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Largest penalty ever of Rs44bn imposed on sugar mills, PSMA - Inside Financial Markets

Largest penalty ever of Rs44bn imposed on sugar mills, PSMA

– Business Recorder

The Competition Commission of Pakistan (CCP) has imposed the largest amount of penalty of nearly Rs44 billion (approximately above US$265 million) on 55 sugar mills and the Pakistan Sugar Mills Association (PSMA) for allegedly committing cartelisation, carrying out anti-competitive activities, collectively deciding the quantum of exports, etc.

In this regard, the CCP issued a detailed order here on Friday.

According to an order issued by the CCP full bench on Friday, “the CCP passed an order against the PSMA and 81 member mills for violations of Section 4 of the Competition Act, 2010 (the “Act”).

“The Commission initiated an enquiry in order to analyze “possible anti-competitive activities in the sugar industry”.

“To gather evidence, search and inspections were carried out under Section 34 of the Act at two premises of the PSMA and of one of the sugar mills”.

The penalty imposed by the Commission, which is the highest till date, is approximately PKR 44 billion (approximately above USD 265 million) (based on calculation of 55 mills’ 2019 turnover figures, including consolidated turnover figures for same group mills, available with the Commission).

First, the PSMA has been imposed the maximum fixed penalty of PKR 75 million each for four contraventions, amounting to a total of PKR 300 million, having been found to be persistently and actively at the forefront of such collusive anti-competitive practice.

Second, five percent of the respective 2019 annual turnover of each of the member undertakings, located in Sindh, KPK and Punjab for collectively deciding the quantum of exports invariably affecting/controlling the domestic supply of sugar in the relevant market for the period from 2012 to 2020.

Third, seven percent of the respective 2019 annual turnover of each of the member undertakings located in Punjab, for sharing and discussing sensitive commercial stock information with the PSMA for the period 2012 to 2020.

A fixed penalty of PKR 50 million on each of the 22 participating member undertakings in the 2010 USC tender.

A full four-member Bench of the Commission was constituted in the instant matter, comprising Rahat Kaunain Hassan (chairperson) and three members: Shaista Bano, Bushra Naz Malik, and Mujtaba Ahmad Lodhi.

The Order disposes of Show Cause Notice (SCN) proceedings against the PSMA and 84 sugar mills pursuant to the prima facie findings of the Enquiry Report.

The hearings for 80 mills (5 mills chose not to appear or respond to the SCNs) spanned a considerable period, commencing on 7 January 2021 and concluding on 26 May 2021, where all concerned parties availed the opportunity of hearing on multiple occasions and submitting detailed written arguments in their defence.

As per the Commission’s majority decision, the PSMA and the Punjab sugar mills have been found to have shared commercially sensitive stock information amongst themselves in violation of Section 4 of the Act.

“Punjab mills went even further to share and discuss the same between themselves through establishment of zonal sub-committees and creation of a Whatsapp group”.

The Commission also “found” that such information was not “publicly available” given that it was “mill-specific, shared frequently and in real-time/on fortnightly basis,” the CCP order said.

The majority decision of the Commission held that, through a discussion of supplies and stock of sugar, PSMA and sugar mills collectively pre-determined export quantities, as “evidenced” by the minutes of PSMA’s annual general meetings on record, in violation of Section 4 of the Act.

“Although no violation was alleged on account of lobbying in the SCNs, the Commission has recognized that lobbying activities may be a mere guise for conducting anti-competitive activities, where in the instant matter, the PSMA is clearly lobbying as a mechanism to pursue a favourable decision regarding quantum of exports and thereby controlling domestic supply of sugar that is likely to have a resultant impact on prices. The minutes of the SAB meetings “evidenced that PSMA asserts an estimate for exportable surplus, which is based on higher estimates of stock available or sugar production figures,” CCP order said.

With regard to the USC Tenders, the majority decision of the Commission found that PSMA has gone beyond its role as an association and “interfered” in the award of the tenders by fixing quantities amongst certain member mills in violation of Section 4 of the Act. The Commission took a “lenient” view for concerned mills in relation to the 2019 USC Tender as USC’s record showed that the tender was “undersupplied” and only awarded to 5 mills, who won the tender. However, for the 2010 USC Tender, the participating mills were found liable as PSMA could not have acted without their consent/agreement. The Commission was of the view that protecting or promoting competition does not solely mean ‘having the lowest price’ and that the choice to participate in a competitive bid and the submission of bid rates are all independent commercial decisions to be made by each individual sugar mill.

With regard to stoppage of crushing in the crushing season 2019-2020 by 15 Punjab mills on the call of PSMA, the Commission, unanimously, found “insufficient” evidence to establish a contravention of Section 4 of the Act. Three mills were also found not liable for any contravention during the concerned period on account of their non-participation or being non-members of PSMA.

The Commission directed the mills whose turnover figures were not available with the Commission to provide the same. The Registrar will issue SCNs to all mills located in Sindh and KPK for contraventions on account of “sharing commercially sensitive information”.

The CCP further directed the mills to remand the matter in relation to Issue VI (ceasing crushing of sugarcane) to the Enquiry Committee for further probe.

“The PSMA and the sugar mills to discontinue and stop the said violations forthwith and to deposit the penalty within 60 days of the issuance of the Order.

The Commission observes that governmental interventions at any end make it all the more important to preserve the latitude for competition that remains in the relevant market.

“The Commission is cognisant that it must engender best practices in the conduct of business and continue to encourage businesses to adopt behavioural change, so that not only do they individually achieve greater economic efficiency and benefit but their responsible business ethic passes on the benefits of the economic enterprise at the national level,” the CCP order added.

Syed Zaki Hussain

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