COMPETITION LAW: BID RIGGING AND COLLUSIVE BIDDING

WHAT IS BID RIGGING AND COLLUSIVE BIDDING?

BID RIGGING

It is an illegal practice in which businesses plot and devise to allow over another to secure contracts at higher prices, thereby undermining free – market competition. Bid rigging infringe antitrust laws and is closely related to horizontal price – fixing, in that both offenses include collusion between supposed competitors in the same market group.

Bid Rigging comes about in situations in which companies are required to competitively bid contracts.

Competitively bid contracts are very well-known in the marketplace, particularly in government and education, where agencies are generally required to the minimal bid of a contract. It is not usual for competitors in same marketplace to plot to allow one or other to win a competitive bid in rotation. Then end result is that each of the companies will make a profit, often at a price well above that which they would have earned in a truly competitive market. The added costs resulting from the rigged bid are passed on to taxpayers, ratepayers and consumers.

COLLUSIVE BIDDING

Collusive bidding refers to agreements by contractors or suppliers in a particular trade or area to cooperate to defeat the competitive bidding process in order to inflate prices to artificially high levels.  It can occur in large and small contracts.  Where collusive bidding is well established prices can rise substantially, in some cases by as much as several hundred percent.

Collusion in international projects often involves corruption, in which government officials and procurement personnel under their direction sponsor or facilitate the collusion in exchange for bribes.  All or part of the corrupt payments often end up in the coffers of local political parties where they are used to offset campaign and other expenses.[1]

INTRODUCTION

The Competition Act, 2002, (as amended), [the Act], follows the philosophy of modern competition laws and aims at nurturing and promoting competition and at protecting Indian markets against anticompetitive practices by enterprises. The Act prohibits anticompetitive agreements, exploitation of dominant position by enterprises, and regulates combinations (mergers, amalgamations and acquisitions) with a view to ensure that there is no adverse effect on competition in India.

The Act forbids any agreement which causes, or is likely to cause, significantcontrary effect on competition in markets in India. Any such agreement is considered void.

An agreement may be parallel i.e. between enterprises, persons, associations, etc. engaged in indistinguishable or similar trade of goods or provision of services, or it may be vertical i.e. amongst enterprises or persons at different stages or levels of the production chain in different markets.

Bid rigging or collusive bidding is one of the horizontal agreements, which shall be presumed to have appreciable adverse effect on competition under Section 3 of the Act.

UNDER THE COMPETITION ACT, 2002

The Competition Act, 2002 (‘Act’), ‘bid rigging’ has been defined in the Explanation to Section 3(3) as:

“An agreement, between enterprises or persons referred to in sub-section 3 engaged in identical or similar production or trading of goods or provision of services, which has the effect of eliminating or reducing competition for bids or adversely affecting or manipulating the process for bidding.”

Section 3(1) of the Act prohibits and Section 3(2) of the Act makes void all agreements by enterprises or persons in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services which cause or are likely to cause appreciable adverse effect on competition within India.

 Further, Section 3(3)(d) of the Act uses both expressions viz., ‘bid-rigging’ and ‘collusive bidding’. Both these terms are normally used interchangeably to describe many forms of illegal anti-competition bidding. However, common thread running through these activities is that they involve some kind of agreement or informal arrangement among bidders, which limits competition.

The act treats agreement between bidders which result into bid rigging on presumptive rule approach, meaning hereby that once the essential ingredients constituting bid rigging are established there is no need to further launch into an elaborate inquiry to find out impact of such conduct on the market and adverse effect on competition is presumed.

 In that situation, the burden shifts on the contravening parties to rebut the presumption by showing that their conduct does not result into “appreciable adverse effect on competition in India.”

DIFFERENT KINDS

Collusive bidding or bid rigging may be of different kinds, for instance-

  1. agreements to submit identical bids;
  2. agreements as to who shall submit the lowest bid;
  3. agreements for the submission of cover bids (voluntary inflated bids);
  4. agreements not to bid against each other, agreements on common norms to calculate prices or terms of bids;
  5. agreements to squeeze out outside bidders;
  6. Agreements designating bid winners in advance on a rotational basis, or on a geographical or customer allocation basis.

It is to be noted that an ‘agreement’ between ‘competing bidders’ is a sine qua non for establishing contravention of Section 3 of the Act.

FORMS OF BID RIGGING

Bid rigging may take many forms, but most bid rigging conspiracies usually fall into one or more of the following categories:

BID SUPRESSION

In bid suppression schemes, one or more competitors who otherwise would be expected to bid, or who have previously bid, agree to refrain from bidding or withdraw a previously submitted bid so that the designated winning competitor’s bid will be accepted.

COMPLEMENTARY BIDDING

Complementary bidding (also known as ‘cover’ or ‘courtesy’ bidding) occurs when some competitors agree to submit bids that are either too high to be accepted or contain special terms that will not be acceptable to the buyer. Such bids are not intended to secure the buyer’s acceptance, but are merely designed to give the appearance of genuine competitive bidding. Complementary bidding schemes are the most frequently occurring forms of bid rigging, and they defraud purchasers by creating the appearance of competition to conceal secretly inflated prices.

BID ROTATION

In bid rotation schemes, all conspirators submit bids but take turns to be the lowest bidder. The terms of the rotation may vary; for example, competitors may take turns on contracts according to the size of the contract, allocating equal amounts to each conspirator or allocating volumes that correspond to the size of each conspirator. A strict bid rotation pattern defies the law of chance and suggests that collusion is taking place.

SUBCONTRACTING

Subcontracting arrangements are often part of a bid rigging scheme. Competitors, who agree not to bid or to submit a losing bid, frequently receive subcontracts or supply contracts in exchange from the successful bidder. In some schemes, a low bidder will agree to withdraw its bid in favor of the next low bidder in exchange for a lucrative subcontract that divides the illegally obtained higher price between them.

Almost all forms of bid rigging schemes have one thing in common: an agreement among some or all of the bidders, which predetermines the winning bidder and limits or eliminates competition among the conspiring vendors.

THE PRIMER ADS

Some of the industry conditions favorable to collision are:

  1. There are few sellers
  2. Higher degree of standardization of products, making it easy for competitive firms to agree on a common price structure
  3. Repetitive purchases enabling the vendors to know of the other bidders

SOME SUSPICIOUS BEHAVIOUR PATTERNS[2]

Bid rigging can be difficult to detect. However, suspicions may bearoused by unusual bidding or something a bidder says or does. An agreement (in collusion) not to respond to an invitation to tender until after discussions with other persons invited to tender, is also a bid rigging offence. Certain patterns in bids can give rise to suspicion of collusion. Situations of suspicious behavior includethe following (illustrative and not exhaustive):

  1. The bid offers by different bidders contain same or similar errors and irregularities (spelling, grammatical andcalculation). This may indicate that the designated bidwinner has prepared all other bids (of the losers).
  • Bid documents contain the same corrections and alterationsindicating last minute changes.
  • A bidder seeks a bid package for himself/herself and alsofor the competitor.
  • A bidder submits his/her bid and also the competitor’sbid.
  • A party brings multiple bids to a bid opening and submitsits bid after coming to know who else is bidding.
  • A bidder makes a statement indicating advance knowledgeof the offers of the competitors.
  • A bidder makes a statement that a bid is a ‘complementary’,‘token’ or ‘cover’ bid.
  • A bidder makes a statement that the bidders have discussedprices and reached an understanding.

INQUIRY INTO BID RIGGING[3]

In exercise of powers vested under Section 19 of the Act, the Commission may inquire into any alleged contravention under subsection (3) of Section 3 of the Act that proscribes bid rigging.

The Commission, on being satisfied that there exists a prima facie case of bid rigging, shall direct the Director General to cause an investigation and furnish a report. The Commission has the powers vested in a Civil Court under the Code of Civil Procedure in respect of matters like summoning or enforcing attendance of any person and examining him on oath, requiring discovery and production of documents and receiving evidence on affidavit. The Director General, for the purpose of carrying out investigation, is also vested with powers of civil court besides powers to conduct ‘search and seizure’.

INTERIM ORDER[4]

Under section 33 of the Act, , during the pendency of an inquiry into bid rigging, the Commission may temporarily restrain any party from carrying on the offending act until conclusion of the inquiry or until further orders, without giving notice to such party, where it deems necessary.

POWERS OF THE COMMISSION[5]

After the inquiry, the Commission may pass inter- alia any or all of the following orders under section 27 of the Act:

1) Direct the parties to discontinue and not to reenter such agreement;

2) Direct the enterprise concerned to modify the agreement.

3) Direct the enterprises concerned to abide by such other orders as the Commission may pass and comply with the directions, including payment of costs, if any

4) Pass such other orders or issue such directions as it may deem fit.

PENALTY[6]

The Commission may impose such penalty as it deems fit. The penalty can be up to 10% of the average turnover for the last three preceding financial years upon each of such persons or enterprises which are parties to bid-rigging or collusive bidding. In case the bid-rigging or collusive bidding agreement referred to in sub-section (3) of section 3 has been entered into by a cartel.

The Commission may impose upon each producer, seller, distributor, trader or service provider included in that cartel, a penalty of up to 3 times of its profit for each year of the continuance of such agreement or 10% of its turnover for each year of the continuance of such agreement, whichever is higher. The penalty can therefore be severe, and result in heavy financial and other cost on the erring party.

Section 46 of the Act empowers the Commission to impose lesser penalty upon a party in a cartel if it makes true, full and vital disclosure leading to busting of the cartel. However, during the investigation if it is found that the party has not complied with the condition on which lesser penalty was imposed or disclosure is not vital or false evidence has been furnished, the party may not receive the leniency.

APPEALS[7]

The Competition Appellate Tribunal (COMPAT) is established under Section 53A to hear and dispose of appeals against any direction issued or decision made or order passed by the Commission under specified sections of the Act.

An appeal has to be filed within 60 days of receipt of the order / direction / decision of the Commission.


[1]https://guide.iacrc.org/potential-scheme-collusive-bidding/

[2] Competition Act, 2020, ‘Advocacy Series 4, Provisions relating to Bid rigging’ pg.6

[3] Ibid, pg.7

[4] Ibid,pg.8

[5] Ibid, pg8

[6] Ibid, pg.8

[7] Ibid, pg.8