CASE SUMMARY WorldCom was a provider of long distance phone services to businesses and residents. It started as a small company known as Long Distance Discount Services (‘LDDS’). What happened Due to acts of CEO Bernie Ebbers, there were inflated assets by $11 billion, leading to 30,000 lost jobs and $180 billion in losses for investors. Methodology Underreported line costs by capitalizing rather than expensing, and inflated revenues with fake accounting entries. WorldCom’s internal auditing department then discovered what a loss of $3.8 billion Result Ousting of CEO and filing for Chapter 11(Bankruptcy). FLOW OF EVENTS Early 2001 WorldCom shows signs of financial troubles: rates and revenues decline and debt rises. July 2001 WorldCom receives $2.65 billion in loans from 26 banks to be repaid by the end of 2001. Apr. 30, 2002 Bernard Ebbers resigns as CEO of WorldCom and is replaced by vice chairman John Sidgmore. Jun. 25, 2002 CFO Scott Sullivan is fired after improper accounting of $3.8 billion in expenses covering up a net loss for 2001 and the first quarter of 2002 is discovered. Jun. 28, 2002 WorldCom fires 17,000 employees to cut costs. Jul. 21, 2002 WorldCom files for reorganization under Chapter 11 Bankruptcy, an action that affects only the firm’s U.S. operations, not its overseas subsidiaries. Aug. 9, 2002 Continued internal investigations uncover an additional $3.8 billion in improperly reported earnings for 1999, 2000, 2001, and the first quarter of 2002, bringing the total amount of accounting errors to more than $7.6 billion. Nov. 8, 2002 WorldCom files additional bankruptcy petitions for 43 of its subsidiaries. Nov. 15, 2002 Michael D. Capellas, former president of Hewlett-Packard Company, is named chairman and CEO. Mar. 14, 2003 WorldCom announces that it will take one-time $79.8 billion write-off. May 19, 2003 WorldCom agrees to pay investors $500 million to settle civil fraud charges. Jul. 7, 2003 A federal judge approves a $750 million settlement between WorldCom and federal regulators. Jul. 31, 2003 The General Services Administration notifies WorldCom that it is ineligible to win new federal contracts until it improves accounting controls. Aug. 6, 2003 A bankruptcy judge approves a $750 million settlement of civil fraud charges made by the Securities and Exchange Commission on WorldCom investors' behalf. Aug. 12, 2003 WorldCom appoints former AT&T Corp. executive Richard R. Roscitt as its new president and chief operating officer. Dec. 22, 2003 Federal prosecutors say they intend to show that former CFO Scott Sullivan was involved in 13 kinds of accounting fraud in addition to financial wrongdoing Jan. 7, 2004 The government lifts the suspension that prevented WorldCom from receiving new federal contracts. Apr. 20, 2004 MCI officially emerges from bankruptcy, 21 months after filing the largest Chapter 11 case in history. May 10, 2004 MCI says it will eliminate 7,500 jobs (15 percent of its workforce). Feb. 14, 2005 Verizon Communications Inc. announces a $6.75 billion deal to buy MCI Inc. Mar. 15, 2005 Former WorldCom CEO Bernard J. Ebbers is found guilty of conspiracy, securities fraud, and making false filings with regulators. He is sentenced to 25 years in prison. Aug. 11, 2005 Former CFO Scott Sullivan is sentenced to five years in prison.
CASE WorldCom took the telecom industry by storm when it began a frenzy of acquisitions in the 1990s. The low margins that the industry was accustomed to weren't enough for Bernie Ebbers, CEO of WorldCom. From 1995 until 2000, WorldCom purchased over sixty other telecom firms. In 1997 it bought MCI for $37 billion. WorldCom moved into Internet and data communications, handling 50 percent of all United States Internet traffic and 50 percent of all e-mails worldwide. By 2001, WorldCom owned one-third of all data cables in the United States. In addition, they were the second-largest long distance carrier in 1998 and 2002. Unfortunately for thousands of employees and shareholders, WorldCom used questionable accounting practices and improperly recorded $3.8 billion in capital expenditures, which boosted cash flows and profit over all four quarters in 2001 as well as the first quarter of 2002. This disguised the firm’s actual net losses for the five quarters because capital expenditures can be deducted over a longer period of time, whereas expenses must be subtracted from revenue immediately. WorldCom also spread out expenses by reducing the book value of assets from acquired companies and simultaneously increasing the value of goodwill. The company also ignored or undervalued accounts receivable owed to the acquired companies. These accounting practices made it appear as if WorldCom’s financial situation was improving every quarter. As long as WorldCom continued to acquire new companies, accountants could adjust the values of assets and expenses. Internal investigations uncovered questionable accounting practices stretching as far back as 1999. Investors, unaware of the alleged fraud, continued to purchase the company’s stock, which pushed the stock’s price to $64 per share. Even before the improper accounting practices were disclosed, however, WorldCom was already in financial turmoil. Declining rates and revenues and an ambitious acquisition spree had pushed the company deeper in debt. The company also used the rising value of their stock to finance the purchase of other companies. However, it was the acquisition of these companies, especially MCI Communications, that made WorldCom stock so desirable to investors. How the fraud happened In 1999, revenue growth slowed and the stock price began falling. WorldCom's expenses as a percentage of its total revenue increased because the growth rate of its earnings dropped. In an effort to increase revenue, WorldCom reduced the amount of money it held in reserve (to cover liabilities for the companies it had acquired) by $2.8 billion and moved this money into the revenue line of its financial statements. That wasn't enough to boost the earnings that the CEO wanted. In 2000, WorldCom began classifying operating expenses as long-term capital investments. Hiding these expenses in this way gave them another $3.85 billion. These newly classified assets were expenses that WorldCom paid to lease phone network lines from other companies to access their networks. They also added a journal entry for $500 million in computer expenses, but supporting documents for the expenses were never found. These changes turned WorldCom's losses into profits to the tune of $1.38 billion in 2001. It also made WorldCom's assets appear more valuable. How it was discovered After tips were sent to the internal audit team and accounting irregularities were spotted in MCI's books, the Securities Exchange Commission requested that WorldCom provide more information. The SEC was suspicious because while WorldCom was making so much profit, AT&T (another telecom giant) was losing money. An internal audit turned up the billions WorldCom had announced as capital expenditures as well as the $500 million in undocumented computer expenses. There was also another $2 billion in questionable entries. WorldCom's audit committee was asked for documents supporting capital expenditures, but it could not produce them. The controller admitted to the internal auditors that they weren't following accounting standards. WorldCom then admitted to inflating its profits by $3.8 billion over the previous five quarters. A little over a month after the internal audit began, WorldCom filed for bankruptcy. Causes Internal Environment The executive and strategic decisions at WorldCom were characterized by rapid growth through acquisitions. ‘Growth, growth, growth...’ was the moto. By 1998, WorldCom had been involved in mergers with sixty companies. Together, these transactions were valued at more than $70 billion, the largest of which, MCI Communications Corporation (‘MCI’), was completed on September 14, 1998, and was valued at $40 billion. Once WorldCom acquired the new companies, it failed to properly integrate the systems and policies that not only led to very high levels of overheads in proportion to the revenues but also to an extremely weak internal control environment. Due to the fast pace of the acquisitions as well as management’s neglect, the accounting systems at WorldCom were unable to keep up with integration and efficiency. The lack of internal controls allowed manual adjustments to be made in the system without the emergence of any red flags, thereby minimizing any chance of detection Company Culture The growth through acquisitions ‘strategy’ at WorldCom was enforced and reinforced by top management. The consistent pressures from top management created an aggressive and competitive culture that did not contain any communication of the need for honesty or truthfulness or ethics within the company. There was a large focus on revenues, rather than on profit margins and the lack of integration of accounting systems allowed WorldCom employees to move existing customer accounts from one accounting system to another. The employees at WorldCom did not have an outlet to express concerns about company policy and behavior either. Special rewards were given to those employees who showed loyalty to top management while those who did not feel comfortable in the work environment were faced with obstacles in their need to express their concerns. The combined management allowed the creation of a culture that was more suitable for a sole proprietorship than for a billion dollar corporation. The aggressive nature of the managing style such as the plethora of acquisitions as well as the failure to integrate them properly created an environment where employees were pressured to report high growths quarter by the quarter. Board of Directors The directors at WorldCom were from different backgrounds. While some had widespread knowledge and experience of business and legal issues, others were appointed due to their connections with Ebbers. The mix of the Board and the close ties to Ebbers led to the Board‟s lack of awareness on WorldCom‟s issues. The Board was inactive and met only about four times a year, not enough for a company growing at the rate that it was. Audit Committee and Internal Audit The lack of independence and awareness of the Board as a whole trickled down to the audit committee. The committee‟s chairman, Max Bobbitt, was very loyal to Ebbers. Hence, the members of the committee, including Bobbitt, were either unaware or had known about the fraudulent misstatements for the years 1999, 2000, and 2001 and choose to ignore it. According to Breeden (2003), the Committee oversaw the $30 billion revenue company when it met for about three to six hours once a year. WorldCom‟s Audit Committee failed to meet with the Internal Auditors of the company, who had the duty to provide the Audit Committee with an independent and objective view on how to improve and add value to WorldCom’s operations. Not only were the personnel in the internal audit department not enough for a large company, but they also lacked the proper training and experience to conduct the testing of the company’s controls. The Misstatement of Line Costs Line costs are the costs associated with carrying a voice phone call or data transmission from the call’s origin to its destination. If a WorldCom customer made a call from New York City to London, the call would first go through the local phone company’s line in New York City, then through WorldCom’s long distance, and finally through the local phone company in London. WorldCom would have to pay both the local companies in New York City and London for use of the phone lines; these costs are considered line costs. Not only were line costs WorldCom’s biggest expense but were also approximately half of WorldCom’s total expenses. Especially after the collapse of the dot com bubble in early 2000, cost savings became extremely important, so important that line cost meetings were the only meetings with regular attendance by top management. WorldCom’s top management strived to achieve a low line cost to revenue ratio (‘line cost E/R ratio’), because a lower ratio meant better performance whereas a higher ratio meant poorer performance. To report better performance and growth, Sullivan implemented two improper accounting methods to reduce the amount of line costs: release of accruals from 1999-2000 followed by the capitalization of line costs in 2001 through early 2002. Releasing Accruals During the fraud period at WorldCom, was characterized by the estimation of costs that were associated with using the phone lines of other companies. The actual bill for the services was usually not received for several months. This meant that some entries made to the payables could be overestimated or underestimated. In the case that the liability was overestimated, when the actual bill was received there would be a surplus of liabilities that when ‘released’ would result in a reduction of the line costs: Accounts Payable 1,000,000 Cash Paid to Suppliers 900,000 Line Cost Expense ‘release’ 100,000 WorldCom adjusted its accrual in three ways. Some accruals were released without even confirming if any accruals existed in the first place. Second, if WorldCom had accruals on its balance sheet it would not release them for the proper period and instead keep them as ‘rainy day’ funds for future uses. Lastly, some of the accruals released were not even established for line costs, thereby violating GAAP by using one expense type to offset another. Line costs were very significant to WorldCom‟s bottom line. Ebbers made public promises to stockholders and Wall Street that WorldCom would keep those costs low. Therefore, the managers at WorldCom were continuously under pressure to find ways to reduce those costs. With the burst of the Internet and telecomm bubbles, the pressure increased and more ways had to be discovered to keep on reporting the false numbers. WorldCom‟s competitors such as Sprint and AT&T had line costs that were 52% of revenues. WorldCom reported line costs of about 42% of revenues, in reality these costs were 50%-52% of revenues. Although WorldCom‟s line cost ratio was in line with the telecomm companies in the industry, it chose to report lower line costs because that is what the analysts expected. By meeting analyst expectations, WorldCom would make Wall Street happy. Wall Street‟s contentment with WorldCom would result in an increase in investments and thereby a higher stock price for WorldCom. The higher the stock price, the cheaper it would become for WorldCom to acquire other companies. The pressure worsened by early 2001 as Sullivan tried to find different ways to reduce expenses. He directed General Accounting to reduce the line cost expense for the Wireless division by $150 million. The Wireless division saw this and told Sullivan that there was no support to the entry and he was forced to reverse it. He then ordered the managers of the General Accounting department to make large ‘round-dollar’ journal entries that weren‟t related to the Wireless division without any documentation. They did not hesitate the first time because they believed in Sullivan‟s integrity and thought that he had most likely discovered an accounting loophole. Two years later, as the fraudulent reporting continued, the managers were very uncomfortable with what they were doing and the only reason they did not report the fraud was because they feared the loss of their well paying jobs. Over the two year period, WorldCom had made inappropriate accrual releases both in the domestic and international divisions that amounted to about $3.3 billion. As the accruals started to run out, Sullivan came up with another strategy: capitalization of line costs. Capitalizing Line Costs The 4% utilization of the fiber optic cables meant that WorldCom was still paying for the leases on the cables even though it was generating no revenue on them. According to Morse 28 (personal communication, February 8, 2011), WorldCom had leased the lines in a 2-5 year agreement that could not be canceled. However, the costs associated with the lines were causing the line cost E/R ratio to increase. Thus, when no more accruals could be released, Sullivan turned to capitalize these costs, another violation of GAAP. By capitalizing the costs from the cables, the 2-5 year leases now had 20-30 year lives which would slowly depreciate over the next two or three decades (Morse, personal communication, February 8, 2011). GAAP requires these costs to be recognized immediately. A Line Cost to Revenue report was generated for top management to which round number adjustments were made a week or so before the numbers were announced to the public (Zekany, Braun, & Warder, 2004). By the time the fraud was discovered, Sullivan had managed to improperly reduce the line costs by approximately $3.883 billion. Capitalizing the expenses resulted in shifting the items from the income statement onto the balance sheet, allowing the overstatement of income as well as the overstatement of assets. Admission of guilt WorldCom admitted to violating generally accepted accounting practices (GAAP), and adjusted their earnings by $11 billion dollars for 1999-2002. Looking at all of WorldCom’s financial activities for the period, experts estimate the total value of the accounting fraud at $79.5 billion. After Bankruptcy WorldCom was renamed MCI. Former CEO Bernie Ebbers and former CFO Scott Sullivan were charged with fraud and violating securities laws. Ebbers was found guilty on all counts in March 2005 and sentenced to 25 years in prison, but is free on appeal. Sullivan pleaded guilty and took the stand against Ebbers in exchange for a more lenient sentence of five years. Re-Organization WorldCom took many steps toward reorganization, including securing $1.1 billion in loans and appointing Michael Capellas as chairman and CEO. WorldCom also tried to restore confidence in the company, including replacing the board members who failed to prevent the accounting scandal, firing many managers, reorganizing its finance and accounting functions, and making other changes designed to help correct past problems and prevent them from reoccurring. Additionally, the audit department staff is was increased and reported directly to the audit committee of the company’s new board. However, this reorganization was not enough to restore consumer and investor confidence, and Verizon Communications acquired MCI in December 2005. Verizon obtained the freshly minted MCI for $7.6 billion, but not the $35 billion of debt MCI had when it declared bankruptcy Aftermath The WorldCom accounting fraud changed the entire telecommunications industry. As part of their overvaluing strategy, WorldCom had also overestimated the rate of growth in Internet usage, and these estimates became the basis for many decisions made throughout the industry. AT&T, WorldCom/MCI’s largest competitor, was also acquired. Over 300,000 telecommunications workers lost their jobs as the telecommunications struggled to stabilize. Many people have blamed the rising number of telecommunication company failures and scandals on neophytes who had no experience in the telecommunication industry. They tried to transform their startups into gigantic full-serproviders like AT&T, but in an increasingly competitive industry, it was difficult for so many large companies could survive.
FINANCIAL ANALYSIS WorldCom’s improper accounting was mainly in two forms: 1. Report reduced line cost This served the purpose of reporting the line costs to 42% of the revenues, whereas in reality the line costs were much above 50%. This allowed Ebbers’ to report double digit growth(inflated). Line costs, during 1999 – 2001, were reduced via 1. Release of improper accruals (amount set aside to pay anticipated bills). 2. Capitalisation of line costs (recording cost as an asset rather than an expense). Release of improper accruals was done in three ways: · Using accruals without checking for excess available. · Using accruals meant for other expenses. · Releasing accruals in the period that it did not belong to, i.e. used them as emergency funds for personal gains. o (The reduction to line costs by accrual release, capitalisation, etc is shown in appendix B) o (The reduction to line costs by accrual release, capitalisation, etc as a percentage of total line cost is shown in appendix C) By capitalising operating costs, WorldCom shifted the high operating cost (line cost) from its income statement to its balance sheet. This increased its pre-tax income and earnings per share(EPS). The capitalized line costs in the first and second quarters of 2001 had been booked in “Construction in Progress”. In August, however, employees in Property Accounting transferred the capitalized line cost amounts out of Construction in Progress and into “in-service asset accounts” as some auditors had expressed interest in reviewing the former account. 2. Exaggerate reported revenues When market conditions deteriorated during 2000 and 2001, most companies in telecom sector reported reduced growth but WorldCom being a growth oriented company, reported same levels of growth (double digit growth). Due to pressure from CEO, the employees made false, fudged entries as revenues as and when they could. During investigation, SEC found hand written notes calculating the difference between desired and actual revenue(monthly) and appropriate(matching) entries were found in the books. Most of these fudged entries of revenues were made in the “Corporate unallocated revenue” account. These entries were recorded mostly after the end of the quarter and not during the quarter, suggesting these were adjusting entries. Also, these entries were always in round figures i.e. in millions or tens of millions. o (The extent of corporate unallocated account in which the revenues were shown falsely is shown in appendix E) 3. Other accounting issues Though in a small proportion, Accounting personnel improperly reduced three other categories of expenses; selling, general and administrative costs(SG&A), depreciation and income taxes. o (Summary of improper income statement amounts is shown in appendix A) CASE LEARNING 1. Ratios help detect accounting scandal These tests(ratios) do not indicate a fraud, but, indicate weak and accounting and give hints of financial trouble. · Accounts receivables growth versus sales growth: if accounts receivables grow faster than sales, then it means company is extending credit to customers who are not paying or has aggressive revenue recognition policy. Ideally this ratio should be negative, as it indicates that company is generating cash form its operations. · Property, Plant and Equipment (PPE) as a percentage of total assets: This ratio should be fairly stable over time. Spike in any direction indicates something is amiss. For example, a large spike indicates that a company is capitalising routine maintenance cost, as was the case in WorldCom. · Operating cash flow versus earnings per share(EPS): This ratio should be relatively stable over time and be negative. GAAP allows companies to match expense with revenue, when it is earned. Inventory cost is recorded as an expense when it is sold and not when it is bought. This reduces volatility. This causes the cash flow to decline with no change in earnings. Hence there is a difference between cash flow and EPS, but it should converge with time, as the sale is made. This property is used to detect health of organization. If EPS consistently exceeds operating cash flow, it indicates poor earning quality. Such companies make poor investments. There are other ratios which help detect fraud and accounting health of an organisation. Such warning signs do not necessarily indicate fraud, but show the health of the company and reflect on their poor performance. o (Effect and extent of capitalisation of operating costs is shown in appendix D)
Introduction The cement industry is a vital part of the Indian economy, employing millions of people directly or indirectly. The Competition Commission of India ("CCI") passed orders adjudicating allegations of anti-competitive agreements and abuse of dominance amongst the cement manufacturers under the Competition Act, 2002 (the "Act") and imposed a penalty of more than INR 60 billion (USD 1.1 billion). This term paper aims to critically analyse two CCI orders of August 31, 2016, namely: (i) Builders Association of India vs. Cement Manufacturers Association & Ors. ("BAI case") and (ii) In Re: Alleged Cartelization by Cement Manufacturers ("Cement case"). It attempts to highlight the impact of these landmark orders on the cement industry and Indian competition law. 1. Facts 1.1 BAI case: An information was filed under S. 19(1)(a)3 of the Act by the Builder's Association of India (the "Informant") against Cement Manufacturers Association ("CMA") and 11 cement manufacturing companies4, for alleged violation of S. 3 (anti-competitive agreement) and S. 4 (abuse of dominant position) of the Act. On June 20, 2012, the CCI found the parties in contravention of S. 3(3)(a) and S. 3(3)(b)5 read with S. 3(1)6 and imposed monetary penalty along with directions to cease and desist from indulging in any anticompetitive activity. It further prohibited CMA to engage and associate itself from collecting and circulating information about wholesale and retail prices and details on production and dispatches of cement companies to its members. 1.2 Cement case: This case was received as a transfer from the office of the erstwhile Monopolies and Restrictive Trade Practices Commission under S. 66(6) of the Act.7 In the instant case, MRTP Commission had taken suo moto cognizance and initiated investigations based on the press reports published regarding the increase in the cement prices.8 Since the allegations and parties were similar to the BAI case, except Shree Cement Limited (respondents in BAI case and Shree Cement Limited are hereinafter collectively referred to as "Respondents"), simultaneous investigations were conducted and the report was filed on May 31, 2011. As findings and penalty for violation of S. 3(a) and S. 3(b) read with S. 3(1) had been imposed in CCI's order in BAI case, CCI limited this case for Shree Cement Limited and observed that, it had violated the above stated provisions of the Act and consequently imposed a penalty of INR 3 billion (USD 59 million). 1.3 COMPAT Order: Aggrieved by CCI's orders, the Respondents appealed before the Competition Appellate Tribunal ("COMPAT"), on the grounds of violation of principles of natural justice. One of the questions that rose was, whether CCI's Chairperson who did not participate in the hearing of arguments of the Respondents could become a party to the final order dated June 20, 2012. The Respondents also raised objections on the grounds of unfair hearing, bias and pre-determined mindset. COMPAT noted that thorough consideration was not given to the report of the Director General ("DG"), parties' submissions and interlocutory orders.9 COMPAT observed that procedural defect in nature of non-observance of principles of natural justice cannot be cured in appeal, because if natural justice is violated in the first stage, the same cannot be given as true right in an appeal. No party can be compelled to satisfy an unjust trial. Accordingly, the COMPAT set aside the impugned orders and remitted the matter to the CCI for fresh adjudication of the issues relating to the alleged violation of S. 3(3)(a) and S. 3(3)(b) read with S. 3(1) of the Act, in accordance with law. 2. Issues and Arguments 2.1 CCI framed 2 questions for determination; whether alleged conduct of the Respondents was an (i) anti-competitive agreement under S. 3 and (ii) amounted to abuse of dominance under S.4 of the Act. Informant had alleged that Respondents were engaged in cartelization by limiting and restricting production and supply of cement and collusive price fixing through price parallelism.10 It was argued that they purposefully did not make maximum utilization of installed production capacity, resulting in artificial scarcity, restricted supply, higher cement prices and abnormal profits. It was submitted that respondents had divided Indian market into 5 zones, based on their operations and increased price without any direct nexus with the varied input costs and production value incurred at different regions. These activities have triggered an adverse affect on the competition in the real estate sector and affected consumer interests at large. Regarding the abuse of dominance, it was submitted that the cement manufacturing companies had a dominant position by collectively holding 57.23% market share in India, which they abused to arbitrarily increase cement prices. 2.2 Abuse of Dominance: On this point the CCI observed that cement market was characterized by several players where no single firm or group was in a position to operate independent of competitive forces or affect its competitors or consumers in its favor. Further, since the Act did not provide for concept of collective dominance, the Respondents could not collectively be considered to hold a dominant position. Hence, no investigation into abuse was required. 2.3 Anti-Competitive Agreement: With respect to S.3, the Respondents questioned the legality of the manner in which the DG conducted the investigations and the economic soundness of the evidence relied upon. It was contended by the cement manufacturing companies that: There was no direct evidence to showcase existence of a cartel between the Respondents and mere circumstantial evidence falls far from sufficient. Price parallelism per se cannot justify cartelization, unless adverse affect on the competition is established. Mere price correlation, dispatch parallelism and generalized under utilization of capacity to cost benchmark is inadequate to analyze concerted action for cartelization. Further CMA contended that, collection of information about prices and production was under the instructions from Department of Industrial Policy and Promotion which was not confidential information, but available in the public domain and also widely published. 3. CCI's Decision on Anti-Competitive Agreement Relying on statistical information on price, production, supply in cement industry, minutes and reports of CMA, facility utilization reports, party testimonies, the CCI held that the Respondents operated in a cartel to cause appreciable adverse effect in competition in cement industry for May 2009 to March 2011. CCI observed that: S. 2(b) which defines "agreement" (any arrangement or understanding or action in concert, whether or not the same is in formal or in writing or intended to be enforceable by legal proceedings), is wide and will include tacit agreement. In cartelization, parties are cautious to avoid explicit and direct evidence such as minutes, paper trails, call records, inevitably mandating an inference to be based on circumstantial evidence taken as a whole and economic index. CCI relied on Dyestuff's case,11 where European Court of Justice observed that, whether there was a concerted action can only be correctly determined if the evidence considered as a whole and not in isolation, bearing in mind the peculiar feature of the market in question. It further noted that given the clandestine nature of cartels, circumstantial evidence is of no less value than direct evidence to prove cartelization. CMA, through its meetings, and reports provided a platform for sharing of price, production, supply related information for sharing between the cement manufacturing companies. CCI relied on the T-mobile case12 where European Court of Justice had held that, in an oligopolistic market13 (like cement industry) the exchange of such information that increases the predictability of market operations between competitors leads to restricted scope for competition. Where there is strong price correlation between involved parties, a positive inference is drawn towards price parallelism indicating concerted action. Cement industry being seasonal, homogenic market is subject to volatile prices, higher variable costs and is susceptible to parallel price pattern. However, CCI noted that even though price parallelism is not conclusive evidence, the same in conjunct with other "plus factors", such as easy access to competition information, product and dispatch parallelism, and capacity underutilization will suffice to prove cartel. Cement manufacturing companies had deliberately reduced their production and produced much less than the installed capacity to create an artificial scarcity and raise the prices of cements in order to earn abnormal profits. Based on this, CCI upheld that the Respondents were in breach of S. 3(3)(a) and S. 3(3)(b) read with S. 3(1) of the Act. This, in effect, means the Respondents have to deposit the specific penalty imposed on each of them. The figure can be computed as a percentage of the turnover or net profits, whichever is higher. CCI computed it on the basis of net profits over a defined period for each cement manufacturer. Additionally, CCI also imposed a penalty of 10% of total receipts over a two-year period. The penalty is payable within 60 days of receipt of the order. Analysis In case of S. 3(3) agreements, once it is established that concerted action exists, it will be presumed that the agreement has an appreciable adverse effect on competition within India. The onus to disprove this presumption lies upon the alleged parties. In the light of this, it is pertinent for companies to maintain accurate price, produce, supply, market feedback and economic strategy. Further, trade associations should have a protocol where they not only work in promoting the interests of their members and the industry they serve, but also for enhancing fair competition. They should be sensitive to the discussions and delineate lines between facilitating competition and anti-competition. Further, as noted by COMPAT, much of the appellate litigation would be obviated if CCI devise a just and fair procedure for conducting investigation and inquiry and passing orders. Thus, it is important that CCI formulate (specifically in oligopolistic markets like petrol, steel, automobiles etc.) regulations for conducting investigations and admitting evidence. Conclusion These two cases implemented the "parallelism plus" approach adopted by the US and European Courts which requires, showing the existence of "plus factors" beyond merely the firm's parallel behaviour, in order to establish the existence of a cartel. Competition authorities across the globe are persuading whistle-blowers in approaching them to give information about companies coming together and forming a cartel. The Act provides for leniency provisions14 where the party seeking the same can avail concessions by way of cooperating in an inquiry. Awareness of this can go a long way in detecting and cracking the presence of cartels.