Motor Suspension Unit Cartelization Reference Case Closure

Ref Case No. 02 of 2023 Page 1 of 9 COMPETITION COMMISSION OF INDIA Reference Case No. 02 of 2023 In Re:

CMM/ Loco BLW Varanasi Office of PCMM/BLW, GM Administrative Building, BLW Varanasi, Uttar Pradesh-221004 Informant

And

Kharagpur Metal Reforming Industries Private Limited, Koushallya, Kharagpur, West Bengal-721301 Opposite Party No. 1

Kay Pee Equipment Private Limited 46/6/2 Chatterjee Para Lane, Kadamtala, Howrah, West Bengal 711101. Opposite Party No. 2

CORAM:

Ravneet Kaur Chairperson

Anil Agrawal Member

Sweta Kakkad Member

Deepak Anurag Member

Order under Section 26(2) of the Competition Act, 2002

1. The present case has been referred to the Commission by the Chief Material Manager (‘CMM’)/ Loco Banaras Locomotive Works (‘BLW’), Varanasi (‘Informant’). BLW,

Ref Case No. 02 of 2023 Page 2 of 9 Varanasi is a unit of Ministry of Railways, Government of India. The reference case has been filed under Section 19(1)(b) of the Competition Act, 2002 (‘Act’) against Kharagpur Metal Reforming Industries Private Limited, Kharagpur (‘OP-1’/ ‘KMRI’) and Kay Pee Equipment Private Limited, Howrah (‘OP-2’) (hereinafter, collectively referred to as ‘OPs’) alleging, inter alia, cartel formation in the supply of electro locomotive item motor suspension unit (‘MSU’) for WAP-7 and WAG-9 locomotives to various railway production units (‘PU’) including BLW; Diesel-Loco Modernization Works (‘DMW’), Patiala; and Chitranjan Locomotive Works (‘CLW’), in contravention of the provisions of Section 3(3)(d) read with Section 3(1) of the Act.

2. It is stated by the Informant that earlier, on receipt of a complaint sent by the Railway Board regarding alleged cartel formation by the OPs in CLW, DLW, DMW & Zonal Railway for electric WAG7 and WAG9 locomotive casting/Mach components, MSU, Gear Case, 6FRA Motor components and many more items for electric/diesel locomotive, the office of the Chief Vigilance Officer (‘CVO’)/BLW had conducted a detailed investigation and submitted its report to the Railway Board vide letter dated 14.01.2021. The vigilance departments of DMW and CLW also submitted their investigation reports on the said matter vide DMW’s letter No. DMW/Vigilance/Dy.CVO/Comp.07/2021 dated 23.08.2021 and CLW's letter No, 20/VO/CLW/CON/33 dated 11.10.2021 respectively.

3. The Informant further stated that the abovesaid reports were examined by the Railway Board Vigilance. After considering the aforesaid reports, Railway Board Vigilance was of the view that there appeared cartelization in the procurement of the item — Motor Suspension Unit i.e. MSU as analysed by BLW. Hence, Railway Board vide letter no. 2020/V5/DLW/ST/56 dated 13.07.2022 asked BLW Vigilance, CLW Vigilance and DMW Vigilance, to consider referring the matter of cartelization to the Commission. Vigilance department, BLW forwarded the said direction to the Office of the Principal Chief Materials Manager, BLW for necessary action vide letter No. GM/Vig/Stores/09- 20/30 Comp. dated 26.07.2022. Accordingly, the present Reference Case has been filed before the Commission for consideration.

4. As per the Information, MSU, a Mild Steel (‘MS’) casting item, is required in the manufacturing of WAG-9 and WAP-7 locomotives which are manufactured at DLW,

Ref Case No. 02 of 2023 Page 3 of 9 CLW and DMW. Earlier, vendor development authority for MSU was vested with Research Designs and Standards Organisation (‘RDSO’) and the item was reserved for procurement from RDSO approved sources. However, during year 2017, vendor development authority of MSU was transferred to CLW. The Informant also provided the list of approved vendors and their production capacity, which is as per the table below:

Table 1: MSU’s Approved vendors and their Production Capacity

5. The Informant further stated that the pattern of consumption of MSU in production units shows that overall consumption of item has increased from 1710 sets in 2017-18 to 3687 sets and 5179 sets in 2018-19 and 2019-20, respectively, whereas the number of approved firms to meet the requirement has not increased correspondingly.

6. It was further stated by the Informant that unapproved firms may be considered for only a small quantity up to 20% of the net requirement as developmental order subject to successful capacity cum capability assessment if found technically suitable subject to completion of formalities as per the bid conditions. Also, tenderer must enclose required past credentials of supply of same /similar tendered item to show that they are capable of supplying the tendered item and to substantiate their capacity to develop the tendered item.

7. It was further submitted by the Informant that M/s Simplex, an approved vendor, has supplied total 332 Sets of MSUs in different purchase orders (‘POs’) at DMW, out of which 22 Sets have witnessed warranty failure. In case of Developmental sources, M/s Indore Nitride’s, Indore, has supplied total 96 Sets of MSUs in different POs at DMW, out of which 06 Sets have been rejected. Hence, it can be noted that though quality

Ref Case No. 02 of 2023 Page 4 of 9 reliability of both the approved vendor (6.63%) as well as the developmental vendor (6.25%) is almost same but implementation of quality and safety is not fairly applied at developmental sources. However, in terms of overall reliability of product, most of the vendors failed to execute the order within the contractual delivery period.

8. It has been submitted by the Informant that delay in granting approval led to fewer suppliers which resulted in procurement at higher rates and cartelization. At present, total value of all POs placed (during 2016-2020) by Railway PUs on different developmental sources is INR 17.42 crores (approx.) for 1249 sets of MSUs. All these POs which are at substantially lower rate are pending against developmental sources. Arbitrariness in execution of the vendor approval process is prevalent.

9. In this regard, a table has also been submitted by the Informant which is being reproduced below. On the basis of this table, it is alleged by the Informant that there were sufficient interested vendors present in the market for supplying MSU and the item is lucrative for the suppliers as 21 tenderers have recently quoted and expressed their interest.

Table 2: Number of participants in various tenders

10. It is further submitted by the Informant that in subsequent tenders, increase in quoted rate of OP-1 and OP-2 are similar in nature with a narrow difference of about 0.5% to 1.75%. This arrangement is alleged to be not coincidental as such arrangements