opportunity cost Of Shlﬁing from. rails to heavy.StrL19tu.ra1.:_.Ih¢.p.¢t9¢ption i.s.b.a.sed 0n..t1tefac.t_t11at SAIL in its negotiations with IR, did not insist on an exit option or a termination date of the MoU.

We will analyze later to what extent this argument is valid in the present case.

12-1. The MoU between SAIL and IR reflects the outcome of bargaining between a seller and buyer. In economics it is viewed as bargaining in a 'bilateral monopoly', where both the agents (SAIL and IR) are monopolists. In bilateral monopoly, equilibrium price and quantity outcome is indeterminate. A solution is to use the notion of Nash bargaining which enables the derivation of a price-quantity solution compatible to both parties. Nash bargaining in this context entails the joint maximization of the surplus from agreement. The outcome of this Nash bargaining is the price-and-quantity contract between SAIL and IR, as reflected in the MoU signed in February 2003. It is an efficient outcome. The MoU cannot, therefore, be termed as anti--competitive on this basis.

122. The allegation of the informant is that the MoU signed in 2003 while competitive at that time, ceases to be so in 2008 when the informant is ready to enter the rail market with RDSO compliant rails. The issue that needs to be examined is whether under conditions of competing suppliers, the MoU is anti-competitive and as claimed by the informant has the potential to create entry---barriers. As per the informants submission, SAIL being a market leader in the production of steel, any fresh investments made by SAIL in the production of long rails would have been recovered in a short space of time. The need to continue with the MoU and the virtual exclusivity granted by the MoU gives SAIL a significant commercial advantage. SAIL, therefore, prefers the comfort of a locked- in relationship.

123. The allegation ofthe informant is that SAIL as a dominant player entered into an open ended agreement and that the MoU of 2003 has not taken into account the possible entry of new suppliers of RDSO compliant rails. The excl ' ', arrangement of the MoU is to e>jo° V". . .

the I iititiate by the dominant steel manufacturer SAIL. The prevailing supply agreement and the conditions of the agreement as.a11<:g6Cl.by the infcwmant .<:1o.e.S.110.t_.r2r9Yi.s19..%!1?y.i11.9¢11tiV¢...t.9thei1?¢1%¥'??l¥¢!'?.'iI9.I°"9Vl¢"? 3 better price or even a technologically improved product". Ultimately it is the end consumer Wl]O l0OSCS.

124. A long term price--and--quantity agreement, which is complete and is common knowledge among all potential market participants, is not inherently exclusionary in nature, even though the agreement is between bilateral monopolists.

125. In the light of the above arguments some essential conditions for completeness of the agreement would entail :

a. Speciﬁc duration of the contract (based on an objective criterion such as recovery of initial investment by SAIL) -- as per the informant the MOU is open ended and does not make speciﬁc mention of the length of the contract;

b. Review process of the contract -- according to the informant the review process was removed as per the communication of 10"' November 2010;

c. An exit clause for either party - The exit clause as per the informant is not complete either: it merely mentions that IR is free to select a different supplier if SAIL fails to meet its demands. It does not specify conditions under which SAIL can exit the contract.

126. The case rests on anti--competitiveness of the MOU and the effort of a dominant player in rails (SAIL) to include conditions that are incomplete. The MoU removes the necessity of finding RDSO compliant rail steel every period and therefore, the uncertainty in supply. It is also in line with empirical evidence showing that why industrial procurements are made through contractual arrangements. Nonetheless, the efficiency gain of a contract relies a lot on whether it is complete or incomplete. A complete contract takes into account all possible contingencies which are likely to affect the relationship between the buyer and the seller during _tl;e_p\eriod in which they interact. 5»-warm' \ rem Complete contracts do not require renegotiation without a termination x 2» . . , _ /~..

date. However, most real life contracts are in U' -,1). S/6)'/9 A'_'5-') -' 4 ') . . .

_ Lure renegotiation to §;. ' 't /:5' it improve the welfare of the participating agents in the contract. We address the issue ...wl1.ct1i.er this MOU is i11COI11I31€I.¢.Of..11QI.....€1I1§l..Wh¢l11¢f,'Chi.S.i11COI11l31.¢.t¢nC.5S..C1'©3lC$ any competition concerns.

127. DG in the investigation report has concluded that both IR and SAIL indulged in AoD in the relevant markets of procurement and manufacture of long rails violating Sec 4(2)(b)(i). According to DG by seeking assurance from IR for regular placement of orders SAIL forced IR to procure all its requirements of long rails from the Bhilai steel plant of SAIL providing the required comfort to SAIL. IR on the other hand restricted SAIL from selling its product to third parties resulting in contravention of Sec 4(2) (a) (i) of the Act discernible in terms of imposing unfair and discriminatory conditions in purchase of the goods. Imposition of RDSO speciﬁcations in the manufacture of long rails IR foreclosed the market for competition in the relevant market, according to the DG. The DG concludes that the MOU is not only exclusive but also perpetual which is still foreclosing the market for procurement of long rails for competition violating Sec. 4(2)(c) of the Act.

128. Analysing the features of the contract in detail, there can be a claim that it is incomplete to the extent that it does not provide for the contingency of a competing supplier of rails available in the domestic market. Cognizance should be taken of the fact that the arrival of JSPL as a RDSO compliant alternative to SAIL is a contingency that could affect the biiyer--seller relationship between IR and SAIL. If a more efficient competing domestic supplier is available, it changes the opportunity cost of IR for procuring rails. Before this event, there was no outside option for IR other than SAIL. Now, there is the possibility of an alternative to SAIL's supply. At the same time, there is no exit clause for SAIL, nor is there a mention ofa penalty (compensation) that IR could pay SAIL in the event it finds a second more efficient supplier. Hence, the emergence of another supplier in the market is a contingency not covered in the MoU which can raise several arguments suggesting that renegotiation of such an incomplete contract could be welfare enhancing if, as claimed, the JSPL's bid w\9'tl:tat 31 '_ /_'0,)~\>r.;,LAS5.):;;:

reliable provider of rail steel compared to .--/'a 6 'ng for the cost of gm» «--' W » renegotiating and rewriting a new contract).

I 1219.' I From the submissions it isnotieidl that ithié"MoU'iS openeéridtéd"aﬁd"there'is'eno"speciﬁc at a duration of the contract, the first condition for a complete contract. Generally the period of any agreement (l\/IoU) is deﬁned to cover the period of payback of the investment in the rail steel mill by SAIL. SAIL has not speciﬁcally mentioned the break-even period of the initial investment. One of SAIL's internal documents does mention 3.3 years as the payback period of the initial investment. Keeping in mind the fact that at least some part of the investment can be fungible and reused for the production of heavy structurals, the payback period of that part of the investment exclusively made for production of rail steel is not immediately clear.

130. The second condition is that of regular reviews of the MoU. In the recent review in 2010 (November) IR have stated that "considering the safety aspect of the investment made by SAIL it did not find it suited to review it further". The only reason for IR to nullify the contract is when SAIL fails to supply the required amount to IR. The arrival of competing and more efficient domestic supply may therefore, not yet be considered as justified reason for terminating the contract as long as SAIL satisfies the conditions of supply in the MoU. The MoU does not take into account the contingency of arrival of competing RDSO compliant supply from another source. It does not spell out the action that IR would take if such a contingency arises in the future.

131. Lastly, there is no exit clause for SAIL. To the informant the lack of this clause is on account of the fact that SAIL, aware of the potential entrant JSPL, has used its dominant position to create entry barriers. The documents only indicate that IR was aware of JSPL's plans. It is unlikely that JSPL would have discussed its plans with SAIL, it's competitor. The lack of an exit clause is perceived as reflecting the adequateness of the price paid by IR. The allegation is that the negotiated price compensates SAIL adequately the contract.

1.3.2. -»

133. 3

4. Tying the arguments ons"i'ncomp1etene§s';' Iiaiid' completeness visi--"a4vis theil\/IOU of SAIL and IR, points for enquiry as regards contravention of Sec 3(4) and Sec 4(2) could be summarised as follows. IR's action was justified at the time when the MOU was signed when there was no competing reliable domestic supply other than SAIL. The compulsions of assuring a regular domestic supply therefore, seems to have been an overriding concern for IR in the signing of the MoU, rather than emphasising conditions on efficiency from a dynamic perspective.

The absence of dynamic efficiency in the contract implies that long run cost efficiency is not internalized within it. As the supply scenario changed from that in 2003 to that in 2008, with the arrival of an RDSO compliant supplier (JSPL) in the market, the partially complete l\/IoU becomes an inappropriate benchmark for the choice of vendor of RDSO compliant steel rails for IR.. With entry in the upstream market, it is now a game of a monopsonist facing a choice of bilateral/multilateral agreements with two possible vendors.

Nonetheless, the final analysis of the extent of incompleteness of the contract needs to factor in some essential ground realities. First, the argument that JSPL is a more efficient supplier than SAIL can be rejected, because the purported welding efficiency is significantly less than the estimates of JSPL. Second, the pricing committee in the SAIL- IR MoU, largely comprised of members of Railways, has successfully reduced prices to some extent in 2008. Third, the production of JSPL is much smaller (production of 34,787 tonnes in 2008--09) compared to SAIL (production of 8,3 1,922 tonnes in 2008-09). FOL1I'l.l1,__£'i§C€SS to the rail market does not give SAIL any significant economic advantage. Rails as a proportion of the total steel market is about 2 per cent in India as of now.

Therefore, it seems more likely that SAIL has been persuaded to provide rail to IR.

MOU: Competition Perspective

135. Havirig examined the allegations of the inform _a'€§i\Oi§\§n§iilid§ ' /515, _//9/> . .1 , ;fﬂ§t;}ic?e complete contracts I-X' SAIL and IR first in the theoretical perspective p 36 and alternative perspective of the informant, the impact on competition is to be examined in terms of the ground reality.

136. Let us address the basic question whether the incompleteness of the MoU between SAIL and IR leads to foreclosure of the market. In economic theory long run contracts have been analysed from two opposite perspectives. Traditionally, Posner (1976) and Bork (1978) {Chicago School) used the notion of individual rationality to argue that long term contracts cannot act as barriers to entry. Individual rationality demands that a consumer would not be willing to sign a long term contract with a monopolist unless it gets as good a deal as it would by not signing and waiting for new entry. A differing and more recent view put forth by Aghion and Bolton (1987) suggest that when there is a dominant buyer, it may be appropriate to lock into a contract of indefinite length as is the case of SAIL and IR. By looking itself into a contract of indefinite length with SAIL, IR reduces the size of the potential entrants' market and also reduces the probability of future entry. Aghion and Bolton (1987) point that it is possible for a monopoly seller with private information about entry to foreclose competition through a long run contract with the buyer.

137. Taking up the argument of 'individual rationality' did IR get a good deal and even more critical did SAIL get: a good deal from the MoU? As mentioned earlier for IR the comfort of the MoU lay in minimising the uncertainty of supplies. In the case of SAIL the informant assumes that IR has sufficiently compensated SAIL. But from the statement made by IR after the review in 2010 that considering the 'safety aspect of the investment' made by SAIL perhaps compensation is still required for SAIL. In this statement IR clearly displays concern for SAIL. SAIL was asked in national interest to shift from structural to rails. SAIL was required to continuousl .a-pgr;;de\tlie quality of rails to Z _.

<'A\C\J{ 1":

vestrnents signify a ,, ,, J . .

' v shrftrn' 'from amore lucrative market to a less lucrative one. By emphasising 'safety of investment' IR is providing a safe harbour for a less commercially lucratipvepproduct;The decisioniunder the given circumstances is rational.

138. A variant of Aghion and Bolton's perspective (with complete information) is the informant's allegation on entry barriers of the agreement. The facts on the ground reﬂect an interesting trend. in response, we can state that given the scale of operations of SAIL, it is obvious that the proﬁtability of SAIL would not be affected even without the MoU. Therefore, we cannot infer any anti-competitive intent on the part of SAIL in signing the MoU with IR. More importantly, data on rails market shows that the supply of rails to non-IR is now a proportion of around 25% of the rails market.

Table -- Sale of Rails Financial" rm SAIL's sales to JSPL's sales of rails -

Total sales Proportion Proportion of total year purchases of rails -- of total of rails non-IR kilotons ldloton rails rails fl kiloton customers - purchased purchased kiloton by IR by ﬁrms other than

139. Market for rails in the non-IR private sidings and industrial use is emerging. With the introducmm 0fC01W€1'iSati°11 VlFl?..P?IlY?'F?.P91?§$ the [email protected] ..l.S.l?L,to..gro.w. exists. The however, indicates that the market for rail is dominated by IR but the growing private sidings which will see greater growth as private ports emerge do not indicate that the market for rails is in any way constrained by the MoU. In a sense, the dominance of SAIL is in a dormant market, especially where the overall rail steel market is quite limited relative to the overall size of operations of the three parties (IR, JSPL, and SAIL) as of now. The actual performance of JSPL in the private siding market is not available. But presumably as the only other supplier of rails, JSPL should be in a position to command a premium.

140. From a different noii--price perspective, the requirement of IR is for continuous supply of high quality apart from quantity dictated by safety conditions of the national network. And at this moment only SAIL can meet these requirements. Safety is a very important dimension of rail transport. Over the years SAIL has been continuously upgrading the quality of its rails and is now rated among the best. Is it justified for IR to look at compelling suppliers at this point, when JSPL is still being stress tested on private sidings? Arguments of foreclosure do not arise, or to suggest: that IR will ignore presumably a more efficient provider of steel is premature to say the least. JSPL has nowhere in it its dealing with IR shown that it will be more efficient on a sustained basis, where efficiency is to be defined in terms of IR's requirements.

141. The argument that SAIL has locked IR into the agreement, and that IR is satisfied with the performance of its current provider of steel rails, SAIL, and therefore is not interested in considering another vendor, has no substance when there is no viable competitor. The MoU review in fact reﬂects a rational revealed preference for a particular supplier relative to another supplier (JSPL) till JSPL meets the required comfort level demanded by IR of assured supplies, high quality and competitive prices. To claim that aigirdrejfige ground realities.

Corn: ' 1\l"lI'35.,. r/-:

. \ . ,.,.._ ") :5 ;, "'/ 9 V.' v ' due process was not given to JSPL in the review ' l42.

IR and SAIL interact in multiple markets and not just in the market for steel rails.

?l.C1J,SlQ.111€1' f01" Illdlﬁlll R?1llWaY5 S31'ViC€S fQ1i.l..r.?1115DQ.1,ﬁ11g ll5 PT0Cl.l19t,S..f¥'Q11l....f?19l91'y l43.

locations to final destination points. IR also purchases other steel products (for overhead traction, structurals, castings) in which SAIL has a big presence (railway products comprise approximately 7% of SAILS overall annual output). The continued interaction between IR and SAIL as buyers in some markets and sellers in some others might explain the perceived "comfort" that these entities mention in their dealings in the steel rail market. An interpretation of that "comfort" as stated by JSPL might be the leverage that SAIL has over IR due to its interactions in multiple other markets is not a sustainable argument. Nonetheless, this is not the reason cited by the IR for not selecting J SPL as a potential supplier. It can be a bit disconcerting that IR's provides no justification specifically as regards JSPL's candidacy on any objective criteria such as failure to meet quality standards (its product is RDSO compliant since 2008) or due to its inability to supply the required amount. The only reason, and deﬁnitely a valid reason for continuing with the present MoU is IR's concern over the safety of SAIL's investment, and that SAIL is satisfying all of IR's current demand. Given the ground realities of the case (the size of production of SAIL as opposed to JSPL and the overall limited size of the rail steel market), it is most likely that objective criteria such as capacity to supply must have played a role in IR's decision. Further, the fact that JSPL is a new entrant and is being stress tested on private sidings, as elaborated in the next paragraph, adds reason to IR's decision. As long as such objective criteria dictate IR's actions, there is no concern from a foreclosure point of view.

Decisions of buyers are not merely price-quantity determined. In the present case, a major consideration tor D ' In is the security of long terms supplies of quality rails and, as stated earlier, long term agreement between SAIL and IR is in the genre of manufacturer- supplier relationship which are 'long-term and stable', especially as the informant is still to enter the market. IR by providing JSPL rails on private sidings, as is normally the required stress testing process after clearance from RDSO, does not give substance to the allegation of the informant that IR has not considered the availability of rail supplies from other suppliers on account of SAIL's dominance and abu 40 .. .Conclusi'ons transport network. For SAIL it meant a shift out of the more lucrative structural market to rails requiring fresh investments

145. The allegation that the bAlL used its dominant position to foreclose competition rests on the three conditions of a) open ended contract; b) removal of the review clause and c) lack of an exit clause does not hold ground on a reading of the MOU and the actual processes on ground. Similarly the perception that IR has suspended regular reviews of the MoU does not hold ground. The Commission is more inclined to accept the view put forward by SAIL that the review is related to the purchase orders of IR, which occur annually once the railway budget is passed by Parliament. At the same time, the price review is done on a regular basis and we note that IR proposes to review the current pricing formula to arrive at a more appropriate pricing formul .

formula has slowly shifted from a purely admin incorporate market related pricing the input cost of rails negating constraints in its pricing policy.

146. The lack of an exit clause, the Commission observes, does not lead to foreclosure of the rail market as alleged by the informant. Firstly, the infonnant's rails imposes a 'refusal to deal' c on in terms of their usage on private sidings. Secondly, and more signiﬁcantly the market for rails is emerging and, witl ' and dedicated freight containers, the market for rai expansion of private sidings. The MOU has not market. The allegation that SAIL as a barriers by locking IR into a long--" the avaﬂablg 0 players and can be 1 monopoly. The MoU signed in 20 03 was a rational outcome and the review in 2010 with no other contending supplier of comfort remains rational.

Metriber {.,/will Vlyf' ff? ' , K3?'

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Competition Commission of India

Jindal Steel & Power Ltd vs Steel Authority Of India Ltd. Main ... on 20 December, 2011