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This is an archive article published on August 25, 2011
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Opinion A realty check?

The Competition Commission’s order jolts the real estate sector.

August 25, 2011 01:15 AM IST First published on: Aug 25, 2011 at 01:15 AM IST

In an order of far-reaching significance,the Competition Commission of India has slapped a fine of Rs 630 crore on real estate major DLF,holding the company guilty of abuse of its dominant position.

The order followed a complaint filed by an association of apartment owners in the upmarket residential complex of “Belaire” in Gurgaon,which centred around allegedly arbitrary and unreasonable conditions,weighted in favour of DLF,and imposed by the company on apartment owners in Belaire; for example,delay in delivery of the apartments,unilateral addition to the number of floors,denial of exit option,and punitive penalty for default by buyers but insignificant penalty for DLF’s default. The CCI,after detailed investigation and analysis,concluded that these one-sided conditions amounted to abuse of DLF’s dominant position.

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The CCI defined the relevant market as “the market for services of developer/ builder in respect of high-end residential accommodation in Gurgaon”. As a “service”,the matter was covered by the Competition Act. The CCI distinguished “high-end” residential flats from those of other categories (for example,low- or mid-income flats offered by HUDA,DDA,and GDA) keeping in mind the profile of buyers. The CCI also defined the relevant geographic market as the territory of Gurgaon,observing that it was a preferred destination for upwardly mobile classes,and was distinguishable from properties in places like Noida or Faridabad which were not substitutable options.

At the core of the CCI’s conclusion lies its analysis that DLF is a dominant player in the relevant market for high-end residential accommodation with a market share of about 50 per cent; in addition,it has deep financial resources,a huge land-bank,a vast array of projects,etc. In all these respects,DLF is way ahead of its nearest rivals.

The CCI invoked its statutory powers to impose a deterrent fine on DLF equal to 7 per cent of its turnover and also directed the company to discontinue the impugned conditions in its agreements. Hitherto,the CCI’s orders have been somewhat cautious and tentative,but through this decision it has sought to send out an unmistakable message to the markets.

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On the other hand,a close look at the CCI’s order could give rise to a debate on some finer points of competition law. For example,competition law experts are sceptical about the basis on which the dominant position has been determined or the relevant market has been defined. They question the ground on which Gurgaon has been definitively considered as the relevant geographic market; in their view,for a prospective high-end buyer,residential properties in areas such as south and south-west Delhi could be equally viable options,particularly since high-end buyers have the wherewithal to travel longer distances for work. They also question the CCI’s decision not to include the secondary market for similar properties in the relevant market,arguing that for a buyer,purchase of a flat meeting his requirements in the resale market is a perfectly feasible alternative; in their view,if the resale market is included,the market share of developers like DLF would automatically fall,thereby diluting their market power. Likewise,the basis for determining market shares — sales volume or sales value or active stock or perhaps a combination/ permutation of these indices — could be debatable. These issues may give rise to more in-depth economic analysis.

Abuse of dominance is one of the principal categories of violation of competition law. Abuses can be of two types: exclusionary or exploitative. Exclusionary abuses are those where the dominant enterprise allegedly tries to exclude its competitors from the market by,for instance,predatory pricing,denying access,and fidelity rebates. On the other hand,exploitative abuses are those where the dominant enterprise exploits the customer or the consumer. Globally,most abuse cases relate to exclusionary conduct,not exploitative conduct (for example,Microsoft,Akzo,France Telecom). Competition authorities hesitate to pursue exploitative allegations since they are not best-placed to decide,for example,what should be the right price or the right terms and conditions of supply of goods and services — this is more in the realm of sector regulators. (In fact,the establishment of a regulator in real estate could resolve many such issues on an ex ante basis.) The case against DLF is one of exploitative conduct,and experts see it as lying uncertainly along the boundaries of competition law,though admittedly,maximising consumer interest by upholding competition in the markets is a primary goal of competition law. Given this context,the issue also arises about proportionality in the size of the fine in this case.

This very significant order of the CCI sets the stage for a complex legal journey; it may be a while before the curtains are drawn on this interesting development.

The writer heads Dhall Law Chambers and is former chairman,Competition Commission of India
express@expressindia.com

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